Understanding the Creative Destruction of Capital


Breaking away from the stereotypical thinking is both a challenge and opportunity. It not only requires a brilliant set up but also looking into when is the right time to innovate? Organizations which have a myopic focus for short term success and placing themselves in comfort either because of their size or otherwise are destined to collapse in the long run. It is for this reason it is imperative for the organization to include innovation as an integral part of their organizational set up.' Innovate or perish' should be the driving theme and it is essential for a manager to extend this thing to the grassroots of the organization.

A significant start to inculcate a culture of innovation is to have a clear and lofty vision that will bring about growth and greatness to the organization. The society will also reap rich benefits through this process as the most sophisticated and environmental friendly products shall be catered to it and competition shall ensure price stability. "Thou shall become as thou dream" but this dream which is the company's vision should not be utopian. Fearlessness and the ability to face crisis are of essence in seeing things in the mirror of success. Finally none of this is real without people. Successful managers have to build a culture of innovations in their team. This is truly reflected in the Indian IT industry which we have tried and evaluated and which now observes many young, innovative and entrepreneurial product companies.

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Theoretical aspects of creative destruction of capital- arguments and evaluation of arguments made by Joseph Schumpeter, Galbrith and Paul Baran


Schumpeter explained that processes intrinsic to any capitalist society engendered a "creative destruction "whereby innovations would destroy existing technologies and methods of production by imitative rival products with newer, more efficient configuration."ANYTHING MORE TO ADD WITH ZOHRA MATERIAL AND GIVE THE REFERENCE

Schumpeter I would say was the first uncontemporary minded revolutionary business person of his time and the paper shall try and converge his theory with contemporary business revolutions. The contemporary time takes cues from the same theory with different or same names which we shall in the paper try and prove.

If you are an entrepreneur, you shall aim to get into top position and establish yourself in whichever industry you choose to be (the choice of which in itself can be due to various reasons). The next step shall be to try and expand itself and then sustain its market share as various other players shall enter looking at the profitability of the industry.

This is what Schumpeter had argued that it is entrepreneurship and zeal to be ahead that leads to destructive changes in the system. These destructive changes come in the system in the form of well established companies destroying their product lines partially or completely, adding new products to the existing product lines etc. which shall be dealt with later.

This is something against the Keynesian's dominant view of mass production and supply and demand equilibrium popular and at the top during the years of Industrial Revolution. This is clearly reflected in the revolutionary work Capitalism, Socialism and Democracy and this according to us makes Schumpeter one of the earliest avatars of entrepreneurship and a strategic marketing referable even today.

His theory challenged the very popular notion of equilibrium i.e. a point of stability. Instead he argued that the 'economy is in perpetual state of dynamic disequilibrium. Entrepreneurs, need to time and again unleash innovation, improve products etc. because the rapid pace of technological change which not only makes difficult for the large player (due to advantage of first entrant or otherwise) but also gives a similar opportunity to enter such industry in lieu of a Niche market which in no circumstances can be served by the dominant industry due to factors like taste, size of the firm as well as the market size for that product or many other factors. This Schumpeter chooses to call 'gale of creative destruction' which forces the players big or small to adapt or die. This in most contemporary times is the case with Daewoo which finally has shut down because of confused strategic innovation policies it adopted. This "process of industrial mutation" he argued "incessantly revolutionized the economic structure from within, incessantly destroying the old one and incessantly creating a new one".

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It is this which makes the economies grow, breaks saturation argued Schumpeter which we often talk in terms of product life cycle where if the product has reached or may reach its maturity stage but it is this which brings it back to growth stage and this new growth stage is characterized by more severe competition. This is what according to Schumpeter stabilizes and brings growth opportunities in Capitalism. The basic Schumpeterian form of analysis were in non-alignment with given economic models and his basic pillars were creativeness, innovation and idea. It was only under heavy influence of existentialist writers like Nietzsche, he amalgamated his ideas with economics.

It is this analysis which in contemporary times we find not only relevant but beating all other stereotype models. The case I am going to give now represents the same and is a published one.

