Creative Construction: The DNA of Sustained Innovation
Creative destruction—the idea that successful innovators sow the seeds of their own destruction—was defined by Joseph Schumpeter over 70 years ago. Is this still a phenomenon today?
Gary Pisano: Absolutely. Schumpeter nailed it when he coined that term, and it’s amazing that he was writing 70 to 80 years ago. Today, many aspects of economic progress and competition are defined by the dynamics he described. We are seeing the constant, almost incessant creation of new enterprises that are thinking of new and innovative ways to do things, challenging existing players with new technologies and business models. As a result, competition today has two levels: existing incumbents challenging each other and new entrants entering the space to challenge incumbents. In the last few decades we’ve seen countless established companies fall by the wayside because they’ve been swept away by Schumpeterian new entrants — who themselves go on to become behemoth. The rise of Amazon and what has happened in the retail sector is a classic example of creative destruction.
You write that, sadly, efforts towards transformative innovation inside of large enterprises are often viewed as a waste of shareholder’s money. Do people really believe that?
Absolutely. You just have to look at analysts’ reports about R&D spending or listen to conversations at board meetings. Particularly when shareholder activists or hedge funds get on company boards, they often make a play to take control and cut R&D expenses. In some sense, this short-term focus on shareholder value creation just amplifies the forces of creative destruction: If you’re a large company and you believe that because your shareholders don’t want you to invest in innovation, you won’t. And, of course, if you don’t invest in innovation, it’s a self-fulfilling prophecy, because you will just be waiting around for someone to come along and push you aside.
No responsible leadership team can ever be satisfied with the status quo.
In my work I do what I can to challenge this flawed thinking. While it is true that large companies can’t just spend their way to glory, if they are designed and led in the right way, they can be very effective innovators — just as effective as start-ups, I would argue.
