Close Shave or Cut Throat? The Imperative of Creative Destruction

One of the hallmarks of Market-Based Management is creative destruction, which is when old processes are destroyed and replace by better, newer ones. It is not difficult to think of examples: ipods replaced CDs, which replaced cassettes, which replaced eight tracks, which replaced vinyl, which replaced wax cylinders.

However, one of the concerns about creative destruction is what to do when one’s business is sitting pretty? As the saying goes, “if it ain’t broke don’t fix it,” and what if pursuing creative destruction might result in a temporary (or even longer) dip in profits? Indeed, there are all sorts of crank conspiracy theories about mysterious firms and organizations unseen paying to keep superior products off the market, but logic would dictate that there is likely more money in bringing a superior product to market than paying money to hold it back.

I recently came across a great example of this while shaving. I finally purchased one of the powered safety razors and have been very happy. Not only do I enjoy a great shave, but I have noticed that the blades last a lot longer. Perhaps the sawing dulls the blades less or ensures that the whole surface wears evenly, but, whatever the reason, I am getting a lot more bang for my razorblade buck. So why would the razor manufacturers do such a thing, when it means they will sell me less razor blades this year? While I am sure they have their reasons, I would venture that they believed that enough new customers will take to the razor to more than offset the fewer blades per capita. At the same time, I wonder if some in the firm fought the introduction of the new razor, but someone must have realized that although the firm already sold plenty of razor blades, it would have to embrace the new product or be destroyed when someone else did.

The lesson is that the firm must drive creative destruction always—especially when it looks as if it doesn’t have to—and even when doing so will cause it to take a hit. No firm is untouchable, and the hard-won lesson of modern business is clear: creatively destroy or be creatively destroyed.

Comments

[John]

I liked your comments Alastair, but I would add one twist that "no firm is untouchable". Only if that firm is not supported by a government body. The example I would give is the US Potal Service and the advent of Email. After sitting by and watching thousands of Email services popup over the last 15 years the only answer the USPS has is to raise their postage stamp rates 6 times in that same time span or to attempt to have legislation introduced to "tax" Emails. What would've happened if the same firm had embraced Creative Destruction during the beginning of the Email phenomenon and been one of the first to offer Email service. I would bet that the potential value & revenue created by a move like that back in the mid-1990s would've prevented at least one of those rate increases if not more. They would've still lost a percentage of their "snailmail". But think of the added insight they could have gained, perhaps anticipating the small package delivery boom generated by Internet sales. Creative Destruction not only deconstructs how you think about your current products/services, it also opens you up to see other avenues that can produce new and potentially higher revenue streams.

[Alastair Walling]

John,

A good point, and I violated one of my own rules—never use absolutes. However, while I definitely agree that firms (or other organizations) supported by government may suffer less from creative destruction, they are not entirely impervious to it. Even if the government backs them to the hilt, they are still bounded by the ingenuity of ordinary people or their love of the new product—imagine the riot if the e-mail tax passed! Here is a previous post on Bangladeshis using Voice over Internet Protocol, to circumvent their country’s ponderous telephone monopoly—despite, which persisted despite threats and violence form the authorities. http://mbm.blogs.com/team_weblog/2007/04/et_phoned_home_.html True, the postal service has missed many opportunities (think what a postal version of gmail could have done for them), at the same time, do you think that competitive pressures have forced some change at the USPS? I don’t know a lot about the USPS, but some of their services (Priority Mail, Express Mail, etc.) seem new and likely a response to the erosion of their business in some areas. Still you are right, government granted monopoly or support does not guarantee the full effects of creative destruction (according to wikipedia Express Mail is notorious for arriving late and does not offer the same be there by 8:30 in the AM the next day), but folks are wily and creative, so I would never rule out creative destruction.

Thanks for the comment—I wish we got more.

AL

[John]

Alastair - excellent points! And I agree, even government protected firms do "suffer" from creative destruction, perhaps just not in the same way as the rest of the market players. Rather than embrace this catalyst of fast growing free markets, they tend to fight the creative destruction that eventually will define their industry.

[David McGinnis]

When you were 'speaking' of conspiracy theories of markets keeping superior products off of the shelf, the first example I thought of was Oil Companies stifling the ingenuity of alternative fuel sources. Naturally, I don't know what the truth is, but they have a lot of money, and we certainly aren't as far along in the research as we should be. I'd be curious to know what our options would currently be if the Oilionaires were on board with creative destruction.

[Alastair Walling]

David,
A great point, and the mindset you describe is very common. In a market economy, goods and services arise from what F.A. Hayek called spontaneous order. Somehow, without formal direction, millions of people cooperate to make even the simplest of goods. The economics classic I pencil (http://www.econlib.org/library/Essays/rdPncl1.html) provides an excellent description of this process. At the same time, a lot of folks have trouble contemplating the sheer magnitude and miracle-like nature of spontaneous order. These are not stupid people (often they are the brightest of the bright), but it is human nature to not waste time with something as mind boggling as spontaneous order and instead attribute an event, good, service, or price to the actions of a single person, small group of persons, or an institution, when instead, the “thing” is really the product of spontaneous order and the actions of untold millions.

Which brings me to the crux of your point: if the situation with alternative fuels is unsatisfactory, then why do we find ourselves in this situation? The natural inclination is to attribute the cause to someone or something, rather than the millions of potential causes. My personal favorite representation of this mindset comes in Steven Seagal’s speech at the end of On Deadly Ground (I don’t recommend the movie).

Needless-to-say, if the oil companies are stifling the ingenuity of alternative fuels, then they appear to be doing a pretty lousy job of it. Ethanol production receives huge amounts of government support and production has gone through the roof, as has the production of soy diesel, and even the making of fuel from hog fat. My impression is that the “holy grail” of alternative fuels is making it from left over stalks, wood chips, grass, and other waste organics, but my understanding is that the problem lies in producing the right enzymes to break these substances down. I am no biochemist, but this seems a Herculean task, which might explain some of the delay.

Furthermore, I think people forget that the reason, the internal combustion engine has not been creatively destroyed (although it inevitably will) is that petroleum is a fantastic store of energy and still the best means of personal locomotion available. If I remember right, electric engines powered the first really effective “horseless” carriages, but they were creatively destroyed by the growing superiority of engines powered by gasoline. Did the electric car industry or “Big Horse” or “Big Stagecoach” or “Big Railroad” manage to hold off the budding gasoline car industry? Has anyone managed to stop the march of the hybrids? True, modern electric cars have proved unsatisfactory (although I hear there are a few very fast ones, but are very, very expensive), but the fact that these models have proved unsatisfactory has more to do with the laws of physics and the wants of customers, than the actions of a single man or organization. The government and car companies have spent billions developing these cars, but they consistently fell short, while the hybrids popped out of nowhere. Anyway, I’ll wrap up by summarizing: (1) the problem you describe is a product of spontaneous order and not meddling; and (2) creative destruction will eventually pounce. Someone somewhere is tinkering away on the replacement for the internal combustion engine, and if he or she comes up with something better that can overcome the laws of physics, economics, and satisfy peoples’ wants better, then no force on Earth will be able to stop that product. There I go with the absolutes again, but creative destruction is just that powerful.

I hope this answers your question, and if not, then please call me on it.

AL

[jubin]

there is absolutely: NO SUCH THING AS A 'FREE MARKET', A FANTASY, GIVE IT UP ALREADY, YOU ARE EMBARRASSING YOURSELVES.

Sincerely,

Jubin Ajdari
[email protected]