ENTREPRENEURSHIP AND THE CONCEPT OF CREATIVE DESTRUCTION Kofi Bentil IMANI SEMINAR SERIES CREATIVE DESTRUCTION Joseph Schumpeter – The concept of Creative destruction was Introduced in 1942 by the economist Joseph Schumpeter. – It describes the process of transformation that accompanies radical innovation which brings about development. – In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained longterm economic growth, even as it disrupted or destroyed established companies and systems. Joseph Schumpeter ENTREPRENEURSHIP AND CREATIVE DESTRUCTION IT IS ABOUT DEVELOPMENT, MOVING STEADLY FROM ONE POINT OF CIVILISATION TO THE OTHER IT REQUIRES MOVEMENT = LEAVING THE PAST BEHIND AND EMBRACING THE FUTURE – PEOPLE ARE AVERSE TO UNCERTAINTLY AND CHANGE – VISIONARIES EMBRACE THE FUTURE – AFRICANS ARE NOTORIOUS FOR CLINGING TO THE PAST DEVELOPMENT REQUIRES NEWNESS “The fundamental impulse that sets and keeps the capitalist engine [DEVELOPMENT] in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.” [AND DEVELOPMENT REQUIRES] The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory…illustrate the same process of industrial mutation…that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of creative destruction is the essential fact of capitalism [DEVELOPMENT]. It is…what every capitalist DEVELOPMENT concern has got to live in.” TO CHANGE OR NOT TO CHANGE “A railroad through new country, i.e., a country not yet served by railroads, as soon as it gets into working order upsets all conditions of location, all cost calculations, all production functions within its radius of influence; and hardly any ‘ways of doing things’ which have been optimal before remain so afterward.” Question: is it a good thing to disrupt life and the status quo? If that brings a better life and future.. YES!!! There is no virtue in owing allegiance to the status quo if there are better options or even a chance thereof RESPONSES Globalization and the emergence of Chinese and Indian and other new competition is “creative destruction” writ large. We cannot hide from it. We can only rise to the occasion, channel it and adapt in order to benefit from it, rather than succumb to it. In other words GLOBALISATION IS A GOOD THING! If you are smart enough to take advantage of it, if you don’t, it will eat you up. REACTIONS Creative destruction can hurt. “Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. Though a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term”.R Fisher The China Effect on Europe and America. Requires that they retrain and move from manufacturing towards the higher end of the value chain, (Conception and Design) in order to survive. In the long run it is good for them. African has to also leapfrog the industrial revolution and insert ourselves straight into the information age in order to compete and develop. We also have to more carefully manage the effects of Creative Destruction because our people are vulnerable and not so easily retrained or economically mobile. The best innoculation against the negatives of Creative Destruction is higher education. CD REQUIRES LIMITED GOVT WITH SPECIFIC ROLES – Less regulation frees ingenuity and people come up with imaginative ways to solve problems Thomas Kuhn basically posited that there is no one clear organised process of evolution by which human thought and knowledge progresses, rather it happens through “paradigm shifts” which have a tendency to upset the staus quo and change things such that the old is rendered mostly useless or in many cases entirely obsolete. Kuhn said In general, knowledge comes about through 3 distinct stages. – Prescience, which lacks a central paradigm, comes first. Here the scientist dreams in an unstructured way and baed on certain internal leanings and beliefs, is convinced that his feelings are right and thus pursues them and seeks to prove them. This leads to the next step KUHN called. – Normal science when scientists attempt to enlarge the central paradigm by "puzzle-solving". So the dreamer seeks scienific justification for his beliefs or dream, and may well get it, then all of us will believe it until it is proven wrong by another. Accordig to KUHN, the failure of a result to conform to the paradigm is seen not as refuting the paradigm, but as the mistake of the researcher. – Revolutionary science, As anomalous results build up, science reaches a crisis, at which point a new paradigm, which subsumes the old results along with the anomalous results into one framework, is accepted. In my view KUHN’s wok simply underscores Schumpeter’s in that there is no real ordered process, in other words nobody can tell what the next big thing will be and therefore the lesson is…. GO AHEAD AND BELIEVE IN WHAT YOU ARE DOING, BECAUSE HIPPIES INVENTED THE MODERN AGE NOT NECESSARILY PROFESSORS, POLITICIANS OR RICH MEN!! How wrong experts can be… "I think there's a world market for maybe five computers." (Thomas Watson, chairman of IBM, 1943.) "But what is it good for?" (Engineer at the Advanced Computing Systems Division of IBM, commenting on the micro chip, 1968) "There is no reason why anyone would want to have a computer in their home." (Ken