"This paper provides an analytical framework to capture the economic importance of social capital for growth and innovation. Relational Capital (RC) consists of contacts between economic necessary to acquire inputs and to sell outputs units. These contacts form the individual aspect of social capital that is directly productive. Replacement of old contacts by new ones is part of Schumpeterian creative destruction leading to technological progress. Because informal social networks facilitate the search for contacts, many empirical studies find that social networks support income generation and innovation. Market institutions enjoy increasing returns to scale in aiding contact formation compared to informal social capital networks. For growth rates in developing countries to increase, a 'fundamental transformation' from informal to formal search institutions is therefore required. But since RC replacement carries a negative externality, creative destruction and technological progress may be punished if it threatens political elite interests (say India in License age). Growth experiences in transition and developing countries are interpreted in this framework".

To understand nuances of any theory one must understand the critique that has gone into it. Essentially the critiques have been "economist" for Schumpeter. This is important as critical revaluation also need to look at certain economical issues. However we have tried and given a marketing perspective to the whole issue. I have mixed the critique argument. Simultaneously I will try and revaluate those critiques either by contemporary scenario or by theoretical aspects of the argument.

The analysis of Schumpeter is based on Competitive capitalism which according to Marx does not exist. Marx pointed out that in the process of competition there are 2 levels of centralization: a) Process of competition itself drives out some and leads to emergence of large concentration of capitalism in relation to aggregate referred as monopoly capitalism. b) Development of Credit/ Financial system: Importance historically for centralization starts with an aid to capitalist accumulation but in course of time this credit system leads to large centralization in course of time. This credit system leads to large centralization in hands of few. He cites examples of Joint stock companies which merged in the 19th century- referred as corporate enterprise. There he argues that this new emergence leads to separation between owners and functioning capitalists. So here legal ownership though is less, effective control is large. Thus this control Marx argued reinforced monopoly capitalism as owners of means of production were separated from operational aspect.

A direct critique of Schumpeter comes from the fact that the imperatives Schumpeter talks about for the business i.e. innovation of new products, new improvement in production etc. which are imperative - which Schumpeter calls perennial gale of destruction is only visible if the business is successful in doing this i.e. business failures despite following creative destruction are invisible. All the more Marx argues that once this becomes a continuous process business success won't be sustained. In all Marx basically argued that you owe success only when you have means of production whereas Schumpeter argued that one acquires more business assets as he meets with more success. This Marx says converts perennial gale to perennial lull.

If one evaluates this critique one must say that Marx had his theory well laid. However if one looks at the contemporary times one sees that creative destruction takes place in every industry. The fact that has been grossly oversimplified is innovation per se is solution to all problems which however removes qualitative questions like segmenting, targeting and positioning. A company cannot simply rely on its research and development without understanding nuances of market in which it is going to sell it to. Marx talked about perennial gale to lull for industry as a whole where he considered no effectiveness of rational positioning. From his theory it appears however rational STP is done at some point the company is bound to fail at some point of time.

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Then he points out the emergence of Monopolies in the markets due to concentration of capital. This is true because large players have more scope for making mistakes for same experiments compared to a new firm, but this very fact also prevents them from doing what new entrants can effectively do. The new entrants have advantages like:

Since they are young, they have an advantage of choosing which technology to adopt which is usually cheaper than when it was introduced by the current large firm.

They have a better chance to shift over to production which is more required which a dominant firm will face difficulty into. This is true from both capital industry perspective where perceived innovation is slow and also from rapid innovating industry perspective like IT. An e.g. of the former is Bajaj auto which though a dominant player did not had the foresight for future competition and had over-invested in its plant capacity and when Honda arrived, Bajaj could not shift out of its geared segment completely. Again this proves Schumpeter right on 2 points. First, being a large but marketing myopic player cannot save you from doom. Second in such industry, capital intensive methods are used which reflect that such industry run a higher risk of being wiped if not managed properly. The point is that Marx has described a process overlooking at the dynamism of firm itself.

The critique by Marx overlooks something called as Niche market- For e.g. look at the biscuit market in India, despite all larger players becoming more large small local players enjoy their due share and their growth on an average has been rising. This is because a large player like Britannia if faces competition from new product due to price or otherwise. Also it cannot simply roll back its product as the cost involved would be very high. Also a large chunk of profit is eaten away by these small markets targeting a particular segment specifically. E.g. Frontiers and Bombay Bhel house in Delhi.

