Friday, September 16, 2016

Schumpters Gale - Creative Destruction

Schumpeter's gale, is a concept in economics which since the 1950s has become most readily identified with the Austrian American economist Joseph Schumpeter who derived it from the work of Karl Marx and popularized it as a theory of economic innovation and the business cycle. src Wiki

The "gale of creative destruction" describes the "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one".

Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid in instant photography – have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs.

In technology, the cassette tape replaced the 8-track, only to be replaced in turn by the compact disc, which was undercut by downloads to MP3 players, which is now being usurped by web-based streaming services.

Companies which made money out of technology which becomes obsolete do not necessarily adapt well to the business environment created by the new technologies.

Online ad-supported news sites such as The Huffington Post are leading to creative destruction of the traditional newspaper. The Christian Science Monitor announced in January 2009 that it would no longer continue to publish a daily paper edition, but would be available online daily and provide a weekly print edition. The Seattle Post-Intelligencer became online-only in March 2009.

For half a century, until Johnson & Johnson introduced Tylenol, Bayer Aspirin drove the growth of Sterling Drug. Out of fear of cannibalizing its Bayer Aspirin leadership, Sterling Drug refused to introduce its leading European nonaspirin pain reliever (Panadol) to the United States. Instead, it tried to expand its Bayer line overseas but failed.

This failure ultimately led to its acquisition by Eastman Kodak. Sterling Drug had become immobilized, unable to change its half-century-old behavior out of fear. Its strong culture—its rules of thumb for decision making, its control processes, the information it used for decision making—blocked its progress and ultimately sealed its fate. It had locked itself into an ineffective approach to the marketplace despite clear signs that it needed to act in a new way.

src Mckinsey

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