Creative Destruction in Economics Definition & Examples

Creative destruction is a concept introduced by the Austrian economist Joseph Schumpeter in the early 20th century. It refers to the process by which innovation and technological progress lead to the continual transformation of the economic structure, resulting in the destruction of old industries and the creation of new ones. This dynamic process is considered a key driver of economic growth and development.

Innovation serves as the spark that ignites change, whether through the introduction of cutting-edge technologies, the creation of novel products and services, or the daring initiatives of entrepreneurs challenging conventional norms. This constant pursuit of improvement and adaptation creates a competitive environment where the old must yield to the new, a phenomenon encapsulated by Joseph Schumpeter’s concept of creative destruction.

Creative Destruction Meaning: What is Creative Destruction

Creative Destruction is the ongoing process of innovating new products and services to replace old ones. New products meet customer needs better, making previous versions inadequate or obsolete. Good examples of Creative Destruction include smartwatches replacing wristwatches, cars with improved gas mileage, and streaming replacing CDs and DVDs.

Creative Destruction, a term that comes from macroeconomics, is the core statement. It states: Every economic development relies on creative or creative destruction, Old structures can be dismantled and destroyed by a new mix of production factors. For reorganization to occur, creative destruction is necessary.

Creative destruction is the basis for innovation, entrepreneurial growth, and prosperity, according to the economic philosophy of Joseph A. Schumpeter, an Austrian economist in the first half of the 20th century. What sounds contradictory at first glance becomes clear at second glance. But let’s start at the beginning.

Joseph Alois Schumpeter is an Austrian economist and social scientist, He was a professor since 1909, among others in Graz (1911 to 1919), Bonn (1925 to 1932) and since 1932 at Harvard University.

Schumpeter developed a theory of the economic development of the capitalist economic system, which he explained by intra-economic changes. These changes are based primarily on “dynamic entrepreneurs” who push through innovations, achieve pioneering profits, and bring about the economic upswing. This process of “creative destruction” enables growth and technical progress.

Schumpeter thus made an important contribution to business cycle theory. However, he also feared the end of capitalism, as the innovation process would weaken, primarily due to bureaucratization in companies and an increased role for the state. Schumpeter is considered one of the most influential economists of the 20th century.

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Creative Destruction in Economics

Creative destruction sounds pretty harsh at first. But what is it all about? The term goes back to the Austrian economist Joseph Schumpeter. He coined it in the first half of the 20th century. The economist believed that creative destruction is the basis of entrepreneurial growth, prosperity, and innovation.

Hardly anyone doubts that innovations are important for economic growth. But how can innovation come about in the first place? And what happens when the innovation is there? The old must perish and make way for the new markets. Although Joseph Schumpeter was referring to national economies, we can nonetheless apply the model of creative destruction to many other areas. And so we can explain the development of services, products, technologies, and methods by this model.

Creative Destruction

The economist Joseph Schumpeter was the first to coin the term “creative destruction”. Creative destruction is the destruction of old markets and those active in them through innovation, & inventing of new markets, this can be new technologies, methods, business models, services, or products.

In the first half of the 20th century, Joseph Schumpeter came to the conclusion that markets and economies do not develop statically, but that dynamic development takes place. Individual products or services are therefore not improved and refined in small steps, but innovative ideas are the fuel of the market economic growth.

Related: Idea Generation Techniques: How to Inspire New Ideas That Drive Innovation?

Innovation and risk-taking can be important keys to success for companies. According to Schumpeter, creative destruction is the driving force of capitalism. Creative destruction ensures that there can continue to be growth and progress and that we can generate sustainable wealth. From this, we can conclude the following:

• If companies are willing to constantly question their business model and adapt it if necessary, they have a better chance of remaining active in the market.
• Newly founded companies and start-ups should be given special support, as innovative ideas generated often come from new market participants. These do not have to take into account already established products and existing markets.

