Advantages and Disadvantages of Schumpeter's Gales of Creative Destruction - Literature review Example

Implementing Strategies Introduction The writer seeks to describe and analyse Schumpeter’s notion of Gales of Creative Destruction with regards to views from other different writers’ stand point. Secondly, the study also seeks to explore environmental factors that affect business existence in the 21st century and how they operate. The writer will then attempt to evaluate the premise of Schumpeter’s Gales of Creative Destruction for doing business in the 21st century by exploring how businesses are affected by the consequences of innovation. A conclusion will be given at the end to show the writer’s position. Description of Schumpeter’s Gales of Creative Destruction Schumpeter, (1942) describes the gales of creative destruction as an evolutionary process within capitalism that incessantly revolutionizes the economic structure from within, incessantly destroying the old one and incessantly creating a new one. Schumpeter’s view on capitalism is that innovations by entrepreneurs are the forces that sustain long-term economic growth, even though they destroy the value of established companies. He further went on to say that every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it. Schumpeter, (1942) also contends that Creative destruction can take different forms which include: new markets/products, new equipment, new sources of labour or raw materials, new methods of organisation or management, new methods of inventory management, new methods of distribution, new methods of communication, new methods of advertising and marketing, new financial instruments, new political lobbing or new legal strategies. A close consideration of each can show new business opportunities or new opportunities for existing businesses which can be harnessed by entrepreneurs to execute their businesses. Other writers look at the Schumpeter’s gales of destruction from an industrial point of view. Caballero R. and Hammour , (1994) posit that when technology, in the broadest sense of the word, is entrenched in capital, human skills as well as organization of work, the resultant technical progress puts the economy in a state of incessant restriction. However, the technical aspects of the productive structure must constantly adapt to innovation in products, techniques and modes of organization, and to involve competitiveness of the world market. He further went on to look at the production unit that embodies new techniques and concurs that these are significant and must be created continuously while destroying outdated units. Caballero and Hammour, (1994; 1996a; 1996b; 1996c; 1998a; 1998b; 2005) conclude that the process of Schumpeterian creative destruction (restructuring) permeates major aspects of macroeconomic performance, not only long-run growth but also economic fluctuations, structural adjustment and the functioning of factor markets. At the microeconomic level, restructuring is characterized by countless decisions to create and destroy production arrangements. These decisions are often complex, involving multiple parties as well as strategic and technological considerations. The success of such decisions depends on the ability to account for all transactional procedures that are involved in undertaking innovative decisions. Failure along this dimension can have severe macroeconomic consequences once it interacts with the process of creative destruction. Foster R. and Kaplan S. (2001) describe the gales of destruction in two ways in that destruction is the process of maintaining market freshness by eliminating those elements that are no longer needed. New, efficient corporations put pressure on existing companies that often are unable to change quickly enough to operate in a competitive environment. Although destruction signifies “the end of the economically useful life,” it does not necessarily mean death or complete end, but it could just as easily result in a spin-off. In this regard, like innovation, destruction comes in three levels namely: incremental (which is a normal part of operations that does not impact the corporate mental models and can be executed by the organization’s front line); substantial (necessary when key functions need to be replaced or overhauled and this requires senior management intervention) and transformational (which “irreversibly changes the course of the corporation” and is often driven by market events). All three types of destruction are necessary in order to keep a corporation fresh by adapting to new innovative changes in response to market forces. Factors affecting business today One of the main reasons why businesses exist is the need to maximize or sustain profit. In order for this to happen, one must be cognisant of the market environment in which this business is surviving especially during the contemporary period of the 21st century. Daft, (2006) describes three types of business environment namely; the internal, external as well as task environment. The external environment includes technology, economic, legal / political, international and social cultural factors. These impact on any business either directly or indirectly in various ways. The task environment deals with the labor market, the customer, competition and the supplier. The internal environment includes employees, organizational culture and management. He goes on to mention that changes in these various sectors of the environment can create tremendous