Joseph Alois Schumpeter, a prominent Austrian-American economist, was the first person to model the initial theory of creative destruction. He was also a former finance minister in Austria and a popular and respected professor at Harvard University(1) from 1932 till his death. He explains the theory of creative destruction and Entrepreneurship in his book Capitalism, Socialism, and Democracy.
Joseph Alois Schumpeter mentions and alludes to the ” process of industrial mutation that revolutionizes the economic from the inside, destroying the old and forking new ones.”
According to his book, Entrepreneurship can see an opportunity and take complete advantage of it. This requires a lot of innovation and a creative mind.
Creative destruction is altering and making a change in technology and improving the business models to make the company or an organization better.
An excellent example of creative destruction is the transformation of the photographic industry gradually.
A few years back, Kodak(2) was the lead manufacturing company of cameras. It employed approximately 145,000 people from across the world.
Kodak was the digital camera; however, the company decided to ignore this invention and decided to continue using the old technologies and methods.
After a few years, a social media company called Instagram rises. This allowed people to exchange digital photos with each other from around the world. This app initially had 15 employees, but later, Facebook bought Instagram for a whopping one billion dollars.
This made Kodak go under. And at the end of 2012, Kodak declared bankruptcy.
Entrepreneurship makes old knowledge moot and introduces new methodologies and knowledge through innovations and creative ideas resulting in exponential development.
Entrepreneurial insight is very non-rational. There will always be a continuous demand to go beyond the calculated and planned or look at a situation from a completely different perspective. This is one of the critical requirements to be a successful entrepreneur.
According to Schumpeter, entrepreneurship triggers creative destruction. The process of creative destruction is solely based on innovating in new products, services, or even organizations. This later creates value for the organization.
A noticeable expression directly related to creative destruction is that ” you can’t make an omelet without breaking a few eggs.” The current unbroken eggs depict the existing production with no improvements. The omelet represents a new and innovative method formed by breaking the old plan and getting something better from it. We can say that the price of progress and improvements is the destruction of the status quo.
Ideally, the labor, land required, capital and entrepreneurship that compromised the old method would be based on the new methodology. This proves that the old or previous ways are not entirely abandoned.
But, indeed, the resources used in the old are rarely required or suited for production now.
For example, the labor, capital, and materials used to maintain and produce horses are not the same as having care and other automobiles. Hence, the results dictate that old industries are destroyed now, but new and innovative initiatives are born.
The two prominent key figures of creative destruction are innovation and entrepreneurship. Entrepreneurship is the driving force that brings new plans and designs. This directly impacts the economy of a country in a better way. Therefore, we can say that Entrepreneurship is a force of creative destruction.