Creative Destruction – Page 26

R. Glenn Hubbard Coins a Phrase: “Nondestructive Creation”

In much of the press speculation right before Bush named the replacement for Alan Greenspan as head of the Fed, three names were usually mentioned as frontrunners: Ben Bernanke, Martin Feldstein, and R. Glenn Hubbard. Based on various speeches and writings, I had reason to believe that Feldstein and Hubbard understood and appreciated the importance of Schumpeter’s process of creative detruction. So I hoped that Bush would pick either Feldstein or Hubbard. Alas, I have found no evidence that Bernanke has ever mentioned creative destruction (but maybe I just haven’t dug hard enough).

In the passage below, Hubbard suggests that much job creation, occurs through nondestructive creation, rather than through creative desruction. An interesting claim, that may be true. But I doubt it. Some evidence would be nice.

Much of the current policy discussion of the ups and downs of the labor market harkens back to entrepreneurship as "creative destruction." This conception has fueled policy anxiety over job loss and global competition. But so much of productivity-enhancing entrepreneurship is really about "nondestructive creation," in which new products and ideas generate growth.

There are policy lessons, too, in the observation that it is not simply opportunity (e.g., IT) but the seizing of opportunity (e.g., new types of firms or business practices) that enhances productivity. Competition can promote entrepreneurial innovation in a way that raises productivity growth: Foreign competition has long been a source of productivity-enhancing innovation. In the domestic economy, policy can enhance or limit competition by its stance toward new business formation and employment. The U.S. has enviably low regulatory costs of business formation, while, by contrast, entry restrictions limit business formation in a number of other competitor countries. Labor market policy matters, too: Recent OECD research finds a strong negative correlation between a country’s technology growth-rate and the strength of its employment protection laws.

. . .

Over the past quarter-century, average U.S. labor productivity has risen by two-thirds. This enormous increase in workers’ ability to produce has not come at the expense of jobs. The 40 million new jobs created over the same period reveal the secret of an entrepreneurial economy: Successfully seizing business opportunities can raise living standards and employment. For this reason, entrepreneurship–the motor that drives the labor market–must be a focus of study in business education and policy making.

For the full commentary, see:

R. Glenn Hubbard. "’Nondestructive Creation’." The Wall Street Journal (Wednesday, September 7, 2005): A16.

P.S. Mark Wohar alerted me to an amusing music video, satarizing Hubbard’s possible ambitions to become chair of the Fed. I later saw the video receive publicity on CNBC’s Power Lunch program, where the video’s student-creators at the Columbia Business School were feted. The video may be found at: http://www0.gsb.columbia.edu/everybreath/

Leapfrog Competition in Video Game Machines

Source of book image: http://www.amazon.com/gp/product/customer-reviews/0385479492/ref=cm_cr_dp_2_1/104-0758544-2447945?%5Fencoding=UTF8&customer-reviews.sort%5Fby=-SubmissionDate&n=283155

Co-opetition is a readable book with some plausible discussion of interesting cases. The central message is that business is not always a zero-sum game (in contrast, say, to competitive sports). One implication is that the firm’s complementary relationships with other firms, may deserve as much attention as its competitive relationships.

One qualitfication: I think the book too much emphasizes game theory as the sine qua non source of the book’s insights. About the only game theory you really need to understand 99% of the book’s analysis is the concept of the "zero-sum game."

In a couple of places, the book discusses "leapfrog" competiton in the video game industry:

(p. 102) By mid-1995 the price of the 3DO machine was down to $400 (with $150 worth of software thrown in). Cumulative sales passed half a million. Progress, surely, but as of early 1996, 3DO’s future remains uncertain. It no longer has the 32-bit game to itself. Sega is shipping its 32-bit Saturn machine at $400. Sony has launched its 32-bit PlayStation at $300. Looking to leapfrog them all is Nintendo, whose 64-bit Ultra machine is due out in April 1996 at a price under $250.

(p. 114) Could a challenger hope to breach Nintendo’s virtuous circle? Not once the circle had got rolling. Forget about alternatives–TV, books, sports. From a kid’s perspective, there were no good alternatives to a video game. The only real threat came from alternative video game systems. Here, software was key, as always. With a huge library of Nintendo titles to choose from, why would anyone buy another machine? Perhaps a challenger could take successful Nintendo games over to its platform and then offer its own library. But the exclusivity clause killed that option. No game could be taken to another platform for a two-year period, by which time the game was passe. A challenger would have had to start from scratch. While large profits and shortages normally invite entry, the virtuous circle made competing in Nintendo’s game hopeless. The only hope was to leapfrog Nintendo with a new technology; that’s what Sega ultimately did, as we’ll see in the Scope chapter.

