Mental Model Summary: Creative Destruction

Contents

1 Mental Model
2 Summary
3 Examples
4 Why It Is Useful
5 How It Fits Into The Latticework
6 Next Step
7 Further Reading

Mental Model

Creative Destruction, Progress, Innovation

Summary

Creative Destruction refers to the process where capitalistic markets result in a perpetual churn where newer and better ideas, products, processes, and organizations replace (destroy) older ones.

It is a byproduct of progress and innovation and is often used to explain how jobs or companies related to old technologies are frequently lost as jobs and companies related to new technologies are created.

The key idea is that markets are competitive and tend to reward adaptation while punishing those that fall behind.

Examples

Buggy Whips: The classic example is how the invention of the automobile destroyed the market for buggy whips (and most horse-drawn products).
Typewriters: Another classic example is how the invention of the computer destroyed the market for typewriters.
Weapons: If we go back further in time, firearms replaced spears and the bow and arrow as our weapon of choice.

Why It Is Useful

Creative Destruction reminds us that things will change over time and that all we can really do is adapt. However, with change comes opportunity and so the death of one industry means if we hustle we have a chance to be even more successful in whatever industry replaces it.

Case 1: The makers of buggy whips had two choices: lament their misfortune or get busy figuring out how to make tires. Fortunately, few industries are destroyed overnight so there is often plenty of time to see the trend as it unfolds and work on adapting.

Case 2: Creative Destruction applies to our Skill Stacks as well. In the world of software programming, newer and better languages appear every few years and the best programmers adapt and learn them so as to stay relevant in their field over the course of their career.

Case 3: Internet Service Providers are constantly scrambling to roll out the latest network technologies so they can provide faster and faster speeds to customers. Think of the old dial-up internet days: where are CompuServe and AOL now? What companies will be household names in 10 years that we haven’t even hear of yet?

How It Fits Into The Latticework

While Creative Destruction is primarily a market/business Mental Model, as I mentioned earlier it can apply individually to our Skill Stacks as well. As such we need to be constant learners to keep up with market and technology changes.

Creative Destruction can also combine with the Sunk Cost Fallacy in that companies that once profited from the old technology may initially be unwilling to give up on it and pivot to the replacement technology, instead plowing more good money after bad.

And how many CEOs have we seen take a public stance against some new technology and then continue to be unwilling to change their minds due to Commitment/ Consistency bias?

However, for those that do pivot quickly, they can benefit from the Mathew Effect where a small initial first-mover advantage can help them ride the wave as the new technology takes hold.