I got attracted to the idea of creative destruction because both the words appear opposite in meaning yet they match perfectly to describe a wonderful phenomenon.
The definition of creative destruction is written on quora.com which is widely endorsed, is as follows-
Definition
'Creative Destruction' is a
paradoxical term introduced to
economic theory in 1942 by the
Austrian economist Joseph
Schumpeter (1883–1950). He used
the term to describe the special
form of economic growth that
entrepreneurs particularly bring to
the capitalist system. Schumpeter
argued that it was the
entrepreneur's introduction of
radical innovation into the capitalist
system that was the real force that
sustained long-term economic
growth, even as it destroyed the
economic value of established
enterprises who may have
previously enjoyed a degree of
monopolistic power. (1)
Creative destruction is seen everywhere, from nature to man made things. Creative distruction is actually a very similar to the process of evolution, or it is the same as the "survival of the fittest".
We are going to discuss about creative distruction with respect to capitalism.
Creative distruction is seen in the capitalist system as innovative ventures making some other ventures obsolete, so that stealing the profit from them and forcing them to shut down. For example audio tapes closed down the gramophone industry, cds closed down audio tape industry, iPod closed down CD player industry. The usefulness to the customer went on increasing. In the age of gramophones, the gramophone was a stationary and bulky thing. Then came audio tapes which was smaller than gramophone but still bulky. Then came Sony Walkman. It was handy, one can carry it anywhere but still needed to carry those tapes and batteries as the batteries couldn't last long enough. Then came CDs, but again the cd players were bulky, then again Sony came to rescue by launching Sony Discman. But again one needed to carry those CDs and batteries. And then finally Apple launched iPod which gave us capacity to carry hundreds of songs with us in a tiny device and battery lasting more than a day on a single charge. It was a major breakthrough. During this evolution many gramophone factories went in to losses, then many audio tape industries, then cd industries are now finding it difficult to survive. Such obsolete industries can't survive for a long time.
Though these companies are shutting down, the new ones are flourishing, they are giving more value to the society than the obsolete one's. So the total value of the society is increasing though some industries are dyeing. The new ones are better ones, economic ones. We can see the process in action as Mr. Eion Musk is building the Gigafactory to bring down the lithium ion battery cost lower. This on turn will bring down the cost of the electric cars produced by Tesla motors. This in turn reducing the carbon emissions from gasoline or diesel powered cars and trucks. Tesla motors is also building a network of solar cell powered free charging points for it's customers all across the America.
Well, This blog is for practical things only, which are beneficial to everyone, and that too from the moment the person understands the point, so how this creative distruction is related to us or beneficial to us?
I am discussing this topic because I see people all around the world opposing this process of creative distruction. People resisting the closure of obsolete companies or the companies with faulty manufacturing processes or faulty or less useful products. Many financial institutions are also using bad processes because of which they are facing problems. People are getting emotional regarding the companies at the verge of closure. Governments all around the world are also sensing the public opinions and supporting the distressed companies for the sake of votes.
In my own country too government is providing monetary help to farmers. I am of the opinion that if government wish to do anything for the farmers, it should educate them. Because most of the Indian farmers are poor and illiterate. On the other hand I have seen educated farmers progressing a lot. They are accumulating wealth whereas the illiterate ones are opting for suicide.
Well let's come back to our topic- how we can use this creative distruction in our favour?
So we have seen that people generally get emotional and resist the process of creative distruction. Much amount of valuable resources like money, time, intelligence is wasted on resisting this process. We can benefit by not participating in the resistance, rather we should be on the side of creative distruction. Because creative distruction is the way of nature. Creative distruction is the way in which capitalist system evolves.
Try to bring about creative distruction by thinking about ways of doing things. Like replacing your shoes with lace with without lace so as saving your time. Now you may say how much difference would it make if you save one minute per day? But think again, one minute per day translates to 365 minutes per year, that is 6 hours per year. If suppose wear shoes for approximately 50 years of our life then the time spent in tying shoe lace is 300 hours, or 12.5 days. So one can easily save 12.5 days of his life just by changing the shoes.