Source:

Brandenburger, Adam M., and Barry J. Nalebuff. Co-Opetition; a Revolution Mindset That Combines Competition and Cooperation; the Game Theory Strategy That’s Changing the Game of Business, 1st ed. Currency, 1996.

Hunter-Gatherers Prefer Civilization

Source of photo: online version of NYT article cited below.

(p. A13) The newly arrived Nukak do not provide much detail about why they left. They just say that "the Green Nukak," a possible reference to Marxist guerrillas, who wear camouflage, told them to leave.

"The Green Nukak said we could not keep walking in the jungle, or else there would be problems," explained Va-di, another Nukak man, whose words were translated from Nukak by Belisario. "The Green Nukak told us to go where it is safe."

. . .

In Aguabonita, the scene on a recent day was full of commotion and laughter. Naked children tugged at the shirts of two foreign journalists, offering big smiles and hugs. The men quickly welcomed the visitors into a makeshift shelter, where they laughed at some of the questions and, it seemed, wholly innocently at their own odd predicament.

Are they sad? "No!" cried a Nukak named Pia-pe, to howls of laughter. In fact, the Nukak said they could not be happier. Used to long marches in search of food, they are amazed that strangers would bring them sustenance — free.

What do they like most? "Pots, pants, shoes, caps," said Mau-ro, a young man who went to a shelter to speak to two visitors.

Ma-be added, "Rice, sugar, oil, flour." Others said they loved skillets. Also high on the list were eggs and onions, matches and soap and certain other of life’s necessities.

"I like the women very much," Pia-pe said, to raucous laughs.

One young Nukak mother, Bachanede, breast-feeding her infant as she talked, said she was happy just to stay still. "When you walk in the jungle," she said, "your feet hurt a lot."

The men still go into the jungle, searching for monkeys, a delicacy the Nukak cannot seem to live without. Monkeys are grilled, dismembered and boiled, then eaten piece by piece. The women still spend their time carefully weaving intricate wristbands and hammocks, using threads from palm leaves.

All live in shelters now, enjoy constant medical attention and, on weekends, stroll into town to take in the sights. "Nukak life is hard in the jungle," Dr. Maldonado said. "You wake up thinking about food and you go hunt, you go search for nuts. So when they see us they think their food problems are over."

That is not to say the Nukak do not have plans.

Ma-be explained that the idea is to grow plantains and yucca and take the crops to town. "We can exchange it for money," he said, "and exchange the money for other things." But first they need to learn how to cultivate crops. The Nukak say they would like their children to go to school. They also say they do not want to lose traditions, like hunting or speaking their language. "We do want to join the white family," Pia-pe said, speaking of Colombian society, "but we do not want to forget words of the Nukak."

For the full story, see:

JUAN FORERO. "Leaving the Wild, and Rather Liking the Change." The New York Times (Thurs., May 11, 2006): A1 & A13.

(Note: ellipsis added.)

Will Google Leapfrog Microsoft?

Microsoft co-founder Bill Gates and Google CEO Eric Schmidt. Source of photo: online version of NYT article quoted and cited below.

The Microsoft-Google rivalry is shaping up as a titanic corporate clash for the ages.

It may not turn out that way. Markets and corporate fortunes routinely defy prediction. But it sure looks as if the two companies are on a collision course, as the realms of desktop computing and Internet services and software overlap more and more.

Microsoft, of course, is the reigning powerhouse of computing and Google is the muscular Internet challenger. On each side, the battalions are arrayed: executives, engineers, marketers, lawyers and lobbyists. The spending and competition are escalating daily. For each, it seems, the other passes what Andrew S. Grove, a founder and former chairman of Intel, calls the "silver bullet test" of strategic competition. "If you had one bullet, who would you shoot with it?"

How the Microsoft-Google confrontation plays out could shape the future of competition in computing and how people use information technology.

Do the pitched corporate battles of the past shed any light on how this one might turn out?

Business historians and management experts say the experience in two of the defining industries of the 20th century, mass-market retailing and automobiles, may well be instructive. The winners certainly scored higher in the generic virtues of business management: innovation, execution and leadership.

But perhaps even more significant, those who came out on top, judging from history, had two more specific attributes. They were the companies, according to business historians, that proved able to adapt to change instead of being prisoners of past success. And in their glory days, these corporate champions were magnets for the best and brightest people.

For the full story, see:

STEVE LOHR. "And in This Corner . . . Microsoft and Google Grapple for Supremacy as Stakes Escalate." The New York Times (Weds., May 10, 2006): C1 & C14.

Source of graphic: online version of NYT article quoted and cited above.

