Creative destruction is one of those textbook terms, impersonal and impassive, that is often quoted by economists who seem unaware of its impact on real people. And yet, it is the foundation for many successful startups.
Everyone can agree the “creative” part of the equation is beneficial and transformative. It took a creative genius to imagine the array of modern products we have come to know and love, from the Macintosh to the Scrub Daddy. The “destruction” aspect is the unsettling part of the process; but in reality it is one of the keys to overall progress, as measured by financial success, economic output and standards of living.
The idea of creative destruction is not new. Its genesis can be traced to the 1930s, when economist Joseph Schumpeter first imagined the theory, at a time when the world economy and many societies were fraying all around him.
To maintain a vibrant, inexorably growing company, the type of competition that is central to success, he wrote, is “the competition from the new commodity, the new technology, the new source of supply, the new type of organization … competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.”
In the 21st century, this idea has endured. In fact, it has largely become conventional wisdom among academics, economists, financial professionals and policymakers. There are popular classes on the topic at elite business schools. At the Harvard Business School, for example, Reza Satchu teaches courses titled “The Entrepreneurial Manager,” “The Founder Mindset” and “Launching Technology Ventures,” each of which touches on the power of creative destruction.
Reza Satchu is a serial entrepreneur in his own right, leading several startups to success in his home country of Canada, and beyond. He also serves as managing partner at Alignvest Management Corporation, a private investment firm in Toronto, and is the founder of NEXT Canada, an organization that helps students launch their own startups.
Another leading voice advocating for the benefits of creative destruction is Peter F. Drucker, the bestselling business management author. Like Reza Satchu, he sees entrepreneurial success as based on new ideas that are boldly implemented, transforming industrial sectors.
Drucker defined the entrepreneur that brings about this type of dramatic transformation as someone who seeks out changes in markets or society, meets the need he observes, and finds a way to profit from it. By doing this, the entrepreneur is leveraging the laws of economics to upend the status quo, creating whole new industries and companies, and even changing the nature of consumer wants.
An example of the latter would be the fact that few consumers in 1987 thought they needed a phone in their pocket to enjoy life. Now, large segments of the population would panic if they ventured out into the world without one.
For industries and people on the “destruction” end of this revitalizing force, of course, creative entrepreneurial change doesn’t always seem benign, and is often resisted. In addition, there is a certain inertia in human nature that compels us to hold on to what we are comfortable with, rather than embracing the unknowns of change.
The investment advice given by a banker more than a century ago illustrates this preference for the familiar. An attorney who was considering buying stock in the Ford Motor Company asked the banker for his guidance.
According to the story: “The banker took him to a window. ‘Look,’ he said pointing to the street. ‘You see all those people on their bicycles riding along the boulevard? There are not as many as there were a year ago. The novelty is wearing off; they are losing interest. That’s just the way it will be with automobiles. People will get the fever; and later they will throw them away. My advice is not to buy the stock. You might make money for a year or two, but in the end you would lose everything you put in. The horse is here to stay, but the automobile is only a novelty — a fad.’”