“Creative destruction” coined by Joseph Schumpeter in Capitalism, Socialism, and Democracy (1942) is:
The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—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. (p. 83)
Basically, some new product comes along, and by its coming along, destroys the old product.
This article by Richard Forester looks at creative destruction in the S&P 500. Some key highlights from his article:
• 61-year tenure for average firm in 1958 narrowed to 25 years in 1980—to 18 years now.
• A warning to execs: At current churn rate, 75% of the S&P 500 will be replaced by 2027.
• To survive and thrive, leaders must “create, operate, and trade”— build new divisions and trade mature ones at the pace and scale of the market without losing control of their company. Few companies have been able to do so over the longer term.
According to Foster, the life span of a corporation is determined by balancing three management imperatives: 1) running operations effectively, 2) creating new businesses which meet customer needs, and 3) shedding business that once might have been core but now no longer meet company standards for growth and return.
The problem is that the innovation that is needed to create significant new businesses
can often directly conflict with the operational effectiveness of the current business. Under these circumstances large companies slowly fall behind the pace of
change of the economy. Most companies end up succumbing to the siren call of continuing
on their current course rather than managing for long term evolution of their product lines to keep pace with the overall changes in the economy.
Ultimately, the challenge faced by all companies is to grow at or above the pace of their industry without losing control of their operations.
So how do these companies embrace creative destruction in order to outpace the market:
The first step in the process of embracing creative destruction is to envision the corporation as if it is a market itself: one that must “create, operate and trade” its assets without losing control of its operations. This must be done at the pace and scale of the overall market.
Drawing lessons from these market leaders, Foster suggests that the CEO and Executive
Committee ask themselves three questions:
1) “Are our operations world class?”
2) “How fast do we have to change to maintain our position within our industry?”
3) “Do our control systems work effectively?”
As we head into a time of stronger growth coupled with increase technological change,
the message for senior executives is clear: if you aim to maintain control of your
corporation and deliver value to shareholders and customers, you must embrace creative
destruction rather than wait to become a victim of this unstoppable force.
RD: Fairly interesting article on strategy. It’s one way to view the world around your organization. Don’t be complacent because your top product today may be replaced by a newer product from your competitor. Creative destruction happens, is your organization ready? As this article points out, there was a large churn in the S&P 500 which may indicate they were not ready when creative destruction struck.