Static Versus Dynamic Pictures

Schumpeter distinguished the static picture of capitalism in the textbook model, with the dynamic reality captured in the process of creative destruction. Apparently Ronald Reagan also understood that a dynamic view is better than a static snapshot. Michael Deaver recounts:

(p. 75) . . . I told him that I noticed his aversion to sitting for photo shoots. He looked at me surprised. "That’s funny, in all these years, nobody’s ever noticed that." I asked him to elaborate. "Well, you can never recover from a still shot."

Reagan was most comfortable with moving film, he went on to say. He truly believed the television camera was a friend, a device that would separate the real from the phony. Still cameras could always be used to make a candidate look like a fool. When he explained this to me in the (p. 76) late 1960s, he said, "You know how I sometimes touch my nose before I make a point? Well, a still shot would show me picking my nose, while a live shot would show me making my point."

Source:

Deaver, Michael K. A Different Drummer: My Thirty Years with Ronald Reagan. Reprint ed. Harper Paperbacks, 2003.

Successful Mutual Fund Expert Claims Capitalism is Revitalized by Creative Destruction

SAN FRANCISCO — One morning in November 2003, 15 Dodge & Cox senior managers gathered in a conference room here to decide an issue brewing for years: Was it time to close the flagship Dodge & Cox Stock Fund to new investors?

For months, senior managers had stood in the hallways and gathered in glass-paned offices, questioning what long had been a point of pride in the mutual-fund world: huge sums of money pouring in for investment. It became "a water-cooler kind of issue," recalls Kenneth Olivier, the firm’s president.

. . .

Dodge also faces some other issues: In December, longtime Chief Investment Officer John Gunn became chief executive, and a new president and executive vice president were named. Another CEO switch could occur when Mr. Gunn turns 65 in 2008. That would be a relatively large amount of turnover for a firm that has had only five CEOs in its history.

. . .

. . . , Mr. Gunn often speaks at mutual-fund forums and investor conferences. The ruffled-hair Mr. Gunn resembles a college professor, wearing gray pants with yellow pinstripes, a light orange shirt and a yellow tie with zebras one recent day. His feet on a chair, he quoted 20th century Austrian economist Joseph Schumpeter when talking about media stocks, noting "capitalism is revitalized by waves of creative destruction." Ancient Asian artifacts, like a pink stone statue from a 14th-century tomb, adorn the office.

As for the flagship fund’s future, Mr. Pohl said as he and Mr. Gunn sat at a conference-room table, "the fact that we have outperformed" since closing to new investors, "I think is proof" that the decision was made at the right time.

"So far," Mr. Gunn added, half-jokingly.

For the full story, see:

DIYA GULLAPALLI. "When Mutual Funds Don’t Want Your Cash Dodge & Cox Says No To Many New Customers; Angst at the Water Cooler." The Wall Street Journal (Mon., May 1, 2006): R1 & R?.

(Note: ellipses added.)

Source of graphic: online version of WSJ article cited above.

Charles Koch Participates in Schumpeter’s Process of Creative Destruction

Charles Koch. Source of image: online version of WSJ article cited below.

I heard Charles Koch speak at the April 2005 Orlando meetings of the Association of Private Enterprise Education. Part of his speech involved how he has tried to apply in his own business, Schumpeter’s process of creative destruction. For a long time Koch has been a stalwart defender of the free market in word and deed.

Ideas seem to exhilarate him. This no doubt explains in part why this professorial CEO delivers "dozens and dozens" of lectures around the country to his employees on these very topics. But what does any of this have to do with explaining his company’s prodigious profitability? Well, everything — he believes. Mr. Koch contends that the key insight of his business career was melding these philosophical insights about the way the wealth-creation process works into a business operating system called "Market Based Management." This system, which he has trademarked, enables every division of his business empire to operate as a separate, autonomous, profit-maximizing unit. It is intended to reward employees who think like entrepreneurs.

"Long-term success entails constantly discovering new ways to create value for customers and building new capabilities to capture new opportunities," he instructs. "In this sense, maintaining a business is, in reality, liquidating a business." Mr. Koch likens the cycle to Schumpeter’s "creative destruction" — where the old and inefficient are ruthlessly swept away by the new.

For the full commentary, see:

STEPHEN MOORE. "THE WEEKEND INTERVIEW with Charles Koch; Private Enterprise." The Wall Street Journal (Sat., May 6, 2006): A8.

Benjamin Rogge in 1973 Discussed Leapfrog Competition

Ben Rogge and the members of Wabash College’s John Van Sickle Club in 1973. Source of image: The Wabash 1973 Yearbook, p. 173.

In explaining Schumpeter’s concept of competition within the process of creative destruction, I have long thought the phrase "leapfrog competition" was apt. I have no memory of Schumpter himself using the phrase, but did think I remembered Rogge using the phrase.

Today (4/21/06) I used the Amazon.com "Search within the Book" feature to search for the "leapfrog", "leap-frog", and "frog" in Schumpeter’s Capitalism, Socialism and Democracy. No use of any of the three was found. This provides some support to my belief that Schumpeter himself did not use the phrase.

