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Appetite for Creative Destruction

13 March 2009

The current economic meltdown has and will continue to affect our businesses. As leaders, we can react in one of two ways: strive to cut costs and maintain the status quo until the storm passes, or see it as opportunity for innovating and planting the seeds for future growth.

What is creative destruction?

Schumpeter’s was a 20th century economist who believed that capitalism “… incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one…” The entrepreneurial enterprise is the mechanism by which creative destruction occurs. Clayton Christensen and his work on the innovator’s dilemma shows that innovation and the entrepreneur is key to long-term economic success.

What are the ingredients for creative destruction?

To create new economic structures new value must be provided to customers. There are three ingredients required for successful displacement of the existing order:

1.      Define a new customer experience . There must be something unique about your product or service that differentiates it from existing offerings.

2.      Develop a new business model . Finding some way to be profitable is crucial given the current shortage of capital and overall spending reductions,

3.      Utilize a new technology that provides a competitive advantage in defining a new customer experience or supports a new business model that was not viable before.

It is difficult to have all three ingredients in a venture but the most successful come up with a strong customer experience, underpinned by new technology that enables a new business model. It may take some time to find the successful mix. Consider that Google, who had new search technology (page rank) and provided a better experience (compared to existing search providers) didn’t really dominate until it developed a new business model (Google Ads).

Of the three ingredients, the most difficult one to get right is the business model. The ongoing search for viable business models by Web 2.0/Social networking companies like Facebook and Twitter illustrates this. Freemium and Google style advertising business models will not sustain their current valuations. Even digital media companies can be affected as recent problems with Sirius XM show. The old subscription based business model is very vulnerable to free streaming Internet Radio, podcasts, and high speed wireless.

How can we take advantage of the current situation?

The traditional media has been severely affected by widespread broadband, Internet based classifieds, and new digital media companies.  Their business model was eviscerated by Craigslist and their customer value of “news” replaced by posting of photos and videos of a newsworthy event to Youtube and Flickr. They have lost their business model and other companies are defining the new customer experience for news.

The ITC industry growth has significantly slowed with even Microsoft having to make their first mass layoffs in 34 years. The traditional hardware/software replacement cycle that has funded these companies is under threat because of reduced IT budgets and reduced consumer spending. Advertising cuts are being made across the board with the traditional media outlets taking the brunt but a reduction in growth for many of the new digital media providers.

However, the pace of technology change is still accelerating. Think of the explosion in open source software, embedded hardware platforms like Arduino, cloud computing tools and services. The cost to create web-based services is at least an order of magnitude lower than in 2000. Two guys and three months of funding could build the next Twitter or Facebook.

There is an abundance of new technology at perhaps the lowest costs ever, many non-differentiated customer experiences (think to-do list web sites), a lack of profitable business models, and many existing business are in survival mode. It seems to me that now is a great time to look for ways to utilize new technology, create new customer experiences, and most importantly define new business models to deliver your value to customer profitably. If you are not doing this, you can be guaranteed somebody else is!

[1] Christensen, Clayton M , “The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail” 1997.

[2] Schumpeter, Joseph A, “Capitalism, Socialism and Democracy ” 1942.

Klaus Krauter is currently a technology manager with Canon Information Systems Research Australia. He can't tell you what he does there its all top secret (shhhhh!), but he is a self-confessed innovator and entrepreneur. In his spare time, Klaus enjoys baseball and tinkering with technology.

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Written by: Klaus Krauter

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