Political parties refer to it as “renewal”. In philosophy the term tends to be “reincarnation”. Economists, from Karl Marx onwards, use it to describe the processes of the “…accumulation and annihilation of wealth under capitalism”. To me, the concept of “creative destruction” is what every firm must do every so often if it is to remain in business.
We are willing to be misunderstood for long periods of time- Jeff Bezos
The phrase was coined or popularised by no other than Joseph Schumpeter in his work of 1942 entitled Capitalism, Socialism and Democracy to denote a “…process of industrial mutation that incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one”.
Recently, Umair Haque – who runs a global think tank, blogs for the Harvard Business Review, authored The New Capitalist Manifesto, and is ranked as one of the world’s most influential management thinkers by Thinkers50 – described the concept of creative destruction as “the value equation of capitalism”.
The duration of business cycles (or the speciation rate for business) has over recent time shortened. In my father’s time, a business – its business model and customer value proposition – would last 10 to 12 years. In his father’s time, it would last 20-plus years.
Today, I think you’d be lucky if a business lasted three to five years without needing to change. It would radically change its mission, business model and customer value proposition. We live in an age of rapid and radical change and this, in turn, means that markets, consumer tastes and entire industries change much more frequently and more abruptly.
Evolution teaches us that when changes in the natural environment accelerate, so does the extinction rate of various species. Survival is determined not by who is the strongest but by who can adapt the fastest.
Look up the word ‘speciation’ and you’ll know what I mean. It is when new varieties of organisms arise and thrive because they are able to find and exploit an ‘ecological niche’.
Conversely, species become extinct when they are no longer able to survive in changing conditions or come up against superior competition. The very same happens to business.
Do you remember Research in Motion (RIM) or Nokia? In the last decade they both dominated their respective industries.
RIM was the master of the BlackBerry, the original smartphone with e-mail capability; Nokia was the undisputed heavyweight champion of the mobile phone mass market. Look at them now. They are both unable to survive in the changing conditions (smartphones with smart screens) and they’ve both come up against superior competition, like the iPhone from Apple.
I recently came across some very interesting research linked to the concept of creative destruction, a Bain & Company three-year study entitled Repeatability, in which they looked into how some companies achieve enduring profit and relative competitive ability to adapt in “…a world of increasing velocity and uncertainty”. They predict that the “…extinction of the slow, the inflexible and the bureaucratic” is about to happen in record numbers.
They quote some frightening figures. Of the 70,000 companies they studied nearly two-thirds destroy value – meaning they earned shareholder returns (dividends plus stock price appreciation) below inflation. Only nine per cent of companies achieved even a modest level of sustained and profitable growth. Just 100 companies accounted for $10 trillion in net returns. So what was the secret of the top 100?
Bain & Company says there are four key lessons: (i) Build an intolerance for excess complexity (read Edward Debono’s Simplicity Principles for some very good tips); (ii) Compete for the long term. Amazon chief executive Jeff Bezos says “We are willing to be misunderstood for long periods of time” and I think that captures the spirit of what Bain & Company are trying to say very eloquently; (iii) Focus on your greatest strengths. Put another way, focus on what you have that others don’t; and (iv) Build a business based on simplicity and focus. By doing so, you can always react faster than your competitors.
There are many local businesses, especially family businesses, which are slow, bureaucratic and inflexible. They generate little real profits and seem to be happy to plod along and break even or generate a small profit.
They desperately need innovation and change if they are to repeat past successes. The dinosaurs had little choice when the ice age wiped them out, but most local businesses do – creative destruction.
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Mr Fenech is managing director of Fenci Consulting Ltd.