I also today examined my lecture notes from Benjamin Rogge’s Comparative Economic Systems course at Wabash College. In the midst of a discussion of creative destruction on 1/25/73, I note "leap-frogging analogy" which supports my memory that Rogge made use of the phrase "leapfrog competition" in class.

In terms of in-print uses of the analogy, I have performed the same three searches using Liberty Fund’s HTML version of Rogge’s Can Capitalism Survive? I found one "hit" which appears on p. 22 of the print versions of the book.

The technical description of the market structure, in the language of the textbook model, would be that of “oligopoly”—the rule of the few.

All of this Schumpeter would label as nonsense. Why? Because the investigator would be examining “each year—taken separately” rather than the never-ending game of leapfrog that the data reveal and that represents the true nature of the competitive process.

I will be in the debt of anyone who can show me an earlier use of the word "leapfrog" in the context of a discussion of competiton in Schumpeter’s process of creative destruction.

Google Evolves

Gary Hamel has recently penned some thoughtful observations about what practices of Google have led to its success. An excerpt from that analysis appears below. (Hamel earlier wrote a popular book in which he makes extensive use of Schumpeter’s process of creative destruction.)

Only time will tell whether Google has succeeded in building an evolutionary advantage. But consider: Since it’s founding, it has repeatedly morphed its business model. Google 1.0 was a search engine that crawled the Web but generated little revenue; which led to Google 2.0, a company that sold its search capacity to AOL/Netscape, Yahoo and other major portals; which gave way to Google 3.0, an Internet contrarian that rejected banner ads and instead sold simple text ads linked to search results; which spawned Google 4.0, an increasingly global entity that found a way to insert relevant ads into any and all Web content, dramatically enlarging the online ad business; which mutated into Google 5.0, an innovation factory that produces a torrent of new Web-based services, including Gmail, Google Desktop, and Google Base. More than likely, 6.0 is around the corner.

Of course Google may ultimately fall victim to hubris and imperial overstretch as it takes on Microsoft, Yahoo, eBay, the occasional telecom giant and pretty much everyone else in cyberspace. Or like Microsoft, it may simply become like every other big company as it grows. But that’s not the way I’d bet. Google seems to have grasped the new century’s most important business lesson: The capacity to evolve is the most important advantage of all.

For the full commentary, see:

Hamel, Gary. "Management à la Google." The Wall Street Journal (Weds., April 26, 2006): A16.

And here is the information on Hamel’s most recent book:

Hamel, Gary. Leading the Revolution: How to Thrive in Turbulent Times by Making Innovation a Way of Life. Revised & Updated ed. Harvard Business School Press, 2002.

Source of image: http://www.amazon.com/gp/product/B000EPFVBE/sr=8-1/qid=1146333251/ref=pd_bbs_1/104-5668094-9083929?%5Fencoding=UTF8

Europe’s Antitrust Policies Based on “Pathological Revulsion” to Creative Destruction

One of the EU’s findings is that Microsoft uses its desktop dominance to capture the market for Web server software, and now the EU further charges Microsoft with failing to honor its ruling. So Microsoft’s takeover of serverware proceeds apace? Er, Brussels we have a problem.

At last count, Apache-Linux had 62% of the market, Windows 25%, with various others capturing smaller slices. True, Microsoft saw a nearly five-point increase in market share last quarter thanks to GoDaddy.com shifting its 3.5 million hosted sites from Linux to Windows. Maybe the EU should subpoena GoDaddy on grounds that for Microsoft to compete successfully for a customer is illegal.

The other pillar of Europe’s case is Microsoft’s alleged ability to foreclose the market to rival media-playing software. This week, EU lawyers are trying to swat down the inconvenient fact that, since their ruling, Apple’s iTunes and Macromedia’s Flash Player have carved out big niches for themselves. The Apple example is worth inspecting up close. It demonstrates that people don’t buy computers to run software, but to consume information and entertainment "content." Apple gave them the music they wanted, and its software easily found a home on their computers.

Yet the EU simply rejects the example as irrelevant because it doesn’t fit its mental category about what constitutes a "media player." More than stupid — this suggests a pathological revulsion against the kind of disorder in which an Apple can come along and upend all the procrustean assumptions of the EU’s drearily youthful staff of economists and lawyers. We’re not kidding when we say there’s a connection between the Microsoft case and the European 20-somethings who riot in the streets because they’d rather have no job than take a job from which they might fail and be fired.

For the full commentary, see:

HOLMAN W. JENKINS, JR. "BUSINESS WORLD; The Land (and Antitrust Case) That Time Forgot." The Wall Street Journal (Weds., April 26, 2006): A17.