In his landmark book Capitalism, Socialism, and Democracy, the economist and political scientist Joseph Schumpeter coined the term “creative destruction” — the idea that in a capitalistic society, “the old way” of doing things is constantly getting destroyed or supplanted as it is replaced by a newer, better alternative.
Schumpeter argued that capitalism “not only never is but never can be stationary.” Despite this, he warned that the success of capitalism would eventually lead to a “corporatism” mindset that was more focused on playing it safe and even becoming hostile to the innovations offered by entrepreneurs and businesses.
Creative destruction — essentially, another term for true innovation — is essential for introducing new products, new production methods and even new ways of organizing a business. Without it, businesses are prone to getting stuck in a rut and eventually dragging down entire industries.
Why Creative Destruction matters
Creative destruction is the force behind almost every major shift in how businesses and consumers operate. It’s how Netflix and streaming replaced Blockbuster and video rental stores. It’s how Amazon and the convenience of e-commerce have forced shopping malls to adapt what they offer to shoppers or go out of business.
What differentiates creative destruction from other ideas of “invention” is that is fueled by business leaders. Geneva L. Oster writes for Regent University: “Entrepreneurs are not simply dreamers who think up brilliant ideas. They are calculated risk takers who aim to enter a market from a unique and innovative angle. Their mission is to introduce a completely radical idea that will better their customers’ lives and ultimately increase productivity.”
Creative destruction’s purpose is to transform the market, often in ways that save time and money. The end goal is to improve workers’ standard of living by helping them become more productive or increase their wealth.
Going back to the examples of Netflix and Amazon, the convenience factor that stems from not having to run to the video store or the mall is a significant time saver. These radical transformations destroyed older business models, but created new opportunities with a more beneficial way of doing things. Such changes are reliant on a free-market model that is willing to let outdated business practices fail and be replaced by something better.
Creative destruction ultimately benefits society by giving customers more options to meet their needs — while also forcing organizations and their competitors to continually innovate and improve. While some businesses will inevitably fail, the net positives for society far outweigh the cons.
How your business can win through Creative Destruction
Just about every business leader can be involved in the process of creative destruction by seeking continuous progress that raises everyone’s standard of living — not just their own. Quite often, this begins by looking at norms within your industry to identify the inefficiencies that are holding back true growth.
A great example of this came from a recent conversation with HongKyu Lee, CEO of Iskra. Lee explained,
“Traditional game publishing uses an adversarial system, where the platform holder and the game developer are endlessly negotiating on fees to monopolize user access. Users never share in these profits.”
Lee continued,
“Our system seeks to tear down the traditional publishing and community model by rewarding all members of the community based on their participation. Whether a game developer, investor or gamer, everything from running network nodes to adding games also grows the community rewards pool because we recognize that each contribution provides value. Everyone can reap benefits by working together, rather than trying to fight against each other.”
This example is especially worth noting because of its emphasis on collaborative, rather than adversarial business relationships. Businesses that collaborate with their suppliers can better optimize the technology used for their products. Partnerships can even be used to develop entirely new products. Such outcomes are achieved when the goal is to raise the standard of living for all.
On the other hand, adversarial relationships take on a “me-first” mindset that usually seeks to undercut other parties — be they business partners or customers. This corporate mindset hinders true entrepreneurship and stifles innovation.
Leaders who wish to participate in creative destruction may think that they can only do this by introducing an entirely new product or service that supplants the current market leader. But this isn’t necessarily the case. The way you do business can be just as influential in improving productivity and raising the standard of living. A collaborative approach that shares value will lead to true win-wins in your business relationship that replace outmoded ways of thinking.
Such an approach can make your company more cost-efficient and better able to compete with others in your niche, fueling an ongoing cycle of innovation and competition that creates the best benefits over the long run.
Time to Destroy … Creatively
The term “innovation” can often be intimidating for business leaders, making them think that they have to come up with a new invention to be seen as true innovators. In reality, creative destruction unleashes the true power of an organization because it is focused on continuous improvement in all aspects of doing business.
As you seek to destroy old ways of doing things and come up with better solutions — whether that is in how you collaborate with partners or how you use technology — you will develop effective methods for taking your business to the next level.
Original Forbes article interviewing Iskra founder, Eugene Lee