challenges, especially for organizations operating in complex, rapidly changing industries where they need to be closely taken into consideration. Usually, businesses strive to acquire competitive advantage over their rival competitors by using Porter’s five force competitive theory as a tool. This is supported by Schumpeter (1942) who recognized that the established incumbent industries have already secured advantages over the would be entrants as a result of their longevity in business practice. Simply put, the experience of incumbents has built up cumulatively to provide established competitors with first-mover advantages that make it difficult for would-be entrants to easily achieve. One good example of an organization using the gales of creative destruction as an innovative factor or give them a competitive advantage over their competitors is Windward and Leeward Brewery which only had one beer brand, Heineken Beer. The Company realized that they were losing market share and profits because they were competing against a brand called Carib, a beer from another country. The brewery increased its portfolio by producing another beer which was almost close to the external features of Carib but had a better taste and its effective marketing strategy has managed to secure the brewery a top position in the market. According to information obtained from the company’s website (2008), it has a ninety five percent market share in the beer market whereas Carib is four percent in St. Lucia with Piton Beer being the best beer within the company’s portfolio. This is one example that can be summed up to show Schumpeter’s Gales of creative destruction by using product innovation. Cited from Wikipedia (2008), Wal-Mart is another example of a company that has achieved a strong position in various markets through its use of new inventory-management, marketing, and personnel-management techniques, which encompass the use of its lower prices to compete with older or smaller companies in their offering of retail consumer products. Writer’s evaluation of the gale of creative destruction From the example given above it is evident that Schumpeter’s gale of creative destruction as a consequence of innovation is still very relevant to any business operating in the twenty first century. It can be noted that this is applicable to various business environments during the 21 century. From the writer’s perspective, it can be seen that there are both advantages and disadvantages with the gales of creative destruction by Schumpeter which are as follows: Advantages of gales of creative destruction a) By being innovative, the intention is to be ahead of the competitors. It brings out the real purpose of entrepreneurship which would then be transformed into profits. This advantage helps to build a forward thinking organizational culture that always anticipates something new to happen either from a product or new equipment for instance. b) Satisfying market demand – the gales of creative destruction can take place when there is enough market research that would have taken place to find out market demand. This can be done in terms of new product introduction for example, the way it will satisfy the immediate consumption need. This can also be new equipment that will speed up or create a new product for the consumer. Disadvantages of gales of creative destruction a) The innovation may be very costly at times which will have a financial impact on the organization. This can also be negative for human relations since some of their financial obligations may have to be put on hold such as pay increase for instance. b) Risk taking – Since the gales of creative destruction deals with replacing the old with the new, there are high risks involved in that process. There is no guarantee that the innovation will be successful and usually there would be a level of uncertainty. In spite of the innovation starting off successfully, there is no guarantee of product longevity. Cited in The Blackwell Encyclopedia of Management Entrepreneurship, Pfarre & Smith (2005) tend to differ with Schumpeter thinking that the entrepreneur is not a risk taker. He also feels that there are no liquidity constraints of being an entrepreneur and that eventually, the capital markets will bear the financial risk of discovery. c) Resistance to change - The readiness of the market to absorb an abrupt change to a product can have negative impact on innovation. Also from an organizational perspective, resistance to change from the traditional culture of a company remains very significant within the organizational structure. This can impact on how the transition process takes place. Conclusion Schumpeter’s idea of the gales of creative destruction is an ongoing process for businesses operating in the 21st century especially given the fact that the markets are always changing while on the other hand taking into consideration the idea that the pursuit of innovation is so vital to the survival of the firm. However, there are some challenges with the process such as making changes to management which can hinder innovation. With reference to relevant academic theories and concepts describe and discus the notion of the learning organisation. What conclusions do you draw? Introduction The paper seeks to examine various academic theories and concepts relating to the learning organization. Firstly, a definition of the learning organization will be given from different authors’ perspective. The writer will then comment on the characteristics