“Situations emerge in the process of creative destruction in which many firms may have to perish that nevertheless would be able to live on vigorously and usefully if they could weather a particular storm.”— Joseph A. Schumpeter
“The perennial gale of creative destruction”— Joseph A. Schumpeter
“The science that we have come to know as information theory establishes the supremacy of the entrepreneur because it appreciates the powerful connection between destruction and what Schumpeter described as “creative destruction,” between chaos and creativity.”— George Gilder
Change is life – no change, no life
What is referred to as “creative destruction” (mostly by economists) is simply a type of change. Some changes are purely destructive. Others are mostly creative. And the rest, everything in between.
How you classify a change is usually based on how it affects you. If the impact is positive and you “win” in some respect, then it is a good change. Bad change is a negative impact, and you lose. Oddly enough, a single event or situation can generate both kinds of impacts. It is the impact, not the causal event or situation, that operationally defines a change.
Impact in turn is largely a function of your response to the change. An ineffective response can be destructive while an effective response to the same change can be constructive (or maybe “creative”, if you like).
Creative destruction is just change, with positive and/or negative impacts
Change simply happens. Things change. Always. This is how life works. Just ask the dinosaurs. Sometimes change takes a breather but it seems to come back fully rested and ready for another round.
Viewing creative destruction as change provides a much stronger basis for management decision and action. We deal with change every day.
Change may just be something that already exists but now taking on a new form or use. Repurposed, if you will. Change may also be something being seriously damaged or destroyed. Or change can be something significantly or entirely new. This has been happening forever.
So, what’s new?
Management is fundamentally about dealing with changes successfully. No changes, no need for management.
How organizations of any kind deal with change tells a lot about the nature of the underlying management systems and process. For example, we might look at this basic classification:
Change resistant. Businesses are designed to minimize or eliminate change as a way to get through whatever may come along. They actively resist as many changes as possible. Stability is the top priority.
Change reactive. Businesses change only what and when they are forced to change.
Change followers. Businesses who accept changes only after their major competitors have done so.
Change leaders. Businesses who stay close to external change drivers and move as soon as these appear to be significant and valuable.
Change creators. Businesses that are fundamentally creative and innovative. They are drivers of change.
Which one describes your organization? A large organization may include several of these across its operating units. Which of these are good or bad? Depends on the organization itself. Could be either or both: it is situation-dependent.
The key question here is what works best for you
You may find that being strongly change-resistant is what makes your business successful. So, you don’t mess with what works. Or you may find that your success formula is creativity and innovation (as you know, these are different). This is usually people-dependent.
Different people have different strengths and weaknesses. You will be very surprised to hear this, I’m sure. This means that each organization will have its own, largely-unique, foundation for dealing with change. What works great for you may be a disaster for your competitor across town.
Winning in a changing world means matching your special strengths to each change as it comes along. You probably do this intuitively, but the long-term U.S. bankruptcy statistics below suggest that quite a few businesses do not always succeed in matching strengths to changes.
Again, changes are just changes – that is, they are reality, aka facts. It is your responses that make them creative or destructive. Even creatively destructive if you are very clever.
Destructive destruction is out there too
Not all change is inherently creative or can with reasonable effort be turned into a positive outcome. Some stuff that happens is just bad for almost everybody. Think about COVID lockdowns.
Lockdowns have destroyed many businesses (and organizations) while delivering positive outcomes to the very (mostly lucky or large) few. Even if lockdowns are mostly lifted, the residual impacts are surely major, long term, and destructive for the majority.
What is especially important here is that major changes are likely to continue happening indefinitely. Predictable and stable are gone. This means that your business – as defined by its key people – must be closely matched to your set of changes in order to come out a winner. Mismatches here may well be fatal.
To give a very simple example, suppose you and your people are solidly change-resistant. You are very good at what you do and don’t want to change. But suppose further that what you do best no longer matches the changed world in which you now operate. Your choices for winning: change your people or change your business.
Neither of these options are likely to be attractive, at least initially. You may feel that you can just “work through” the changes and adapt only at the periphery. This experiment may well fail, and if so, your business likely becomes toast.
A better, and probably obvious, alternative might be to buy or merge with a business that needs a strong stable partner and that is well-matched to your current marketplace. This effectively changes both your people and your business. The trick of course is to figure out what might work best in your changed world so you can develop specs for a solid, winning addition.
Example: think about order delivery. In past it was FedEx, UPS, and even good old USPS, or customer pickup. Today requires quick delivery to be a tightly-integrated part of many product packages. Few businesses are very good at delivery so you may still be limited to FedEx et al. But if your products involve some post-delivery services like setup or testing, then you may need to add a delivery partner.
Does anybody actually do “creative destruction”?
Besides economists and government officials, I mean? In my extended experience with many businesses and a few organizations, I can’t think of a single one that pursued creative destruction. Lots of “creative” but very little destruction – the latter usually involving just the closing or disposition of weakest units.
I must have missed something along the way because professor of economics Arthur M. Diamond, Jr. has written a whole book on this: “Openness to Creative Destruction: Sustaining Innovative Dynamism”. From Amazon’s book overview:
“Life improves under the economic system often called “entrepreneurial capitalism” or “creative destruction,” but more accurately called “innovative dynamism.” Openness to Creative Destruction: Sustaining Innovative Dynamism shows how innovation occurs through the efforts of inventors and innovative entrepreneurs, how workers on balance benefit, and how good policies can encourage innovation.”
