The Power of “Creative Destruction” in Entrepreneurship

The concept of creative destruction originates as early as the era of Karl Max ( Das Kapital, 1863) and Nikolai Kondratiev (The Major Economic cycles, 1925). These concepts were later refined by an Austrian economist, Joseph Schumpeter, who in 1942 wrote a book named “Capitalism, Socialism, and Democracy.”

In his book he wrote: “Capitalism is by nature a form or method of economic change and not only never is, but never can be stationary. The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, and the new forms of industrial organization that capitalist enterprises create.”

In other words, creative destruction comes from entrepreneurs’ new consumer goods that open up new markets. Disruption creates completely new industries.

What does this mean?

First, we need to go through the basic principles of this thesis. On one hand, there are existing firms that compose the core marketplace which are well positioned and profitable. On the other hand, when a new innovation is placed in the market, a “new market” appears.

Creative destruction refers to the dynamic effects of innovation, for example, where new products or business models lead to a reallocation of resources. In simple words, some jobs are lost (destruction) but others are created (creation). That means, established businesses come under threat to make way for new businesses. This is disruption at its core.

So, is this process constructive? The answer is YES!

For example, online travel platforms such as Airbnb can dominate over the hotel-chains and the jobs of travel agents. Their jobs are disrupted to some point, but on the other hand this new business allows people to travel for more affordable prices with no need of travel-agents to book their stay.

Another example would be how Smartr Marketing shares a referral fee from each transaction with the person who shared a referral code for that corresponding business. This means, the major ad agencies that we see online posing as “social networks” are no longer going to be paid millions of dollar for ineffective advertising campaigns since companies can now pay their own customers and promoters to advertise for them. This action increases the margins for those business, and puts a more effective marketing tool in the hands of both the customer and the vendor using the software.

Although, there is a side of the process that is painful, without it, economies would stagnate and we would never experience higher standards of living as time goes on.