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Monday, August 09, 2010

Creative Destruction & the Innovator's Dilemma


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.

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