Creative Destruction – Page 28

“We In Las Vegas Reinvent Ourselves All the Time”

Dust from the implosion of the Stardust. Source of the photo: online version of the NYT article cited below.

If any city in the United States has dynamism, it is Las Vegas. Yet, note in the passage below, that even in Las Vegas there are those who want dynamism to die.

Las Vegas has become known in recent decades for tearing down the notable resorts that first put the Strip on the map, and famous places like the Dunes, the Hacienda and the Sands have been replaced by the Bellagio, the Mandalay Bay and the Venetian.

“The Stardust was the Bellagio of its day, the most dazzling casino out there,” said Nicholas Pileggi, who spent four years researching the exploits of Frank Rosenthal, the mobster who ran the Stardust, for his best-selling nonfiction book “Casino” and the fictionalized screenplay for the Robert DeNiro film of the same name. “But time moves on.”

The oldest casino structure on the Strip now is a part of a coffee shop at the Sahara and dates back just 55 years.

“Unlike most other cities, we in Las Vegas reinvent ourselves all the time,” Mr. Boyd said. “In order to keep up with the competition, you have to keep improving your product. That’s what we’re going to do here at the Stardust. But we still have great memories.”

Some are not so accepting of the changes in the city. Joel Rosales, 23, owns the Web site LeavingLV.net, which pays tribute to each property that is razed.

The loss of the Stardust, Mr. Rosales said, is particularly disappointing.

“Having been born and raised here in Vegas, it’s always been a rock,” he said of the resort. “I wouldn’t say I’m as upset as I am disappointed that we as a city have no sense of preserving our past and heritage, no matter how tacky or out-of-date it may be.”

For the full story, see:

STEVE FRIESS. "Aging Resort Demolished to Make Way for a Young One." The New York Times (Weds., March 14, 2007): A14.

Celebration of, and then demolition of, the Stardust. Source of the photo: online version of the NYT article cited above.

Advice from Charles Koch: A Successful Business Schumpeterian

Source of book image: http://media.wiley.com/product_data/coverImage300/89/04701398/0470139889.jpg

When Charles Koch became the chief executive of Rock Island Oil & Refining after the death of his father in 1967, the company was a moderately successful enterprise based in Wichita, Kan. He renamed it Koch Industries in honor of his father — and over the next 40 years proceeded to transform Fred Koch’s legacy into the world’s largest private company. Koch Industries — now a commodity and financial conglomerate that includes brands such as Stainmaster, Lycra and Dixie cups — has 80,000 employees in 60 countries. Its revenue last year was $90 billion. In one generation, the book value of Koch Industries has increased 2,000-fold. That’s an 18% compounded annual return — comparable with the long-term track record of Warren Buffett’s Berkshire Hathaway.

. . .

At age 71, Mr. Koch clearly feels that the time has come to pass along the business formula that has served him so well. In "The Science of Success," he describes a technique, called Market-Based Management (MBM), that he says evolved from his reading, early in his career, in history, political science, economics and other disciplines. He arrived at an understanding of what allows a free society to prosper, Mr. Koch says, and decided to apply those principles to business.

. . .

. . . He is especially fond of the "Austrian school" of economists, such as Ludwig von Mises and Joseph Schumpeter, who emphasized production processes, technology and the dynamic competitive models of "creative destruction."

For the full review, see:

MARK SKOUSEN. "BOOKS; A Short Course in Long-Term Value." The Wall Street Journal (Weds., March 7, 2007): D8.

(Note: ellipses added.)

More on Creative Destruction in Science Fiction

On April 11, 2007 I posted an entry noting a new science fiction book with the title Creative Destruction. Not having read the book, I wondered aloud whether the book contained any reference to Schumpeter.

Yesterday (4/13/07), I was delighted to receive an email from the author of the book, answering my question. With his permission, I reproduce his email below:

Dr. Diamond,

I noticed your blog entry about Creative Destruction, my computer-themed SF collection. You asked: Does Schumpeter get a mention?

Absolutely. Here are the opening lines of the foreword:

     If the Internet bubble had a patron saint, he was an obscure economist named Joseph Schumpeter.

     Schumpeter owes his posthumous celebrity to two words: creative destruction. In 1942, he wrote of the "… Process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.

     "Creative destruction," he said, "is the essential fact about capitalism." Every dotcom, of course, claimed its new technology would sweep out the old in a frenzy of creative destruction. Occasionally — think Yahoo! and Amazon — they were even correct.

The stories in the collection are most definitely science fiction — I have degrees in physics and computer science — but I also have an MBA from the University of Chicago.

Best regards,

– Ed Lerner

(Note: I have changed the format of the email, a little. The ellipsis was in the original.)

Creative Destruction in Science Fiction

Source of book image: http://ec1.images-amazon.com/images/P/0809557487.01._SS500_SCLZZZZZZZ_V38973347_.jpg

There’s a new collection of science fiction stories entitled Creative Destruction (after one of the main stories in the collection that is also entitled "Creative Destruction"). I have not read the book, but used to enjoy reading science fiction, and hope to have a look before too long.

I welcome comments from anyone who has read the book. Does Schumpeter get a mention?