of the learning organization, focusing mainly on its advantages and disadvantages. The author will then try to evaluate the rationale of the learning organization and its ability to be implemented in today’s global environment. Description of the Learning organization Senge (1990) defines learning organization as an organization where people continually expand their capacity to create the results they truly desire. In undertaking this exercise, new and expansive patterns of thinking are nurtured and collective aspiration is set free where people are continually learning to see the organization as a whole. Senge et al (1994) further state that the core of learning organization is based on five learning disciplines which include personal mastery, mental model, shared vision, team learning and system thinking. Personal Mastery is learning to expand our personal capacity to create the results we most desire and creating an organizational environment which encourages all of its members to develop themselves whilst focusing on the goals and purposes they choose. The second discipline, Mental Model, reflects on continuously clarifying, and improving our internal pictures of the world and how these pictures shape our action and decisions. Shared Vision is the third discipline which is the building of a sense of commitment in a group by developing shared images of the future they seek to create, and the principles as well as the guiding practices by which they hope to get there. Fourthly, team learning transforms conversational and collective thinking skills, thereby enabling groups of people to reliably develop their intelligence. This concept is similar to that of brainstorming where people devise creative ideas in the short run to solve problems they encounter. The final discipline is system thinking, which is a language for describing and understanding the forces and the interrelationship that shape the behavior of the system. This discipline helps the organization to monitor change systems more effectively, fusing them into a coherent body of theory and practice. Senge (1990) concludes that systemic thinking is the conceptual cornerstone of organizational learning. Other theorists, Pedler et. al. (1991), contend that the learning organization is a vision of what might be possible. They went on to argue that it is not brought about simply by training individuals, but it can only happen as a result of learning at the whole organizational level. A third theory by Watkins and Marsick (1992) describes learning organizations as institutions characterized by total employee involvement. The culture of these organizations is that of collaboratively conducted, collectively accountable change directed towards shared values or principles. It must be recognized that in order for the learning organization to be successful, the organization must first facilitate this process by creating the proper conditions that will allow learning to take place. From the definitions of the learning organization above, one can conclude that two theorists, Senge (1990) and Watkins and Marsick (1992), both agree that the learning organization is directly influenced by contributions from all individuals within the organization, rather than the top-bottom approach advocated by Hughes and Tight (1998). This encourages persons to learn from each other, whilst allowing the organization to remain competitive. Peddler et. al. (1991) tend to differ from this view. They state that the organization should facilitate the learning process of its members. In that case, it is the sole responsibility of the top manager to encourage and facilitate the learning process. However, all the theories share a common view in that the learning organization involves all members of an organization. The only difference is the persons who are responsible for initiating the process. Characteristic of the Learning Organization After reviewing the writings of authors like Pedler, Boydell and Burgoyne (1989), Dixon (1993) and Mc Gill and Slocum (1993), five characteristics and management practices emerge. These are essential for learning to take place in an organization. Goh and Richards (1997) list them as follows: Clarity of mission and vision- This is the degree to which employees have a clear vision/mission of the organization and understand how their efforts contribute to its success and achievements. Leadership refers to the role of leaders in the organization with respect to helping employees to learn, whilst encouraging behaviors that are consistent with an experimenting and changing culture. Experimentation is the degree of freedom the employees enjoy in the pursuit of new ways of getting the job done and freedom to take risks. This point is dependent on the leadership attributes that would empower their employees to be free to be innovative. Transfer of knowledge is the systems that enable employees to learn from others’ past failures and from other organizations. In order for the transfer of knowledge to take place, persons should know about each others’ experiences; positive or negative; hence the reason it is important to share that knowledge with each other. Teamwork and group problem-solving refers to the degree of teamwork possible in the organization to solve problems and generate new and innovative ideas. There are many features of the learning organisation model that makes it attractive to those interested in lifelong learning, such as its broad emancipatory and inclusive language and its emphasis