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More than fifty years ago, economist Joseph Schumpeter described the dynamic pattern in which innovative upstarts unseat established firms through a process he called “creative destruction.”1 While most twentieth century economists have focused on competition under conditions of static equilibrium, Schumpeter insisted that disequilibrium was the driving force of capitalism. The theme of creative destruction has received growing attention ever since.2
There is now little doubt that the economy is driven by firms that are able to capitalize on the “new combinations” described by Schumpeter: Coal Age technologies gave way to Oil Age technologies that are now giving way to Information Age technologies. With each change, the technological and economic infrastructure of society experiences dramatic transformation, with new institutions, enterprises, and geographic patterns of development created. During periods of dramatic change, incumbent firms have not been successful in building the capabilities needed to secure a position in the new competitive landscape, for example, manufacturers of horse carriages, sailing ships, vacuum tubes, steam locomotives, and propeller engines.
Not surprisingly, the notion of creative destruction makes many managers uncomfortable — and it should. Frequently, incumbent firms have either discounted the significance of an emergent technology or have reacted to changes by becoming more committed to existing products and markets. Incumbents that survive episodes of creative destruction do so because they display more foresight than their peers; they invest and form partnerships to acquire new competencies and experiment in new, untested markets. They are not held hostage by their current technology or market position.
Foresight is the key to survival. Managers able to perceive trends and weak signals where others see only noise or chaos can capitalize on the changing nature of the market to reposition their firms before new entrants become a serious threat. Armed with the proper tools and frame of mind, managers of incumbents can be as foresighted as the CEO of the hottest new IPO. Foresight, however, requires managers to strip away many assumptions so that they can view the world through new lenses.
In this article, we argue that the emerging challenge of global sustainability is a catalyst for a new round of creative destruction that offers unprecedented opportunities. Today’s corporations can seize the opportunity for sustainable development, but they must look beyond continuous, incremental improvements.
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1. The importance of entrepreneurs to creative destruction was first discussed in:
J. Schumpeter, The Theory of Economic Development (Cambridge: Harvard University Press, 1934).
The thesis was later extended to include consideration of how large corporations might participate in this process in:
J. Schumpeter, Capitalism, Socialism and Democracy (New York: Harper Torchbooks, 1942).
2. There is extensive literature on this topic, including:
A. Cooper and D. Schendel, “Strategic Responses to Technological Threats,” Business Horizons, volume 19, February 1976, pp. 61–69;
W. Abernathy and J. Utterback, “Patterns of Industrial Innovation,” Technology Review, volume 80, number 7, 1978, pp. 40–47;
S. Winter, “Schumpeterian Competition in Alternative Technological Regimes,” Journal of Economic Behavior and Organization, volume 5, number 3–4, 1984, pp. 287–320;
W. Abernathy and K. Clark, “Innovation: Mapping the Winds of Creative Destruction,” Research Policy, volume 14, number 1, 1985, pp. 3–22;
M. Tushman and P. Anderson, “Technological Discontinuities and Organizational Environments,” Administrative Science Quarterly, volume 31, number 3, 1986, pp. 439–465;
R. Foster, Innovation: The Attacker’s Advantage (New York: Summit Books, 1986);
R. Henderson and K. Clark, “Architectural Innovation: The Reconfiguration of Existing Product Technologies and the Failure of Established Firms,” Administrative Science Quarterly, volume 35, number 1, 1990, pp. 9–30;
A. Cooper and C. Smith, “How Established Firms Respond to Threatening Technologies,” Academy of Management Executive, volume 6, number 2, 1992, pp. 55–70;
C. Christensen and J. Bower, “Customer Power, Strategic Investment, and the Failure of Leading Firms,” Strategic Management Journal, volume 17, number 3, 1996, pp. 197–218; and
M. Tripsas, “Unraveling the Process of Creative Destruction: Complementary Assets and Incumbent Survival in the Typesetter Industry,” Strategic Management Journal, volume 18, Special Summer Issue, 1997, pp. 119–142.