The reference to the book is:

Lerner, Edward M. Creative Destruction. Rockville, MD: Wildside Press, 2006.

Kodak Tries to Survive Creative Destruction

A Kodak digital production printer. Source of photo: online version of the NYT article cited below.

Digital photography replacing film technology is an example of Schumpeter’s process of creative destruction, and maybe also of the gradual growth of a disruptive technology. Leading incumbent firms frequently have trouble prospering, or even surviving, during such a change. Both the Wall Street Journal and the New York Times had articles on the latest news from Kodak. Here is an excerpt from the New York Times version:

On Tuesday, as the Eastman Kodak Company unveiled its long-anticipated consumer inkjet printer in New York, the mood at the company’s Rochester headquarters could not have been more positive.

“People know we are back on the offensive,” said Frank Sklarsky, Kodak’s chief financial officer. “And that’s making them a lot more charged up about coming to work.”

But yesterday, Kodak gave them reason again to feel depressed. The company said it would cut 3,000 more jobs this year, on top of the 25,000 to 27,000 it had already said would be gone by the end of 2007. At that rate, Kodak will end the year with about 30,000 employees, half the number of just three years ago and a fraction of the 145,000 people it employed in 1988, when its brand was synonymous with photography.

Kodak executives insist that the new cuts do not indicate any snags in the continuing struggle to transform itself from a film-based company into a major competitor in digital imagery. And analysts, too, say the cuts are inevitable, and probably healthy.

For the full NYT story, see:

CLAUDIA H. DEUTSCH. "Shrinking Pains at Kodak." The New York Times (Fri., February 9, 2007): C1 & C4.

For the related WSJ story, see:

WILLIAM M. BULKELEY and ANGELA PRUITT. "Kodak Sees More Job Cuts, Higher Restructuring Costs." The Wall Street Journal (Fri., February 9, 2007): B4.

Source of the first and third graphic: the WSJ article cited above. Source of the second graphic: the NYT article cited above.

Woodrow Wilson: The Automobile is “a Picture of the Arrogance of Wealth”

It is the common characteristic of new products from creative destruction that new products are first so expensive that only the rich can afford them, but then fairly soon, usually within a few years at most, the price falls to the level that ordinary people can afford. At that point, what the rich gets are added features, at a high premium, but the basic product is widely available. Consider the automobile:

(p. 193) The autos of the time were a luxurious novelty. One model even offered electric curlers in the back seat for on-the-go primping. They were unreliable and expensive, costing around $1,500, twice the average annual family income. And they were enormously unpopular. Anticar activists tore up roads, ringed parked cars with barbed wire, and organized boycotts of car-driving businessmen and politicians. Public resentment of the automobile was so great that even future president Woodrow Wilson weighed in, saying, "Nothing has spread socialistic feeling more than the automobile . . . a picture of the arrogance of wealth." Literary Digest suggested, "The ordinary ‘horseless carriage’ is at present a luxury for the wealthy; and although its price will probably fall in the future, it will never, of course, come into as common use as the bicycle."

Source:

Kim, W. Chan, and Renée Mauborgne. Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant. Boston: Harvard Business School Press, 2005.

(Note: ellipsis in original. Also, the book provides sources for each quote in the passage above.)

Preventing Creative Destruction Slows Economic Growth

Source of graphic: online version of the NYT article cited below.

It would be interesting to explore why the gap in growth rates was smaller last year than previously. Was it a statistical fluke? Or did the U.S. labor market become somewhat less flexible? Or maybe the job market in Europe and Japan became somewhat more flexible?

FOR more than a decade, many American economists have pointed to Europe and Japan as prima facie evidence that layoffs in the United States are a good thing. The economies in those countries were not nearly as robust as this country’s. And the reason? Too much job security in Europe and Japan, the economists said.

American employers, in sharp contrast, have operated with much more “flexibility.” Hiring and firing at will, they shift labor from where it is not needed to where it is needed. If Eastman Kodak is struggling to establish itself in digital photography, then Kodak downsizes and labor moves to industries and companies that are thriving — software, for example, or health care, or Wal-Mart Stores or Caterpillar.

This shuffling out of one job and into another shows up in the statistics as nearly full employment. Never mind that the shuffling does not work as efficiently as the description implies or that many of the laid-off workers find themselves earning less in their next jobs, an income roller coaster that is absent in Europe and Japan. A dynamic economy leaves no alternative, or so the reasoning goes among mainstream economists.

“Trying to prevent this creative destruction from happening is a recipe for less economic growth and less productivity,” said Barry Eichengreen, an international economist at the University of California, Berkeley.

For the full commentary, see:

LOUIS UCHITELLE. "ECONOMIC VIEW; Job Security, Too, May Have a Happy Medium." The New York Times, Section 3 (Sun., February 25, 2007): 5.

Pay Rebounds in Silicon Valley

Source of graphic: online version of the WSJ article cited below.

Silicon Valley’s nascent economic recovery gathered steam last year, with the nation’s technology capital adding more than 30,000 jobs and showing gains in areas such as average annual wages and household income.

That was the conclusion of an annual report from Joint Venture Silicon Valley, a nonprofit group representing businesses and government agencies in the San Francisco and San Jose, Calif., area.