There are many such ways. Use your brain to get your own ways formulated perfectly for you.
CONCLUSION-
How can we use creative destruction in our investments?
I hope you have understood how the creative distruction works in a capitalism. Innovative companies go ahead, while others are left behind. Innovative companies enjoy growing market share, growing efficiencies, growing customer base, high capacity utilisation, high return on capital etc. The non-innovative companies just fall behind with losing market share, declining profit, reducing efficiencies, low return on capital employed, less capacity utilisation etc.
So it is common sense to guess that the future belongs to the innovative companies. Conversely one can say that non innovative companies have no future. Up on using our common sense further we can say that in investing, the investor investing in the innovative companies will get benefited. While the investor investing in the non innovative companies will lose his money.
But there is a catch- any company can turn in to innovative company or it can even buy inventions if the management wishes so. Again, conversely any innovative company can turn in to non innovative or a dud.
So it is up to the investor to see if he is holding innovative or agile companies? Are his holding companies can adapt to the changing business scenario? Or changing markets? Or changing customer taste's? Or are they improving? Are they learning from their mistakes?
If the answer to any of this question is NO then it is a bad sign. There are more chances that the company will go in to losses and the investor will lose money.
Then what to do?
The answer is simple, instead of holding such dud companies, simply sell them even if at loss, recover the remaining capital and find good innovative companies which can grow your capital for extended time period.
There are many such companies out there, listed on stock exchanges. One just need to be curious enough to find them, buy them at reasonable price and hold them until they are innovative and agile. Just relax and let your compounding machines compound your wealth.
This is the practical use of creative destruction. There are many more you can think of, just share them in comments section.
Hope, I have contributed something through this post to your understanding and wisdom. A step towards our goal of health, wealth and happiness.
Thanks for reading..
Have a nice day..
Sumit
The POWER is when,
You use ODDS,
To get EVEN.
Sources-
(1) https://www.quora.com/What-is-creative-destruction
The definition of creative destruction is written on quora.com which is widely endorsed, is as follows-
Definition
'Creative Destruction' is a
paradoxical term introduced to
economic theory in 1942 by the
Austrian economist Joseph
Schumpeter (1883–1950). He used
the term to describe the special
form of economic growth that
entrepreneurs particularly bring to
the capitalist system. Schumpeter
argued that it was the
entrepreneur's introduction of
radical innovation into the capitalist
system that was the real force that
sustained long-term economic
growth, even as it destroyed the
economic value of established
enterprises who may have
previously enjoyed a degree of
monopolistic power. (1)
Creative destruction is seen everywhere, from nature to man made things. Creative distruction is actually a very similar to the process of evolution, or it is the same as the "survival of the fittest".
We are going to discuss about creative distruction with respect to capitalism.
Creative distruction is seen in the capitalist system as innovative ventures making some other ventures obsolete, so that stealing the profit from them and forcing them to shut down. For example audio tapes closed down the gramophone industry, cds closed down audio tape industry, iPod closed down CD player industry. The usefulness to the customer went on increasing. In the age of gramophones, the gramophone was a stationary and bulky thing. Then came audio tapes which was smaller than gramophone but still bulky. Then came Sony Walkman. It was handy, one can carry it anywhere but still needed to carry those tapes and batteries as the batteries couldn't last long enough. Then came CDs, but again the cd players were bulky, then again Sony came to rescue by launching Sony Discman. But again one needed to carry those CDs and batteries. And then finally Apple launched iPod which gave us capacity to carry hundreds of songs with us in a tiny device and battery lasting more than a day on a single charge. It was a major breakthrough. During this evolution many gramophone factories went in to losses, then many audio tape industries, then cd industries are now finding it difficult to survive. Such obsolete industries can't survive for a long time.
