The Creative Destruction of Technology Firms
The term creative destruction in business jargon conjures up different images for different people. To some it may mean that some technologies become outmoded, or certain products are obsolete; to others it conjures up an image of entire businesses being destroyed and replaced by new fangled business models and ideas. In the technology arena, creative destruction potentially is the mugger just waiting around the corner to hit you on the head and relieve you of all your worldly possessions.
Like the mugging you won’t know what hit you or who or maybe if you have a concussion even when. Creative destruction is what made Andy Grove of Intel paranoid and what drives the fear of obsolescence for Bill Gates and Microsoft. You should fear it too, for it can make your entire business fold up in a flash if you are not careful.
The great economist Joseph A. Schumpeter coined the term ‘creative destruction’ in 1942 in his book Capitalism, Socialism and Democracy. It was “the process of mutation…that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”. He believed that creative destruction is an essential fact of capitalism, that it strikes not at the margins of profits or outputs of existing firms ‘ but at their foundations and their very lives”.
In “Only the Paranoid Survive”, Grove used the term ‘strategic inflection point’ to describe a time in the life of a business when its fundamentals are about to change. This change can mean an opportunity to rise to new heights or it may signal the beginning of the end. It is also more than just technological change; they are ‘full scale changes in the way business is conducted, so that simply adopting new technologies or fighting the competition the way you used to may be insufficient’. Grove was basically describing ‘creative destruction’ in a technology firm.
Take the iPod for example and how it has revolutionised the music industry. Today it is a fashion tool for young people and the technology-savvy. But its ramifications for the electronic gadget and music industry are profound. The Sony Walkman, that iconic music machine of the 1980s and 90s is no more. No geek would be caught with one today. The iPod has destroyed an icon, all in less than a year. That is true creative destruction. It has also changed the face of how music is sold and delivered. Sales of CDs are down but not music sales as millions of tunes are sold over the Internet for downloading into not just the iPod but also other MP3 players. Soon they will not sell CDs anymore, as all music will be delivered only online.
Even the latest Bose sound systems have hard discs to store music which can be transferred either via the CD or downloaded through the Internet. Enjoying music will never be the same again either.
Creative destruction can happen anywhere and at anytime. The entry of Sony and then Microsoft into the computer gaming industry ended the reign of Atari and has sounded the death knell for Nintendo, although Nintendo still has a fighting chance with new technological developments on the way. Atari and Nintendo were leaders in the gaming industry, which was hugely profitable and had great potential. Unfortunately for them such potential always attracts competition and their worst luck was that it attracted two of the giants of the business world. No one can withstand the entry of such major players. They got mugged and it’s game over for them.
The Internet was the greatest mechanism of change in my living memory. It changed not just how business is run but even how products and services are delivered. Today the insurance salesman is no more in the UK as all insurance services are delivered online or via call centres. You can buy all sorts of insurance products online; from home, to travel to motor insurance, all at the click of the mouse. It has so revolutionised the business that even supermarkets sell insurance to their customers, online of course.
Even the call centres owe their flourishing new business to the Internet because cheap international telephone calls were only made possible by Voice over Internet Protocol (or VoIP), a product of the Internet. Thanks to VoIP, the Indian and Malaysian call centres are doing roaring business though at the expense of call centres in the West. Creative destruction is an opportunity to some while destroying the business of others.
So we know that creative destruction can contribute to significant changes in business, but is there anything you can do to prevent the potential destruction of your business? This is especially the case for technology businesses where things can change in the flutter of an eyelid.
Intel is a good example. It is surprising that Intel has managed to last for so long without being overtaken by new technologies or rivals. Perhaps the paranoia that Grove had while CEO and then Chairman of Intel helped him to stay ahead of potential destruction. Beyond paranoia though, Intel had to change and to adapt to the potential new destroyers of its business existence. The Internet was one such potential destroyer because Grove believed that it was possible to build a simple computer that could run on a simple microchip. Using the Internet the networked computer, as it was called, would link up to a mainframe server that would host the data and even the software needed to run all applications. Hence the computer that you own does not need expensive, powerful processors and would put Intel out of business. It has not happened yet, but like he said it is possible.
Intel however, took steps towards managing the potential for destruction. They updated their own genetic makeup to be in tune with the new environment. They also worked closely with customers and potential customers including software and telecommunications firms, advertising and media companies and other firms that could impact on their technology or product.
They also realised the need to rethink their entire corporate organisation structure, to modify it to cater to this new role of cooperation with the above firms. They needed to communicate this to their thousands of employees who needed to know why they were making changes when business was still doing well.
They evolved with the technology. They were always innovating and being creative and spent billions on research and development to keep ahead of the curve and their competitors. Hence whenever AMD came out with a faster chip (which was not often) Intel would exceed their speed in a matter of weeks. Innovation is a key to Intel’s success at keeping creative destruction at bay.
There are a lot of lessons here for Malaysian firms. Local firms must learn to keep ahead of the curve, to be aware of not just what is happening in their industry but also of what could happen in the future. They need to constantly update their management processes to be in tune with the constantly changing environment. They must be prepared to change at a moment’s notice but be able to communicate any change to their employees, as change is difficult for staff to manage.
They must always be aware of what is happening in their industry by being networked into the industry, by attending conferences and exhibitions and by reading all the latest information especially on the Internet. Mostly they must innovate and be willing to spend money on research and development to keep ahead of technological changes. Most of all they must be paranoid about their business and their industry because in this case paranoia will help you to avoid a technological mugging.