“The inventors and innovative entrepreneurs are often cognitively diverse outsiders with the courage and perseverance to see and pursue serendipitous discoveries or slow hunches. Arthur M. Diamond, Jr. shows how economies grow where innovative dynamism through leapfrog competition flourishes, as in the United States from roughly 1830-1930. Consumers vote with their feet for innovative new goods and for process innovations that reduce prices, benefiting ordinary citizens more than the privileged elites. “
“Diamond highlights that because breakthrough inventions are costly and difficult, patents can be fair rewards for invention and can provide funding to enable future inventions. He argues that some fears about adverse effects on labor market are unjustified, since more and better new jobs are created than are destroyed, and that other fears can be mitigated by better policies. The steady growth in regulations, often defended on the basis of the precautionary principle, increases the costs to potential entrepreneurs and thus reduces innovation.”
“The “Great Fact” of economic history is that after at least 40,000 years of mostly “poor, nasty, brutish, and short” humans in the last 250 years have started to live substantially longer and better lives. Diamond increases understanding of why.”
I do like his “innovative dynamism” terminology, however.
Responding to change in practice
The goal for managing change is to seek as close a match as possible between your strengths and change preferences and the continually-changing changes that you face. This requires monitoring and accommodating significant changes explicitly and it requires you to have a clear picture of where your real business and management strengths lie.
Very different from many standard planning practices.
What is being described here is simply an added component of an agile business process. Lots of small low-risk steps to learn about the changed environment’s response. Monitoring the changing changes daily via those closest to the ground and routinely feeding any new information into your agile decision process and action set.
Business-as-usual (BAU) no longer exists in most of our new, changing world. Your responses to changes will determine whether whatever is happening out there will be creative or destructive for your business. A winner or a victim? Truly your choice.
Economists talk often about creative destruction to describe the disruptive process of transformation that accompanies innovation. Politics is a common context but the more important story for businesses and management involves change. Change is life and will always be with us. It just IS – a reality. Most important, your response to change is what determines whether you win or lose.
Wikipedia offers a good outline of what is generally understood by the term “creative destruction”:
“The expression “creative destruction” was popularized by and is most associated with Joseph Schumpeter, particularly in his book Capitalism, Socialism and Democracy, first published in 1942. Already in his 1939 book Business Cycles, he attempted to refine the innovative ideas of Nikolai Kondratieff and his long-wave cycle which Schumpeter believed was driven by technological innovation. Three years later, in Capitalism, Socialism and Democracy, Schumpeter introduced the term “creative destruction”, which he explicitly derived from Marxist thought (analysed extensively in Part I of the book) and used it to describe the disruptive process of transformation that accompanies such innovation:”
“Capitalism … is by nature a form or method of economic change and not only never is but never can be stationary. … The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.”
“The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”
“In Schumpeter’s vision of capitalism, innovative entry by entrepreneurs was the disruptive force that sustained economic growth, even as it destroyed the value of established companies and laborers that enjoyed some degree of monopoly power derived from previous technological, organizational, regulatory, and economic paradigms. However, Schumpeter was pessimistic about the sustainability of this process, seeing it as leading eventually to the undermining of capitalism’s own institutional frameworks:”
“In breaking down the pre-capitalist framework of society, capitalism thus broke not only barriers that impeded its progress but also flying buttresses that prevented its collapse. That process, impressive in its relentless necessity, was not merely a matter of removing institutional deadwood, but of removing partners of the capitalist stratum, symbiosis with whom was an essential element of the capitalist schema. [… T]he capitalist process in much the same way in which it destroyed the institutional framework of feudal society also undermines its own.”
“In 1992, the idea of creative destruction was put into formal mathematical terms by Philippe Aghion and Peter Howitt, giving an alternative model of endogenous growth compared to Paul Romer’s expanding varieties model.”
“In 1995, Harvard Business School authors Richard L. Nolan and David C. Croson released Creative Destruction: A Six-Stage Process for Transforming the Organization. The book advocated downsizing to free up slack resources, which could then be reinvested to create competitive advantage.”
“More recently, the idea of “creative destruction” was utilized by Max Page in his 1999 book, The Creative Destruction of Manhattan, 1900–1940. The book traces Manhattan’s constant reinvention, often at the expense of preserving a concrete past. Describing this process as “creative destruction,” Page describes the complex historical circumstances, economics, social conditions and personalities that have produced crucial changes in Manhattan’s cityscape.”
“The opening up of new markets and the organizational development from the craft shop and factory to such concerns as US Steel illustrate the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one … [The process] must be seen in its role in the perennial gale of creative destruction; it cannot be understood on the hypothesis that there is a perennial lull.”
Investopedia gets a little closer to the business side of creative destruction in its “Understanding Creative Destruction”:
“The term creative destruction was first coined by Austrian economist Joseph Schumpeter in 1942. Schumpeter characterized creative destruction as innovations in the manufacturing process that increase productivity, describing it as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
“Basically, the theory of creative destruction assumes that long-standing arrangements and assumptions must be destroyed to free up resources and energy to be deployed for innovation. To Schumpeter, economic development is the natural result of forces internal to the market and is created by the opportunity to seek profit.”
“Creative destruction theory treats economics as an organic and dynamic process. This stands in stark contrast with the static mathematical models of traditional Cambridge-tradition economics. Equilibrium is no longer the end goal of market processes. Instead, many fluctuating dynamics are constantly reshaped or replaced by innovation and competition.”
“As is implied by the word destruction, the process inevitably results in losers and winners. Producers and workers committed to the older technology will be left stranded. Entrepreneurs and workers in new technologies, meanwhile, will inevitably create disequilibrium and highlight new profit opportunities.”