Though these companies are shutting down, the new ones are flourishing, they are giving more value to the society than the obsolete one's. So the total value of the society is increasing though some industries are dyeing. The new ones are better ones, economic ones. We can see the process in action as Mr. Eion Musk is building the Gigafactory to bring down the lithium ion battery cost lower. This on turn will bring down the cost of the electric cars produced by Tesla motors. This in turn reducing the carbon emissions from gasoline or diesel powered cars and trucks. Tesla motors is also building a network of solar cell powered free charging points for it's customers all across the America.
Well, This blog is for practical things only, which are beneficial to everyone, and that too from the moment the person understands the point, so how this creative distruction is related to us or beneficial to us?
I am discussing this topic because I see people all around the world opposing this process of creative distruction. People resisting the closure of obsolete companies or the companies with faulty manufacturing processes or faulty or less useful products. Many financial institutions are also using bad processes because of which they are facing problems. People are getting emotional regarding the companies at the verge of closure. Governments all around the world are also sensing the public opinions and supporting the distressed companies for the sake of votes.
In my own country too government is providing monetary help to farmers. I am of the opinion that if government wish to do anything for the farmers, it should educate them. Because most of the Indian farmers are poor and illiterate. On the other hand I have seen educated farmers progressing a lot. They are accumulating wealth whereas the illiterate ones are opting for suicide.
Well let's come back to our topic- how we can use this creative distruction in our favour?
So we have seen that people generally get emotional and resist the process of creative distruction. Much amount of valuable resources like money, time, intelligence is wasted on resisting this process. We can benefit by not participating in the resistance, rather we should be on the side of creative distruction. Because creative distruction is the way of nature. Creative distruction is the way in which capitalist system evolves.
Try to bring about creative distruction by thinking about ways of doing things. Like replacing your shoes with lace with without lace so as saving your time. Now you may say how much difference would it make if you save one minute per day? But think again, one minute per day translates to 365 minutes per year, that is 6 hours per year. If suppose wear shoes for approximately 50 years of our life then the time spent in tying shoe lace is 300 hours, or 12.5 days. So one can easily save 12.5 days of his life just by changing the shoes.
There are many such ways. Use your brain to get your own ways formulated perfectly for you.
CONCLUSION-
How can we use creative destruction in our investments?
I hope you have understood how the creative distruction works in a capitalism. Innovative companies go ahead, while others are left behind. Innovative companies enjoy growing market share, growing efficiencies, growing customer base, high capacity utilisation, high return on capital etc. The non-innovative companies just fall behind with losing market share, declining profit, reducing efficiencies, low return on capital employed, less capacity utilisation etc.
So it is common sense to guess that the future belongs to the innovative companies. Conversely one can say that non innovative companies have no future. Up on using our common sense further we can say that in investing, the investor investing in the innovative companies will get benefited. While the investor investing in the non innovative companies will lose his money.
But there is a catch- any company can turn in to innovative company or it can even buy inventions if the management wishes so. Again, conversely any innovative company can turn in to non innovative or a dud.
So it is up to the investor to see if he is holding innovative or agile companies? Are his holding companies can adapt to the changing business scenario? Or changing markets? Or changing customer taste's? Or are they improving? Are they learning from their mistakes?
If the answer to any of this question is NO then it is a bad sign. There are more chances that the company will go in to losses and the investor will lose money.
Then what to do?
The answer is simple, instead of holding such dud companies, simply sell them even if at loss, recover the remaining capital and find good innovative companies which can grow your capital for extended time period.
There are many such companies out there, listed on stock exchanges. One just need to be curious enough to find them, buy them at reasonable price and hold them until they are innovative and agile. Just relax and let your compounding machines compound your wealth.
This is the practical use of creative destruction. There are many more you can think of, just share them in comments section.
Hope, I have contributed something through this post to your understanding and wisdom. A step towards our goal of health, wealth and happiness.
Thanks for reading..
Have a nice day..
Sumit
The POWER is when,
You use ODDS,
To get EVEN.
Sources-
(1) https://www.quora.com/What-is-creative-destruction
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