"Silicon Valley is back and it’s rebooting," said Russell Hancock, Joint Venture’s president and chief executive. "This is familiar since the Valley has already done it five or six times over its history. It regroups, then reboots."

The report comes as Silicon Valley, which prospered during the dot-com frenzy in the late 1990s, has struggled to remake itself in the wake of the tech crash in 2000. In the years since, the region has experienced job losses and a slowdown in growth at many tech companies. The area began to turn the corner in 2005 when a net gain of 2,000 jobs was recorded, the first time since 2001 that there had been an overall increase in jobs. Start-up activity has also become widespread again, with Internet firms specializing in online video, social networking and "clean technology" springing up.

For the full story, see:

PUI-WING TAM. "No Longer Down in Silicon Valley Jobs, Wages Show Gains As Bust Fades Further; Small Firms Fuel Rebound." The Wall Street Journal (Mon., January 29, 2007): B5.

Barney Frank on Schumpeter’s “Great Concept”

Barney Frank. Source of photo: http://www.house.gov/frank/welcome.html

Policy-makers are often enthused by the innovation unleashed by Schumpeter’s process of creative destruction, but draw back out of fear of the destruction of jobs. In the passage below, Barney Frank expresses that fear.

I think that there are answers to the fear. More and better jobs are created, than destroyed; workers can invest in general skills that do not depreciate, and retool the specific skills that do depreciate; and conscientious workers suffer from lack of recognition and upward mobility, when creative destruction is stiffled. The pain is less than usually thought, and the gain is greater.

One of the consequences of this separation between economic growth and the well-being of the great majority of citizens is that an increasing number of citizens don’t care about economic growth. Not surprising. Not only do they not benefit, but in many cases they get the short-term disruptive effects.

I mean, there was a great concept from Joseph Schumpeter of creative destruction in which, as the old economic order is destroyed, resources are freed up for the new order.

Well, increasingly, we have people who see the destruction in their own lives, but don’t see that they’re going to be part of the new creation.

Source:

Transcript of remarks delivered at the National Press Club on "Wages" by Democratic Representative Barney Frank of Massachusetts, on January 3, 2007.

Toyota Turns from Incremental Change to Revolutionary Change

Source of graph: online version of WSJ article cited below.

(p. A1) TOYOTA CITY, Japan — The world sees Toyota Motor Corp. as an unstoppable profit juggernaut, overtaking rivals one by one as it rolls toward replacing General Motors Corp. as the world’s largest auto maker.

Not Katsuaki Watanabe. Toyota’s chief executive officer is a worried man. He thinks Toyota is losing its competitive edge as it expands around the world. He frets that quality, the foundation of its U.S. success, is slipping. He grouses that Toyota’s factories and engineering practices aren’t efficient enough. Within the company, he has even questioned a core tenet of Toyota’s corporate culture — kaizen, the relentless focus on incremental improvement.

U.S. and European car makers have spent years struggling to overhaul outdated operations and work practices to better compete with Toyota. By some measures, some of those companies are catching up. Now, driven by a severe dose of institutional paranoia, Mr. Watanabe is trying to move the target.

Mr. Watanabe, 64 years old, wants kakushin, or revolutionary change in how Toyota designs cars and factories. He is pushing Toyota to reduce the number of components it uses in a typical vehicle by half — a radical idea that would usher in a new chapter in car design. He also wants to create new fast and flexible plants to assemble these simplified cars.

For the full story, see:

NORIHIKO SHIROUZU. "Paranoid Tendency As Rivals Catch Up,Toyota CEO Spurs Big Efficiency Drive Culture of Institutional Worry Drives Mr. Watanabe; How Paint Is Like ‘Fondue’ Finding Limits to Improvement." Wall Street Journal (Sat., December 9, 2006): A1 & A6.

(I thank Aaron Brown for bringing this article to my attention.)

Silicon Graphics’ Jim Clark Understood Disruptive Innovation

There’s a great passage in The New, New Thing about Jim Clark trying to convince Silicon Graphics to produce a PC. Clark talks about how hard it is for a company to create a product that competes with itself.

Shades of Clayton Christensen:

Clark thought that Silicon Graphics had to "cannibalize" itself. For a technology company to succeed, he argued, it needed always to be looking to destroy itself. If it didn’t, someone else would. "It’s the hardest thing in business to do," he would say. "Even creating a lower-cost product runs against the grain, because the low-cost products undercut the high-cost, more profitable products." Everyone in a successful company, from the CEO on down, has a stake in whatever the company is currently selling. It does not naturally occur to anyone to find a way to undermine that creative destruction, and he was prepared to do the deed. He wanted Silicon Graphics to operate in the same self-corrosive spirit. (p. 66 of hb edition)

The reference to The New, New Thing is:

Lewis, Michael. The New New Thing: A Silicon Valley Story. New York: W. W. Norton & Company, 2000.

Christensen’s most important book is:

Christensen, Clayton M., and Michael E. Raynor. The Innovator’s Solution: Creating and Sustaining Successful Growth. Boston, MA: Harvard Business School Press, 2003.