Creative Destruction and the Aftermarket
(Mitt Romney - 1; Karl Marx - 0)
by Craig Fry
When Mitt Romney ran Bain Capital, he talked a lot about creative destruction as a concept of capitalism. When he ran for President, a lot was written about Mitt and Bain and creative destruction, but few people ever really understood the concept or what to do about it.
Turns out, there’s an interesting story behind creative destruction. It’s one of the core concepts of capitalism. And it was first observed by one of the chief adversaries of capitalism: Karl Marx.
The Destruction Of Wealth
Karl believed that capitalism creates wealth by destroying wealth. It destroys and reconfigures old orders and systems of wealth replacing them with new orders and systems. And it must do this endlessly in order to survive.
Sounds evil, doesn’t it?
Marx felt that this endless cycle of evil would eventually be the death of capitalism. He felt that capitalism, by its very nature, insures that the rich always stay rich and the poor always stay poor.
The working class, oppressed by a system that’s stacked against them would eventually rise up in rebellion against the wealthy class (the bourgeois) and overthrow it.
Hold The Phone, Karl
But wait a minute. That’s a contradiction. Any economic system based on the constant destruction of wealth can’t insure that the rich always stay rich.
Joseph Schumpeter, considered one of the foremost economists of the twentieth century, was fascinated by Karl’s theories. He agreed with the notion that capitalism is constantly replacing old wealth with new wealth. But instead of something evil, he saw this as a form of continuous improvement.
Wealth, in a capitalist economy doesn’t tend to stay in the same hands, the same family, from generation to generation. The nouveau riche are, by definition, folks whose parents were not rich. And at least some of tomorrows poor folks will come from today’s wealthiest families. Economists like to say, “Three generations from overalls to overalls.”
True, a wise man once said that, “The poor you will always have with you.” But they wouldn’t always be the same people. They wouldn't even come, necessarily, from the same families.
What’s more, it turns out that new wealth doesn’t really destroy old wealth very often. Rather, it steps up to fill in the gaps as old wealth dies from natural causes.
The circle of life.
So, what causes old wealth to die? Lots of things: Wars, natural disasters, social upheaval, new technologies, competition and even the cyclical nature of business.
Schumpeter spent his entire life studying creative destruction and economic upheaval and wrote a number of wonderful books detailing his observations. Some common threads emerged from his careful analysis of major shifts in wealth.
New Wealth Is A Threat
New wealth always threatens old wealth, regardless of whether it’s actually causing its destruction. The working classes fight against it because it threatens their jobs. The bourgeois fight against it because it threatens their wealth. The full force of the dying system is brought to bear on upstart wealth in a frantic effort to stop it cold. Laws are passed. Tariffs are levied. The wealthy form conspiracies and workers riot. Politicians and preachers condemn it as evil and old folks long for the good old days.
But change still happens. Call it “creative destruction” if you like. But it’s unstoppable. In this sense, at least, Karl Marx was right. So what is the primary force driving economic change?
Enter The Entrepreneur
After a lifetime of study, Schumpeter came to the surprising conclusion that it isn’t normally invention nor technology. It’s the entrepreneur. It’s not Steve Wozniak. It’s Steve Jobs.
“The entrepreneur will destroy any equilibrium in the capitalist process.” Sometimes entrepreneurs promote new technologies, like the powered looms that gave birth to the industrial revolution. Sometimes, entrepreneurs find new ways to organize and run a business, like the first national railroads. (What a way to run a railroad!) Sometimes entrepreneurs find new methods of financing, like installment payments to buy a car. (GMAC. What a crazy idea.) Sometimes an entrepreneur comes up with a brilliant new channel of distribution, like iTunes.
It could be a big idea that changes the world or a small concept that causes you to conquer your local market. Either way, it’s the entrepreneur that most often causes and benefits from creative destruction.
Wealth is going to be destroyed. Period. Old wealth is going to be replaced by new wealth. Those who try to stop it from happening usually end up as road kill. The best thing you can do when you see your wealth threatened by new forces in the marketplace is to channel your inner entrepreneur.
Look. You built your business because you had an idea and you took a chance. Now, no matter how long you’ve been in business, you have to keep it up. The day you stop innovating, risking, trying-failing-and-trying-again, entrepreneuring … that’s the day you become old wealth on its way out. Today, it’s happening with frightening speed. These days, it seems more like three years from overalls to overalls.
There are many forces currently threatening the independent aftermarket. OEMs are always trying to lock down their markets. E-commerce and the internet are changing everything. Foreign competition has entered product categories that were once thought safe from off-shore manufacturing. Technology is changing so fast that product life-cycles are shorter than ever. At a time when technical knowledge and skills are in short supply, education and training programs are failing worse than ever. Money is tight. Margins are slim. We’re in a down business cycle.
In a climate like this, one thing is certain. Your company’s wealth is either being destroyed or created. Which one is largely up to you.