Creative Destruction at the Speed of Thought
May 11, 2008 by Raj Sheelvant
Joseph Schumpeter, the noted economist popularized the term Creative Destruction
This is how the process of Creative Destruction works: Initially, entrepreneurs innovate to create product/service with an unknown growth prospect. In order to generate profit they take huge risks and devote a huge amount of time to create an entirely new market for their product/service. To begin with they generate ‘monopoly profit’ but that profit margin attracts new competitors which end up destroying the very company that created a new market.
In his seminal work “Capitalism, Socialism and Democracy” Schumpeter says that “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. . . .” and he goes on to say “Every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it. It must be seen in its role in the perennial gale of creative destruction; it cannot be understood irrespective of it or, in fact, on the hypothesis that there is a perennial lull. . . .”
What that means is that the process of Creative Destruction is a ‘necessary evil’ for a vibrant capitalistic framework to function. When Schumpeter proposed this hypothesis in 1940s, the process was slow. It took several decades to unravel the process. Take TV as an example. It took several decades to displace radio as the main entertainment medium. The Business Strategist in an old technology company (in this case radio) had a long lead time to fine tune their strategy to the evolving competitive market. Because of slowly moving competitive landscape, there was no need for a specific role of Business Strategist in an organization. The executive management team was well qualified to perform that role.
But what has happened since Schumpeter’s time is that the process of Creative Destruction has accelerated. In the 1980s-1990s the automation and computerization aided the acceleration of Creative Destruction. Take the example of hard disk drives in the computer. The detailed Creative Destruction process in the hard disk space is extremely well documented by Clayton M Christensen in his classic ‘Innovators dilemma’. Top executives in the organizations began to become less qualified to understand the evolving business landscape. This era started to attract academicians to the field of Business Strategy. Experts or Business Strategy Gurus created processes and framework to decipher the changing landscapes (like McKinsey’s 7-S Framework, Porters Framework etc). The executives started to hire the so called experts to chart out the organization’s Business Strategy.
Now, more technological innovations are enabling faster innovation through collaboration and creating new competitors globally by leveling the playing fields. IT is playing an important role for creating an ecosystem for anyone to ‘innovate in their pajamas’. The Process of Creative Destruction is moving at a breakneck speed and the process will only accelerate further. All this has created a market environment that is unpredictable and mind numbingly complex. Look at the new online Web 2.0 today products like Facebook, Twitter, LinkedIn etc. that are redefining the online hiring industry. Under these circumstances the process of setting up a Business Strategy is very different from what has been in the past. By the time the refined Business Strategy to tackle the known competitive landscape is executed, the marketplace will have changed again rendering that Business Strategy irrelevant. Two new important characteristics become very relevant to the organization in an environment where the process of Creative Destruction is faster than executing a new and refined Business Strategy.
- Simplistic and Agile Business Strategy: The knee jerk reaction by every organization to deal with rising complexity is to complicate the ecosystem and the process of developing the business strategy. That will not work because complex strategy has a tendency to increase bureaucracy and slow down decision making process. Ultimately this will impact innovation. That is exactly the opposite end result of what is intended. The main need in today’s hypercompetitive environment is to build an agile organization structure that will dynamically and proactively adjust itself to the changing landscape. This is possible only when the organization structure is built on the foundation of ‘agile business strategy’. Agility is possible only when the Business Strategy is Simple to understand. So Simplicity and Agility go hand in hand.
- Collaborative Business Strategy: What this means is that the process of creating a Business Strategy in today’s world is no longer top down process. Of course top management needs to articulate their organization’s core competency and Business Strategy to every employee, and they need to embed it into the corporate culture. More importantly the organization needs to enable every employee to help fine tune that business strategy. Everyone in the organization has a shared platform where they can influence the Business Strategy. It’s not going to be easy but if the Business Strategy is simple and everyone in the organization understands their core competency, then the executives can leverage the ‘wisdom of the crowd’ to create an ‘agile’ Business Process.
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