Further critique mentioned says that competition from all sectors will be eroded at a point of time. But this again has not been seen. Take the e.g. of Indian railways, once you change the domain of competitors that is include low cost airlines the level in market competition goes up. So even an established player like railways now can't just sit back. It has to develop new strategies in accordance with new market realities. It is also how one is defining a market structure i.e. say worldwide Coca-Cola and Pepsi if looked at in terms of market share one finds a duopoly structure emerging but if one looks at beverage market as a whole one finds a relative diluted oligopolistic structure where growing incomes has reduced consumption of Colas. Also the other non black drinks market themselves as say non -colas. Even within the same company there is competition between products produced. For example Colgate toothpaste not only competes with only rival companies making similar products rather it competes with Colgate gel i.e. its own product line, even a datum for that matter. Why I choose to call it this way because a particular customer's budget is fixed with which he has to make a choice for the thing he is going to clean his teeth with?

The reason I point out such details because marketing talks about product differentiation, it has to be and must be seen in such a broad perspective to get the right picture.

Further as Schumpeter has argued that even if in this processes there is emergence of monopolies cannot sustain themselves unless they innovate. The whole idea is that such large firms cannot just fold their hands and sit back. A classical example of this is the case of Nokia. The Finnish company is world's leading maker in mobile phones. Its annual revenues exceed 29 billion Euros and it sells over 200 million phones each year making it the leader in the market with whooping 35% share.

Let's look at this more closely. Nokia was one of the earliest companies to recognize mobiles as a fashion item and had heavy emphasis on product design which made it a market leader.

But then the mobile operators began to exert pressure on brand of mobile phones purchased by the consumer. Leading mobile phone makers began to market their own phones and Nokia was the biggest loser out of this. At the same time Samsung and Motorola were launching its newer products and battling it out for 2nd position.

To answer these new threats Nokia made number of strategic changes. It killed some of its product line and launched some new ones (it came out with as many as 40 new handsets in 2005). It also cut prices of cell phone in order to recover the market share. Also major internal restructuring had taken place, creating a separate unit for mass market, business and multimedia cell phones. Also company entered into operator specific segment of the market, with its first custom handset for China mobile and also outsource some production (India has also received FDI in this regard).

Baran's conception is a bit different. He has basically argued that when there is transformation from competitive to monopoly capitalism, does the cost of production and waste come down? He makes a comparative analysis with feudalism and says that in capitalism this loss should come down. But then he says that investments made by monopolists don't lead to potential economic surplus, which is only possible if actual consumption is same as minimum economic consumption.BARAN essentially argues that transition from competitive to monopoly capitalism doesn't reduce potential economic surplus rather increases it. But due to monopolization of resources consumption in monopoly stagnates due to investment savings gap which increases the perpetual requirement of unproductive utilization of surplus created which otherwise shall lead to chronic stagnation.

In other words he acknowledges that in competitive capitalism there was compulsion to replace the existing technique which however vanishes in monopoly capitalism.

He further argued that it's typical to find excess capacity in oligopolies as capacity is created in advance. Hence endogenous tendencies to generate investment become weaker with advent of monopoly capitalism. Another aspect that he takes is that under competitive capitalism the basis for innovation was price stickiness, however oligopoly sees price stickiness i.e. price don't go down due to existence of excess capacity. Further in case of a monopoly, he may not take price to be given as he has the capacity to influence. Now a qualitative difference between Schumpeter and Baran is that both wrote at different times. Schumpeter's analysis comes in the period of 1920's i.e. before Golden Age whereas Baran wrote his paper in the Golden Age itself where he observed formation of excess capacity with the increase in size of companies. Here one has to give due credits to findings of Baran and this is really true of large firms who can leverage their financial muscles to sustain themselves. However the question that we are asking is absolutely different. We are asking whether the presence of such monopolies prevent them from going for innovation -as per Baran or will it be an additional factor to innovate?

The question can be answered using 2 models

A model where innovation is rapid -IT, FMCG etc. If one looks at the rapid technology change in Indian IT sector it does not only involve better products only. It is here where the group shall shift from traditional definition of creative destruction which included innovating newer products (which is still a large chunk) to strategic placement of new product which was not much emphasized by Schumpeter and which may answer Baran's conceptual debate.

