Creative Destruction: A concept to bear in mind on entrepreneurship and innovation

“I have been often told that my analytical outline refers only to a historical period which is rapidly coming to its end. And on that, I agree. In my opinion the economic theory can never be, in this sense, more than the theory of a certain historical period”. Joseph A. Schumpeter

Creative destruction was popularized by Joseph Alois Schumpeter (1883-1950), prominent Austrian-American economist, finance minister in Austria and professor at Harvard University from 1932 until his death. Explains it to us in his book Capitalism, Socialism and Democracy (1942).

Joseph Alois Schumpeter alludes to the “process of industrial mutation that incessantly revolutionizes the economic structure from within, destroying the old and creating new ones”.

Joseph Alois Schumpeter, said that entrepreneurship is the ability to act in order to take advantage of the opportunities created by innovation and new discoveries.

Creative destruction is the continuous process of generating changes in technology and business models that make obsolete the skills that have made successful organizations.

An good example of this transformation is found in the photographic industry:

At his best the company Kodak employed 145,300 people around the world.

Kodak was the creator of the digital camera, however, decided to keep and continue to use the old methods and old technologies.

A few years later, a company called Instagram emerges and creates an App through which digital photos could be exchanged. Only 15 people worked at Instagram and a few years later it was bought by Facebook for one billion dollars.

At the end of 2012 Kodak was declared bankrupt.

The great contribution of Joseph Schumpeter was to refine the idea that capitalism is like war, in the sense of proposing the theory of creative destruction.

Joseph Alois Schumpeter maybe put too much emphasis on the fact that the competition destroys existing production structures in order to replace them with innovative structures and he did not know how to underline the positive aspects of innovation, which may arise without necessarily destroying the ability to make a living, of those used to the old way of doing things if they show adaptability to changes.

However, it has a dark side: the social cost that this process produces on the people affected.

If enough alternatives for change are not open, not only will fail the economy, but markets, organizations and individuals will also fail. There are only two choices: to keep playing or to be erased.

Joseph Alois Schumpeter concludes that competitive advantages are always in the process of becoming obsolete as technologies change, because the consumer’s likes and environment conditions also change.