Changing markets, creative destruction¶

When you're in an existing (economic) market, you not only have to look out for your competitors, but also for the upcoming landslide that can tip over the entire marketplace altogether.

Comment placed on slashdot in a discussion about Kodak doing badly since the rise of the digital camera.

A 1942 book by Joseph Schumpeter (excerpt here) provides some background info on this.

{Capitalism] incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in....

The idea is that capitalism and innovation are almost linked. By doing something better, handier, cheaper, you can make more money than the other companies. So there is an incentive to do something new.

Seen over a long time, the biggest threat for companies is not so much the competition in the existing market, but the landslide next year when something entirely new just chops down existing, nicely ordered, markets.

Digital photography is such a "creative destruction" development. Suddenly the demand for ordinary kodak camera rolls drops down. Not even the best product in it's category will sell really well when the entire market moves to different products. (Kodak is not just camera rolls, also photographic paper etc, but this is the general idea).

An historical analogy: the dreadnought was the first all-big-gun battleship, completed in 1906. Great Brittain and Germany (and others) were engaged in a huge shipbuilding arms race. A lot of "ordinary" battleships were being build (one year later they were called "pre-dreadnoughts"...). That one single first dreadnought, prototype of the modern battleship, made every single fleet on earth obsolete. Brittain and Germany effectively had to start from scratch, 0 vs. 0. (Or, more rather 1 vs. 0 :-) Talking about creative destruction...