Positioning of the product and proper segmentation is important. This can either be traditional or a new mix but it is this which gives meaning to new product. In Infosys for e.g. a lot of attention is paid to shape of chairs, lightning and environment. This should be looked as innovation because for IT companies the product is not TANGIBLE rather it's what the human resource (HR) have put in creates an output. So innovation gets a new dimension. One also concludes that marketing tools are not only product based they can be equally applied to intangibles (HR in Infosys). Another aspect which should be highlighted is that there should be parity in innovation i.e. effective marketing tools are a must for innovation, however they don't prevent innovation.2 examples in case of FMCG can be a case of Kurkure where actual product modification was negligible. But a brilliant marketing strategy gave new meaning to product. The add considered lot of nuances in terms of middle class Indian set up where a revolutionary demographic situation was taken to consideration.

A similar FMCG product introduced was Nirma which despite innovation has positioned itself as a low cost powder, a soap called Ganga failed despite new market logic simply because of bad strategy. Hence we can conclude 2 things

A industry where technology scale is high (a capital intensive industry)

The four points consistent with the theme of creative destruction:

Destruction of traditional industry structure- There has been a transition from clearly defined industry boundaries ,entry barriers and market p

The challenges on innovation:

"95 percent of Indian managers believe innovation is key to competitive advantage…..………only 36 percent believe that their innovation outcomes were as, or better than, expected"

Certain questions that corporate face today, the existence of wide discord between the expected results from innovation and the actual results? Apart from this, the challenge for managers is also to understand how to place and integrate innovation into the system as they very well know that innovation is important and imperative? To what extent do the factors which are external to the organizational set up and corporate set up like Education and financing system restrict innovation in Indian scenario?

The general perception about innovation is believed to be imperative for an upcoming organization in the competitive environment. The requirement is to identify with the curve based on the characteristics of performance of a product or a business. Focusing on the shape of the curve, it is initially sloping upwards where it increases at decreasing rate reflecting the slow growth rate of any new business or a product. Subsequently, as it begin to be accepted by the market, the business creates its space in the marketplace and the curve increases at the increasing rate. This is followed by a rapid take off as innovation gains footing. Not to forget, the law of nature that everything comes to an end and so for that reason after the growth phase the business inevitably reaches the area of stability and subsequently declines.


The realization of the fact that the decline is inevitable is of utmost importance. The reasons for this decline could be numerous like altering purchaser inclination, societal trends and the competitive factors. In this process, the organization tends to make attempts to arrest the fall to some extent by rejuvenating the product, keeping up to date with competition and other similar efforts. Sooner or later, the need of new product or business is generated.

The super challenge in the concept of innovation is that it has too much countenance that the organizations risk getting focused on only one of its elements.

Some believe that innovation to be a sort of differentiation, some said it is a mindset, an idea, attitude and ways to do things. It clearly depicts that innovation is perceived to be a linear and naive fashion. The real danger is that innovation is only treated as something synonymous with any creativity or Research & Development or patents or just any new product development overlooking the fact that innovation is much more than all this.

AS rightly proposed "The successful innovation is the outcome of a happy alchemy of many complex and interlinked variables like strategies, cultural, economic and infrastructural factors. The complexity in the relationship of various factors in innovation makes it unpredictable"

The point arises that the companies keep on facing challenges despite the regular traditional measure of innovation like patents, copyright etc.

The following table shows the list of companies with most patent registered on the one side and on the other side that of the most innovative companies. The data reveals that only one of them appears on the list of most innovative companies.

Companies with most US Patents1

Considered most innovative2











Micron Technology










Source : 1.Patent Information, AWA Patent, Top 10 companies receiving most US patents, 2006 2. Most innovative companies 2005, Business week poll.

The probable reason for the dissatisfaction of the CEOs with the link between innovation and the return on innovation investment despite the series of creative ideas, the top management fails to see drastic and permanent impact. Reason for this could be the lack of introspection on behalf of management in terms of finding what lies in it for the organization objective fulfillment? While taking up an innovation rather than merely treating innovation with the development of an idea or an outcome, innovation overall covers a wider canvas incorporating he entire gambit of activities beginning from the conceptualization of an issue then developing a solution and subsequently exploiting it successfully to create value addition.

The innovation should take the organization towards its objective realization otherwise the consequences would be only out pouring of ideas that could be creative without contributing towards the main goal of the organization. In order to ensure this, the need is to probe what is the need of the hour for the concerned organization.

Innovation Radar:

Distinguishing features of the innovation radar is that it ensures a 3600 view of innovation, presenting it in an image and a visual tool to present the clear cumulative logic to innovation dimensions. It offers a vigorous measurement methodology and a benchmarking database.