Standstill Means Regression

“The new”, according to Schumpeter in his book “Capitalism, Socialism, and Democracy”, allows for erratic, radical, and dynamic development. Many companies, however, try to manifest stability and plannability as basic principles. It may be in the nature of man to strive for stability and to avoid change.

From a business perspective, however, this is tantamount to standing still and insisting on the status quo. In an economic system characterized by competition, companies strive for development by moving past and strengthening their competitive positions.

Creative Destruction In Context

If you want to develop, you need more. This “more” is the “creative destruction”. “Creative destruction” in this context means:

• to question the status quo and to improve permanently
• to create something “new”: the “old” faces competition and disappears. “New” refers not only to products and inventions but also to processes, methods, procedures, …
• the “new”, the innovation, changes everything that was before (for the better) and brings about further and far-reaching changes
• these changes have an impact on many companies, create new jobs, new business models, technologies, and industries, or more generally formulated:

Creative destruction = the better is the enemy of the good

Creative Destruction – Innovations Mean Opportunity And Risk

Not many people welcome innovations and changes joyfully and with a warm welcome. We like to stick with the tried and true. We like habits and are happy to persist if it feels good so far. However, without economic development, there is no further growth, and capitalism is built on this.

If a company has a product that is actually doing well in the market and then rests on it, it can quickly be overtaken by competitors. The competitor’s product offers something completely new. Of course, the competitor doesn’t know whether this will be well received. For this reason, innovations are always a risk. They are part of the entrepreneurial risks that you have to take if you want to survive as a company in the long term.

Related: Unfair Advantage: What is it, and how do you find yours?

If a company manufactures carriages, even if they are the best, most beautiful, and even cheapest carriages available, this does not benefit the company at all if the competitor brings cars onto the market. The carriage manufacturer can invest as much as he likes in advertising and marketing, he will simply be overrun by the car manufacturer. It is therefore important for managers to allow innovation of business model and take risks time and again. Entrepreneurial thinking and action do not involve simply accepting every risk, but analyzing them and proceeding.

In today’s fast-paced world, where change is the order of the day, companies must also adapt. Either they simply react to these changes, or they try to actively shape the market. The concept of creative destruction is, therefore, more relevant to modern companies than ever before.

Creative Destruction Examples

Digital Photography vs. Film Photography:

• The advent of digital photography disrupted the traditional film photography industry. As digital cameras and smartphones with high-quality cameras became widespread, film cameras and related products faced a decline. Companies that failed to adapt to the digital era faced obsolescence, while new opportunities emerged for digital imaging technologies and services.

Streaming Services vs. Traditional Media:

• The rise of streaming services, such as Netflix, Amazon Prime Video, and Hulu, has disrupted traditional television and film distribution models. These platforms offer on-demand content, challenging the dominance of cable and satellite television. This shift has led to the decline of traditional cable subscriptions and forced traditional media companies to adapt to the new streaming paradigm.

E-commerce vs. Brick-and-Mortar Retail:

• The growth of e-commerce giants like Amazon has transformed the retail landscape, challenging brick-and-mortar stores. Consumers increasingly prefer the convenience of online shopping, leading to the decline of traditional retailers that were slow to embrace digital platforms. This shift has also influenced supply chain and logistics industries.

Smartphones vs. Traditional Phones:

• The introduction and widespread adoption of smartphones have revolutionized the telecommunications industry. Traditional mobile phones were gradually replaced by smartphones that offer a wide range of features beyond basic calling and texting. This shift has not only affected the phone manufacturing industry but has also given rise to new markets for mobile apps and services.

Electric Vehicles vs. Internal Combustion Engine Vehicles:

• The automotive industry is experiencing creative destruction with the rise of electric vehicles (EVs). As concerns about climate change and environmental sustainability grow, EVs are disrupting the traditional internal combustion engine vehicle market. Companies investing in electric vehicle technology are gaining prominence, while traditional automakers are adapting to the changing landscape.