on organisational goals that transcend the pursuit of short-term profit maximisation. Advantages of the Learning Organization a) One major positive aspect of the learning organization is that the process encourages employees to be innovative and to experiment. This can assist the organization in maintaining its competitive edge. The learning organization also fosters the environment where employees and leaders are able to communicate and transfer information with each other effectively. Existing firms today are engaging in team building exercises to provide the necessary skills to their employees to enable them to work as one unit rather than a defragmented institution. This is the reason why teamwork is an advantage to the learning organization. The learning organization focuses strongly on human relations. b) The learning organization process is a long term because firstly, it takes the culture within the organization to provide the atmosphere that will allow people to learn, communicate and share their experiences with each other. As a result, the firm should not have repeated errors which would be converted to increased productivity, and time and money saved for the organization. This point is supported by Pearn, (1997) and Jones and Hendry, (1992). Disadvantages of the Learning Organization Based on their study of attempts to reform the Swiss Postal Service Finger M. and Brand (1999) cited some disadvantages with which the writer tends to agree as it is still very prevalent in organisations. a) The learning organization concept focuses mainly on the cultural dimension and does not adequately take into account the other dimensions of an organization. They also contended that in order to transform an organization, it is necessary to attend to structures and the organization of work as well as the culture and processes. b) Another shortcoming of the learning organization is that it favors individual and collective learning processes at all levels of the organization but does not connect them properly to the organization’s strategic objectives. As the process is so human focused, persons may have different attributes that will affect the learning negatively. For instance, a leader may be autocratic and would like to see things from his stand point and may not allow his staff the opportunity to implement all or most of the characteristics of the learning organization as seen above which is a major disadvantage. c) Other problems of learning are exacerbated specifically by the organizational character of learning. For example, different individuals and units within an organization may hold somewhat different criteria of success. Also, advocates of a policy are likely to interpret any difficulties with it as reflecting an insufficiently vigorous pursuit of the policy, while opponents interpret the same data as signifying a bad policy. Feedback about the results of organizational actions may be distorted or suppressed as people rush to protect their standpoint or to maintain a positive climate. Conclusion Organizations, like individuals, can learn. Many of the basics of learning are the same for individuals and organizations. However, organizational learning also has distinguishing characteristics with reference to what is learned, how it is learned, and the adjustments required in order to enhance learning. These are based on the fact that any organization by definition is a group of individuals working together to achieve a common goal. In the process, different perspectives, values and information are passed along through the organization’s own communication channels. It can also be argued that the concept of the learning organization provides managers and others with a picture of how things should be done within an organization. A number of authors, such as Senge, Pedler et. al. and Watkins and Marsick have contributed to that theory by stating that working with the human aspect of an organization could result in more harmonious and effective operations. This is very important in today’s changing environment as there is pressure from unions, human rights organizations and labour activists. These are all advocating employee empowerment. Employees need to feel the sense of appreciation and belonging as a way of improving staff morale and increasing productivity. They also need to know that they can contribute effectively to the decision making process of the organization which can lead to diversity and increased productivity. However, as can be noted from the theories above, there are also disadvantages and shortcomings to this concept. However, a question still remains about the practicality of such a system existing within and between organizations in today’s globalized capitalist economy. Certain components of the learning organization are being practiced in businesses around the world, but it is hard to identify a full-fledged learning organization. This is supported by Kerka (1995) who stated that it is difficult to find real-life examples of learning organizations in today’s business environment. Bibliography Barbaro, Michael.(2007) "It’s Not Only about Price at Wal-Mart." New York Times. March 2, 2007. Retrieved on September 13, 2008 Calvert, G.; Mobley, S.; and Marshall, L.  "Grasping the Learning Organization." Training 48, no. 6 (June 1994):  38-43.  (ERIC No. EJ 484 475) Caballero, R. and Hammour, M. 1994, The cleansing effect of recessions, American Economic Review 84, 1350-68. 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