It's a framework of 12 "dimensions" (such as "brand" and "platform") that leading companies tend to consider before investing in a breakthrough technology or service. A company's strengths and weaknesses can be mapped via a simple computer program into a radar-like graph. The image pinpoints where to invest resources.


Offerings: Develop innovative new products or services like Gillette Mach3Turbo razor, Apple iPod music player and iTunes service

Platform: Use common components or building blocks to create derivative offerings like General Motors OnStar Telematics platform and Disney animated movies.

Solutions: Create integrated and customized offerings that solve end-to-end customer problems like UPS logistics services Supply Chain Solutions, DuPont Building Innovations for construction.

Customers: Discover unmet customer needs or identify underserved customer segments. Like Enterprise Rent-A-Car focus on replacement car renters; Green Mountain Energy focus on "green power"

Customer Experience: Redesign customer interactions across all touch points and all moments of contact. Concept: Washington Mutual Occasio retail banking concept; Cabela's "store as entertainment experience"

Value Capture: Redefine how company gets paid or create innovative new revenue streams. Like Google paid search and Blockbuster revenue-sharing with movie distributors

Processes: Redesign core operating processes to improve efficiency and effectiveness. Like: Toyota Production System for operations; General Electric Design for Six Sigma (DFSS)

Organization: Change form, function or activity scope of the firm for customer focus. Like: Cisco partner-centric networked virtual organization; Procter & Gamble front-back hybrid organization

Supply Chain : Think differently about sourcing and fulfillment. Like:Moen Project Net for collaborative design with suppliers; General Motors Celta use of integrated supply and online sales.

Presence: Create new distribution channels or innovative points of presence, including the places where offerings can be bought or used by customers. Like: Starbucks music CD sales in coffee stores and Diebold Remote Teller System for banking.

Networking: Create network-centric intelligent and integrated offerings. Like Otis Remote Elevator Monitoring service and Department of Defense Network Centric Warfare

Brand: Leverage a brand into new domains. Lke:Virgin Group "branded venture capital; Yahoo! as a lifestyle brand


Problems Addressed by Operational Innovation - Sound Familiar??

Higher customer retention

Greater market share

Lowering direct/indirect costs

Greater customer satisfaction

Creating stronger customer relationships

Developing better organizational agility

Better utilizing assets

Creating faster cycle times

Increasing accuracy

Creating customization options

Simplifying processes


Classic example of creative destruction in environment scenario can be seen in automobile sector -congestion pricing.

"IBM and other tech companies are discovering a mother lode of potential new business "-THE HINDU*BUSINESS LINE

Probably the biggest green initiatives these days is congestion pricing-charging people for the right to drive into downtown area .it is already proving to be the most effective short term way to clean up polluted city air, promote energy efficiency and making urban areas more livable, while also generating revenues.

But what has it companies to do with this?

To make congestion pricing work -you need technology .that is what it companies are providing for the city.

This can also be seen as creative destruction on part of it companies such as IBM. So, IBM is now in traffic business? It can be said but it underscores a fundamental truth about green technology: you can't make the product greener, whether it's a car, a refrigerator or a traffic system, without making it smarter- smarter design, smarter materials and smarter software.

This also means that to the extent "green "standards are made part of everything we design and manufacture, green collar jobs are created ,which are more difficult to outsource.

(Source: msnbcmedia4.com)

Another exciting example that can be stated for the revolution and creative destruction in both FMcg sector and related to environment is of MC DONALD"s.

MC DONALD"s is a company on mission. The fast food chain has been hitting out with a series of environmental and social initiatives designed to prove that it cares. Besides this , the company is also going through a full makeover, redesigning some of its restaurants in a way that it hopes will revitalize the sites and attract more customers.

The latest initiatives announced by the group recently were: to turn it's spent cooking oil into biodiesel fuel to power its vans in the UK.

This is applied in USA and EUROPE, where the big redesign was launched. The redesigned outlets, revamped menus, the rebranded stores, the companies more progressive stance on the environment have all had a positive influence on consumers. The redesign entices people to spend more time there and therefore spend more money and it encourages people to go at different times of the day than they normally would.

This is the power of creative destruction.

Innovation generates perennial gales of creative destruction that disturb the economic system and provokes deep-seated industrial mutations."Joseph Schumpeter

What type of innovation predominates in the music industry? Is it a still "a gale" or a constant breeze? Why music?