Module 3•Unit 4 of 6•11 min

Creative Destruction

Closely related to renewal and reinvention is the concept of creative destruction, popularised by the Austrian-American economist Joseph Schumpeter (building on earlier ideas from Karl Marx and the German sociologist Werner Sombart).^[1] Creative destruction refers to the act of destroying the old in order to make way for the new.

"The process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

- Joseph Schumpeter on creative destruction

A necessity, not a tragedy

Creative destruction is a necessity - both inside businesses and inside markets - so that markets can keep receiving ever-increasing value from new innovation. The old must give way for the new to flourish. Gas lamps gave way to electric light; horse-drawn transport to the automobile; film to digital. Each destruction was painful for the incumbents, but essential for progress and for the greater value delivered to society.

The hardest part: destroying your own

The profound challenge for an established business is that creative destruction must sometimes be self-inflicted. To reinvent, a company may have to cannibalise its own successful products - to destroy a profitable old business to build the new one, before a competitor does it for them. This is agonising, because it means walking away from something that still works. Yet the alternative is to let someone else do the destroying.

The businesses that endure across generations are usually those willing to practise creative destruction on themselves - retiring their own winners to make room for what comes next. Netflix killing its own DVD business for streaming is the textbook example (see the next unit). The unwillingness to self-destruct is how great companies fall.

Discuss

What successful thing in your organisation might eventually need to be 'creatively destroyed' to make way for the future? Who would resist, and why?

Try this at work this week

Identify one "sacred cow" in your business - a profitable offering nobody dares question. Ask honestly: if a startup set out to destroy it, how would they do it? That is often the blueprint for how you should reinvent.

Sources

Schumpeter, J., Capitalism, Socialism and Democracy, 1942.
Marx, K. and Sombart, W. - earlier roots of the creative-destruction idea.
Foster, R. & Kaplan, S., Creative Destruction, 2001.

Reinvention for Resilience

Case Study: Kodak vs. Netflix