3. See J. Coates, J. Mahaffie, and A. Hines, 2025 (Greensboro, North Carolina: Oakhill Press, 1997; and
A. Hammond, Which World? Scenarios for the 21st Century (Washington D.C.: Island Press, 1998).
4. See, for example, S. Hart and G. Ahuha, “Does It Pay to Be Green?” Business Strategy and the Environment, volume 5, number 1, 1996, pp. 30–37.
5. For more detail on the competitive dynamics of the Responsible Care program, see:
A. King and M. Lenox, “The Benefits of Membership: Performance Implications of the Responsible Care Program” (San Diego, California: Academy of Management Best Paper Proceedings, 1998).
6. For an elaboration on this definition, see:
World Commission on Environment and Development, Our Common Future (New York: Oxford University Press, 1987).
7. See, for example:
W. Van Dieren, Taking Nature into Account (New York: Springer-Verlag, 1995);
T. Graedel and B. Allenby, Industrial Ecology (Englewood Cliffs, New Jersey: Prentice Hall, 1995);
G. Keoleian et al., Industrial Ecology of the Automobile (Warrendale, Pennsylvania: Society of Automotive Engineers, 1997);
E. von Weizsacker, A. Lovins, and H. Lovins, Factor Four (London: Earthscan, 1997; and
G. Daily, Nature’s Services: Societal Dependence on Natural Ecosystems (Washington, D.C.: Island Press, 1997).
8. For extensive data on the “ecological footprints” associated with human activity, see:
M. Wackernagel and W. Rees, Our Ecological Footprint (Philadelphia, Pennsylvania: New Society Publishers, 1996).
In the United States, for example, it currently takes 12.2 acres to supply the average person’s basic needs; in the Netherlands, 8 acres; in India, 1 acre. The footprint analysis makes it clear that dramatic reductions in footprint will be necessary to support future generations of a growing population.
9. See P. Hawken, The Ecology of Commerce (New York: HarperBusiness, 1993); and
S. Hart, “Beyond Greening: Strategies for a Sustainable World,” Harvard Business Review, volume 75, January–February 1997, pp. 66–76.
10. For a complementary argument, see C. Fussler, Driving Eco-Innovation (London: Pitman Publishing, 1996).
11. When incumbents do not drive the process of creative destruction, it is inevitable that entrepreneurs and new entrants will.
12. For an in-depth discussion of consumer, emerging, and survival economies, see:
13. For details on income levels and numbers of people associated with each of these three economies, see:
World Bank, World Development Report: Knowledge for Development (New York: Oxford University Press, 1999).
14. Wackernagel and Rees (1996).
15. See Hammond (1998).
16. See Wackernagel and Rees (1996).
17. For a discussion of inefficiencies in conventional automotive technology, see:
Only about 1 percent of energy used is transferred to forward motion.
18. Remarks by C. Holliday, Chemical Industry Conference, Washington, D.C., 9 November 1998.
19. See Hammond (1998).
20. U.S.-Asia Environmental Partnership, “Report of the Independent Technical Review Panel” (Washington, D.C., 1995).
21. Food and Agriculture Organization, Forest Products Forecasts to 2010 (Rome, Italy: FAO, 1995).
22. Hammond (1998).
23. See J. Magretta, “Growth through Global Sustainability,” Harvard Business Review, volume 75, January–February 1997, pp. 79–88.
24. For more discussion of the survival economy in relation to global sustainability, see:
25. M. Baghai, S. Coley, D. White, C. Conn, and R. McLean, “Staircases to Growth,” McKinsey Quarterly, volume 4, 1996, pp. 39–61.
26. Traditionally, life-cycle analyses have been regarded as extremely complex and time-consuming procedures that produce results of questionable utility. More recently, however, organizations such as Battelle, Eco-Balance, Franklin Research, and Carnegie-Mellon’s Green Design Initiative have developed simplified life-cycle tools that produce more usable results.
27. Schumpeter (1934), p. 66.