Olson, president, chairman and founder of Digital Equipment Corp, 1977.) "This 'telephone' has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us." (Western Union memo, 1876.) "The wireless music box has no imaginable commercial value. Who would pay for a message sent to nobody in particular?" (David Sarnoff's associates in response to his urgings for investment in the radio in the 1920's.) "Who the hell wants to hear actors talk?" Bros, 1927.) (HM Warner, Warner How wrong experts can be… "We don't like their sound, and guitar music is on the way out." (Decca Recording Company rejecting the Beatles, 1962.) "Heavier than air flying machines are impossible." president, Royal Society, 1895.) (Lord Kelvin, "If I had thought about it, I wouldn't have done the experiment. The literature was full of examples that said you can't do this." (Spencer Silver on the work that led to the unique adhesives for 3M PostIt Notepads.) "So we went to Atari and said, 'We've got this amazing thing, even built with some of your parts and what do you think about funding us? Or we'll give it to you. We just want to do it. Pay our salary, we'll come work for you.' They said 'No'. Then we went to Hewlett-Packard; they said, 'We don't need you. You haven't got through college yet'." (Apple Computer founder Steve Jobs on attempts to get Atari and HP interested in his and Steve Wozniak's personal computer.) "Drill for oil? You mean drill into the ground to try and find oil? You're crazy." (Drillers whom Edwin L Drake tried to enlist to his project to drill for oil, 1859.) "Airplanes are interesting toys but of no military value". Ferdinand Foch, Professor of Strategy, Ecole Superieure de Guerre.) (Marechal How wrong experts can be… "Everything that can be invented has been invented." (Charles H Duell, Commissioner, US Office of Patents, 1899.) "Louis Pasteur's theory of germs is ridiculous fiction." (Pierre Pachet, Professor of Physiology at Toulouse, 1872.) "The abdomen, the chest, and the brain will forever be shut from the intrusion of the surgeon." (Sir John Eric Ericksen, British surgeon, appointed Surgeon Extraordinary to Queen Victoria, 1873.) "640K ought to be enough for anybody." (Bill Gates of Microsoft, 1981.) Passion for an idea Edwin Laurentine Drake On August 27, 1859, a well that Drake drilled struck oil. in the late 1840’s Edwin Drake was hired to investigate suspected oil deposits in Pennsylvania. The oil company chose the retired railway man partly because he had free use of the rail. Drake decided that the best way to find oil was to dig for it. He had limited success, but was only able to extract a maximum of 10 barrels per day. This was not enough to make a commercial yield sustainable. When attempts to dig huge shafts in the ground failed due to water seepage, Drake decided to drill in the manner of salt well drillers. He purchased a steam engine to power the drill. It took some time for the drillers to get through the layers of gravel. At 16 feet (5 m) the sides of the hole began to collapse. Those helping him began to despair. But not Drake. It was at this point that he devised the idea of a drive pipe. The going, however, was slow. Progress was made at the rate of just three feet (1 m) per day. After initial difficulty locating the necessary parts to build the well, which resulted in his well being nicknamed "Drake's Folly," Drake proved successful. Meanwhile crowds of people began to gather to jeer at the apparently unproductive operation. Drake was also running out of money. Amazingly the Oil Company abandoned their man and Drake had to rely on friends to back the enterprise. On August 27th 1859 Drake had persevered and his drill bit had reached a total depth of 69.5 feet (21 m). At that point the bit hit a crevice. The men packed up for the day. The next morning Drake’s driller, Billy Smith, looked into the hole in preparation for another day’s work. He was surprised and delighted to see crude oil rising up. Drake was summoned and the oil was brought to the surface with a hand pitcher pump. The oil was collected in a bath tub. Within a day of Drake's striking oil, Drake’s methods were being imitated by others along Oil Creek and in the immediate area. This culminated with the establishment of several oil boom towns along the creek, and by 1865 nearby Pithole City was producing oil. Drake set up a stock company to extract and market the oil. But, while his pioneering work led to the growth of an oil industry that made many people fabulously rich, for Drake riches proved elusive. Drake did not possess good business acumen. THE ENTREPRENUER Entrepreneurship Entrepreneurship is a process of innovation and new-venture creation as a result of the interaction of individual and societal/environmental factors. It is primarily driven by the initiator (s) (Entrepreneur), who take major decisions that ultimately lead to success or failure of the effort, whatever the outcome, it usually affects the initiators directly, and society as a whole by extension. The whole process is aided by collaborative interaction of various networks in government, education, and institutions that provide support and guidance. Entrepreneur The