Online Travel Agencies vs. Traditional Travel Agencies:

• The travel industry has witnessed creative destruction with the rise of online travel agencies (OTAs) like Expedia, Booking.com, and Airbnb. These platforms have changed the way people book flights, accommodations, and experiences, leading to a decline in traditional travel agencies and altering the dynamics of the hospitality and travel sectors.

Print Media vs. Digital Media:

• The shift from print to digital media has transformed the journalism and publishing industries. Online news platforms, blogs, and social media have disrupted traditional print newspapers and magazines. Advertisers increasingly allocate resources to digital channels, impacting the revenue models of traditional print media.\

LED Light Bulb:

• Creative Destruction: The transition from traditional incandescent and fluorescent light bulbs to LED light bulbs represents a classic case of creative destruction. LED technology offers energy efficiency, longer lifespan, and environmental benefits, leading to the decline of older, less efficient lighting technologies.

Digital Camera:

• Creative Destruction: The advent of digital cameras disrupted the film camera industry. Digital cameras provided instant feedback, eliminated the need for film development, and enabled easy sharing of photos online. This shift rendered traditional film-based cameras and the associated film development processes less relevant.

E-Mail:

• Creative Destruction: The advent of email revolutionized communication, challenging traditional postal services. Email provides instant communication, eliminates the need for physical mail, and significantly accelerates the exchange of information. While traditional mail services still exist, they have been profoundly affected by the rise of electronic communication.

LCD Television:

• Creative Destruction: The transition from cathode-ray tube (CRT) televisions to LCD televisions exemplifies creative destruction in the electronics industry. LCD technology provides improved image quality, thinner form factors, and energy efficiency, leading to the obsolescence of older CRT television technology.

Word Processing Software:

• Creative Destruction: The advent of word processing software revolutionized document creation and editing. Traditional typewriters were gradually replaced by software like Microsoft Word, which offered advanced formatting, editing, and collaborative features. This shift transformed office workflows and communication.

Pen Drive and Solid-State Disk:

• Creative Destruction: The introduction of pen drives (USB flash drives) and solid-state disks (SSDs) disrupted the traditional market for magnetic storage devices like floppy disks and hard disk drives (HDDs). These compact, faster, and more durable storage solutions have become standard in modern computing.

Creative Destruction Examples in Economics

The following are some creative destruction examples of immense value creation:

• The printing of books ensured that knowledge could be disseminated and enabled the education of the population
• The record player has been replaced by cassettes, cassettes by CDs, and CDs by digital offerings
• Automobiles have displaced carriages. The automobile provides mobility (and created gas stations)
• Digital innovations for photography have almost completely replaced analog photography
• The railroad ensured the settlement of larger areas and faster communication
• In the future, electric cars and autonomous driving cars will entirely replace cars with gasoline or diesel
• Assembly line work was a process innovation that lowered the cost of cars

These creative destruction examples show that often not only the old products disappear from the market, but also their manufacturers. However, there are always companies that recognize the current trends and adapt accordingly. Those that manage to adapt in this way often also succeed in continuing to secure market share.

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Especially in recent times, under the keyword “Disruptive innovation or Innovative technology“, we can find many interesting examples:

• The Internet, of course, is changing pretty much everything we know – from television to social interaction (and also made publication formats like this blog possible in the first place)
• Mobile telephony and smartphones changing the telecommunications industry and creating something like “apps”
• Peer-to-peer data exchange was ultimately the basis for the digitization of the music industry
• and many, many more that you can find in our article on disruptive innovation examples

Conclusion On Creative Destruction

Creative destruction teaches us that we should generally place more emphasis on competition and market mechanisms in our economy. We must avoid any type of overregulation by politicians, which should allow companies to develop and innovate. Innovations are always a risk, but they also offer and identify a great opportunity to help shape future markets. Those who do not develop further, do not take risks, and do not dare to innovate will probably not be able to survive in the long term. In this context, there are of course also many examples of innovation flops.

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