8th August 2005
Like the mugging you won’t know what hit you or who or maybe if you have a concussion even when. Creative destruction is what made Andy Grove of Intel paranoid and what drives the fear of obsolescence for Bill Gates and Microsoft. You should fear it too, for it can make your entire business fold up in a flash if you are not careful.
The great economist Joseph A. Schumpeter coined the term ‘creative destruction’ in 1942 in his book Capitalism, Socialism and Democracy. It was “the process of mutation…that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”. He believed that creative destruction is an essential fact of capitalism, that it strikes not at the margins of profits or outputs of existing firms ‘ but at their foundations and their very lives”.
In “Only the Paranoid Survive”, Grove used the term ‘strategic inflection point’ to describe a time in the life of a business when its fundamentals are about to change. This change can mean an opportunity to rise to new heights or it may signal the beginning of the end. It is also more than just technological change; they are ‘full scale changes in the way business is conducted, so that simply adopting new technologies or fighting the competition the way you used to may be insufficient’. Grove was basically describing ‘creative destruction’ in a technology firm.
Take the iPod for example and how it has revolutionised the music industry. Today it is a fashion tool for young people and the technology-savvy. But its ramifications for the electronic gadget and music industry are profound. The Sony Walkman, that iconic music machine of the 1980s and 90s is no more. No geek would be caught with one today. The iPod has destroyed an icon, all in less than a year. That is true creative destruction. It has also changed the face of how music is sold and delivered. Sales of CDs are down but not music sales as millions of tunes are sold over the Internet for downloading into not just the iPod but also other MP3 players. Soon they will not sell CDs anymore, as all music will be delivered only online.
Even the latest Bose sound systems have hard discs to store music which can be transferred either via the CD or downloaded through the Internet. Enjoying music will never be the same again either.
Creative destruction can happen anywhere and at anytime. The entry of Sony and then Microsoft into the computer gaming industry ended the reign of Atari and has sounded the death knell for Nintendo, although Nintendo still has a fighting chance with new technological developments on the way. Atari and Nintendo were leaders in the gaming industry, which was hugely profitable and had great potential. Unfortunately for them such potential always attracts competition and their worst luck was that it attracted two of the giants of the business world. No one can withstand the entry of such major players. They got mugged and it’s game over for them.
The Internet was the greatest mechanism of change in my living memory. It changed not just how business is run but even how products and services are delivered. Today the insurance salesman is no more in the UK as all insurance services are delivered online or via call centres. You can buy all sorts of insurance products online; from home, to travel to motor insurance, all at the click of the mouse. It has so revolutionised the business that even supermarkets sell insurance to their customers, online of course.
Even the call centres owe their flourishing new business to the Internet because cheap international telephone calls were only made possible by Voice over Internet Protocol (or VoIP), a product of the Internet. Thanks to VoIP, the Indian and Malaysian call centres are doing roaring business though at the expense of call centres in the West. Creative destruction is an opportunity to some while destroying the business of others.
So we know that creative destruction can contribute to significant changes in business, but is there anything you can do to prevent the potential destruction of your business? This is especially the case for technology businesses where things can change in the flutter of an eyelid.
Intel is a good example. It is surprising that Intel has managed to last for so long without being overtaken by new technologies or rivals. Perhaps the paranoia that Grove had while CEO and then Chairman of Intel helped him to stay ahead of potential destruction. Beyond paranoia though, Intel had to change and to adapt to the potential new destroyers of its business existence. The Internet was one such potential destroyer because Grove believed that it was possible to build a simple computer that could run on a simple microchip. Using the Internet the networked computer, as it was called, would link up to a mainframe server that would host the data and even the software needed to run all applications. Hence the computer that you own does not need expensive, powerful processors and would put Intel out of business. It has not happened yet, but like he said it is possible.
Intel however, took steps towards managing the potential for destruction. They updated their own genetic makeup to be in tune with the new environment. They also worked closely with customers and potential customers including software and telecommunications firms, advertising and media companies and other firms that could impact on their technology or product.
They also realised the need to rethink their entire corporate organisation structure, to modify it to cater to this new role of cooperation with the above firms. They needed to communicate this to their thousands of employees who needed to know why they were making changes when business was still doing well.
They evolved with the technology. They were always innovating and being creative and spent billions on research and development to keep ahead of the curve and their competitors. Hence whenever AMD came out with a faster chip (which was not often) Intel would exceed their speed in a matter of weeks. Innovation is a key to Intel’s success at keeping creative destruction at bay.
There are a lot of lessons here for Malaysian firms. Local firms must learn to keep ahead of the curve, to be aware of not just what is happening in their industry but also of what could happen in the future. They need to constantly update their management processes to be in tune with the constantly changing environment. They must be prepared to change at a moment’s notice but be able to communicate any change to their employees, as change is difficult for staff to manage.
They must always be aware of what is happening in their industry by being networked into the industry, by attending conferences and exhibitions and by reading all the latest information especially on the Internet. Mostly they must innovate and be willing to spend money on research and development to keep ahead of technological changes. Most of all they must be paranoid about their business and their industry because in this case paranoia will help you to avoid a technological mugging.
8th August 2005
posted by Dr. Siva at 10:30 PM
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