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Creative Destruction

Definition

The continuous process of invention where new products replace obsolete ones. By halting or eliminating aging processes, one frees up resources to innovate. Capitalistic markets naturally dismantle old methods for new ideas and practices as a part of the free-market system.

Why Use It

Creative destruction is a byproduct of continuous improvement. Old technologies become outdated, and people lose their jobs, companies go bankrupt — in the name of innovation.

Organizations are incentivized to acquire the largest market share in an industry, leading to competition and a tit-for-tat game as all organizations vie for dominance.

Society encourages innovation by incentivizing disruption and new markets. Conversely, it demands the destruction of old products and processes. When businesses cannot change over time, they do not keep up with new entrants and play a part in their deaths.

In Capitalism, the effort to devalue old products directly affects existing wealth. For a country, economic crises and war unseat existing wealth and pave the way for new wealth.

When to Use It

The process of creative destruction results in winners and losers, and by remaining committed to aging methodologies, organizations and people are left behind. As entrepreneurs embrace new technology, they disrupt industries and create new verticals.

New products and services compete with existing companies by offering lower prices, more features, increased performance, and better marketing. Adaptation rewards an organization with continued relevance, and stagnation is punished with irrelevance.

There are many examples of new technology replacing old technology:

  • Digital music replaced compact discs that replaced tapes that replaced records.
  • Computers replaced typewriters.
  • Cars replaced horse-drawn vehicles.
  • Email replaced direct mail.

Asymmetric war demonstrates the gap between countries with resources and ones that do not. In this case, the outmatched country must rely on unconventional tactics and risk the superior power with better technology taking over.

The concept drives macroeconomic issues such as unemployment and investment. Entire industries and populations are made redundant by new technologies. Leaders tolerate a system that accepts people will be left behind and that those organizations may never recover. Globalization illustrates how capitalism causes creative destruction and uses it to move crises worldwide rather than fix them.

Creative destruction helps generate visionary companies that net higher profits.

How to Use It

Entrepreneurs seeking new and better products bring about the demise of older industries. With the knowledge that change occurs, then adaption is critical. Opportunity is equivalent to choosing constant change and reinvention.

Many companies have successfully transformed themselves time and again over the years:

  • IBM famously evolved from punch-card computing to gigantic mainframe computers, personal computers, services in the 1990s, cloud computing, and SaaS products. Its ability to pivot has allowed IBM to continue innovating since 1911.
  • 3M, despite several notable bumps in the road, has remained one of the most profitable companies in the world. It has been in the Fortune 500 since 1955, a distinction only 10.4% of companies share.

If an entity resolves to adapt and evolve, they are more likely to perceive market shifts and take advantage of new ideas. An organization may want to protect its profitability and business model, but focusing on empowered divergent thinking can accelerate opportunities.

Organizations and people can foster a culture of innovation:

  • Support and nurture creative folks across the organization
  • Form channels to collect ideas
  • Eliminate the fear of failure so ideas can find their way
  • Publicly note when an individual’s idea has produced a remarkable outcome
  • Make idea generation a competitive process where folks are recognized
  • Incentivize and reward innovation

Ultimately, the success or failure of an entity relies on how it can effectively codify transformation as a core value.

How to Misuse It

Creative destruction is a means to see how the world incentivizes invention and leaves aging practices and organizations behind. It is not a playbook in itself but a vehicle to choose innovation.

Next Step

Wherever you are now, whatever you are doing, in whichever industry you find yourself in, is a great place to start. Look at the market you exist in and at what is unfolding. What does the end look like? What would need to be true to circumvent it? How would you pivot or change trajectories to meet the future?

Where it Came From

German sociologist Werner Sombart mentioned the term in his 1913 work Krieg und Kapitalismus, but Joseph Schumpeter coined it in his 1942 book In Capitalism, Socialism, and Democracy. Karl Marx’s writing inspired the concept, and while today it’s seen more positively, the original text is specific to capitalism and the means to accumulate and annihilate wealth. In 1992, Philippe Aghion and Peter Howitt formalized the idea in mathematical terms.

What Are Mental Models?

Mental models are thinking tools that help guide and shape our perceptions of the world. They simplify complexity so we can understand life better, make decisions confidently, and solve problems.

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Deep Dive Into Mental Models

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