Organizational Creative Destruction

This article was originally published on our Medium Platform Rethinking Organizations.

Creative destruction is a cyclical phenomenon in which existing practices, norms, and production processes are disrupted and replaced by new innovative ones. Netflix is an excellent example of creative destruction in action; the (new) streaming service made the (old) disc rentals obsolete. It revolutionized the media industry and disrupted the rental sector.

Joseph Schumpeter coined the term in 1942 by observing Henry Ford’s famous production line. In his view, capitalism is an ever-evolving and dynamic process, where new ideas will always challenge existing ones. Therefore, creative destruction is an inherent characteristic of the free-market system. Because of its ever-evolving nature, eventually, capitalism would cause its downfall. Since then, this term has been used widely in the worlds of innovation and economics. Creative destruction has been used as a motivator for constant innovation and an argument for disruptive technologies.

This outlook has led to many extraordinary inventions for humankind, one being the internet that revolutionized our lives! Though this may sound pretty positive and relevant, in economics, the concept has come to serve as a defense for constant growth and led to the creation of short-sighted organizations. Economists argue that recessions are a part of the economy. According to them, recessions are partly attributable to creative destruction. In the course of new practices and ideas overtaking existing ones, there is a natural period of imbalance where the markets adjust, leading to a slump in GDP growth. Eventually, equilibrium will be established, and the economy will start to grow again. As a result, we believe that constant boom-bust cycles are a normal part of our economic journey towards un-ending growth.

Organizations, of course, are no exception: if the economy’s target is growth, then the organizations’ goal is expected to be the same. That’s because economics and organizational structure go hand in hand. Organizations internalize Macro-Economic goals, and in turn, economies thrive based on the successes of organizations. Consequently, most organizations’ current end goal is profit, eventually translating into GDP growth. These organizations have fragile and rigid structures; they struggle to survive and adapt during market failures. Creative destruction as a means of justification can only address the fact that this cycle occurs. It cannot defend the chaos caused by constant oscillation between two extremes. A new approach is needed to address this.

In her book, Doughnut Economics, Kate Raworth recognizes the correlated nature of economies and organizations. She believes that we must rethink economics first where a new generation of organizations can thrive.

“Today’s economy is divisive and degenerative by default.
“Tomorrow’s economy must be distributive and regenerative by design.”

Raworth’s fundamental call for action adds another valid reason to a long list of why we need to rethink organizations. As outlined above, economic and organizational goals are interlinked. Therefore, a new economic vision requires redesigned organizations.

What do these “redesigned organizations” look like? What are the key features that we must have in these organizations?

Maybe rethinking organizations might be of help.

To be distributive, organizations must change their strategic outlook from short to long term.
To be regenerative, they must be purpose-led in their actions.
To tackle the rigidity of their structure, biomimicry can be explored. Additionally, by approaching the concept from a different angle, Schumpeter’s creative destruction can also serve us in this endeavor.

Schumpeter’s idea was influential and ‘modern-day’ economic thinking, which led to organizational structure being formed as the way we are used to. Yet, the structures born out of and inspired by Schumpeter were manifested in a one-dimensional manner. Rather than using creative destruction to justify the modern economy’s failures, we can take it as a design feature embedded into the contemporary organizational structures.

Let’s turn to the field of innovation as they are also THE disruptive sources. The way that creative destruction is applied there (to serve as a constant push for new ideas) allows the field to be more adaptable and creative in times of change and crises. Taking inspiration from this, creative destruction can be applied to organizations’ design and structures. Organizations today are rigid, but incorporating creative destruction would allow them to leave this behind and be more creative entities. This would make them agile and flexible during change. In doing so, organizations would benefit from being proactive rather than reactive, to become better prepared to handle such situations during a crisis.

Resources:

https://www.econlib.org/library/Enc/CreativeDestruction.html
https://www.econlib.org/library/Enc/bios/Schumpeter.html
https://www.cmu.edu/epp/irle/irle-blog-pages/schumpeters-theory-of-creative-destruction.html