entrepreneur is a catalyst for (economic) change who by the generation of ideas, purposeful searching, careful planning, and bold judgment organizes resources and capabilities to create incremental wealth through the solution of problems, or the provision of life enhancing services. Uniquely optimistic and committed, the entrepreneur works creatively to achieve set goals, all for a particular purpose, which is usually to create wealth, as an end or a means to other ends. The Soul of the Entrepreneur It's not the critic who counts, nor the observer who watches from a safe distance. Wealth is created only by doers in the arena who are marred with dirt, dust, blood, and sweat. These are producers who strike out on their own, who know high highs and low lows, great devotions, and who overextend themselves for worthwhile causes. Without exception, they fail more than they succeed and appreciate this reality even before venturing out on their own. But when these producers of wealth fail, they at least fail with style and grace, and their gut soon recognizes that failure is only a resting place, not a place in which to spend a lifetime. Their places will never be with those nameless souls who know neither victory nor defeat, who receive weekly paychecks regardless of their week's performance, who are hired hands in the labor in someone else's garden. These doers are producers and no matter what their lot is at any given moment, they'll never take a place beside the takers, for theirs is a unique place, alone, under the sun. They are entrepreneurs. Joseph R. Mancuso Center for Entrepreneurial Management CHARACTERISTICS ATTRIBUTED TO ENTREPRENEURS 1. Total commitment determination and perseverance 2. Drive to achieve and grow 3. Opportunity and goal orientation 4. Taking initiative and personal responsibility 5. Persistent problem solving 6. Realism and a sense of humor 7. Seeking and using feedback 8. Internal locus of control 9. Calculated risk seeking and risk taking 10. Low need for status and power 11. Integrity and reliability 12. Creativity 13. Optimism 14. Ability to influence others 15. Flexibility MYTHS OF ENTREPRENEURSHIP THEY ARE DOERS NOT THINKERS Because they become rich and famous through their deeds, people underestimate the thinking behind the doing. Entrepreneurs usually think more than they do, but they are go-getters, who don’t stop until they achieve their goals. THEY ARE BORN NOT “MADE” Based on the romantic stereotype of a super person with special gifts. Drucker directly attacked this notion when he said “entrepreneurship can be learnt”. It has process, and various models which can be studied and the knowledge acquired. THEY ARE ALWAYS INVENTORS Few are, most are not, rather they are superb visionaries and organizers, who usually benefit by improving on other peoples ideas. THEY ARE ACADEMIC AND SOCIAL MISFITS This romantic view of the entrepreneur as an antiestablishment person is anecdotal. Most get their ideas from belonging to the system and all business is about contributing to the system. A few may achieve success in unorthodox ways, but most are mainstream. THEY MUST ALWAYS FIT THE “PROFILE” over time a stereotype “romantic” view of the entrepreneur has emerged and people assume one must fit it in order to make it as an entrepreneur. ALL THEY NEED IS MONEY Money is never at any time the most important resource, good strategy is. Money is always critical for implementing plans, but more of it does not guarantee success. ALL THEY NEED / HAVE IS LUCK Luck is always a major factor in success, but it is always the best prepared who seem luckiest, entrepreneurs prepare for the big break, that is their luck. IGNORANCE IS BLISS False, most entrepreneurs are meticulous analyzers, and they seek and use information better than others, but they are also not risk averse, they know the risks, but take their chances. They however avoid P.D.A. THEY FAIL A LOT Many try a number of times before they make it, once done, many survive especially if they follow proven principles. It is not a totally uncertain world. THEY ARE EXTREME RISK TAKERS Risk taking is important in entrepreneurship, but most entrepreneurs take only calculated risks with theoretically proven chances of success which are better than possibility of failure. The plan must work on paper. Screening and Consultation SAFETY FINE TUNING IMPROVEMENT, ADDITIONS INITIAL REALITY TESTING WHY WHO FRIENDS INDUSTRY PUNDITS OR OPINION LEADERS ACADEMICS AND INTELLIGENTSIA FAMILY HANDLING CONSULTATIONS LISTEN INTERACT BUT DON’T DISRUPT NOTE EVERYTHING PONDER EVERYTHING RULE OUT SHORTLIST PONDER SPECIFIC OPTIONS REFER TO YOUR ORIGINAL DREAM AND DETERMINE WHICH ISSUES ARE KEY DETERMINE RESPONSES TO KEY ISSUES CONSULT SOME MORE WITH KEY PEOPLE IF NEEDED AVOID PARALYSIS DUE TO ANALYSIS STOP AT SOME POINT AND ACT! Innovation Principles of Innovation Action orientation Simplicity and functionality Customer orientation/focus Start small Aim high Try - test - revise Learn from everything good or bad Set milestones and Measure progress Encourage ideas. reward heroics, tolerate failure Work work work The Innovation Process TYPES OF INNOVATION – Invention [supportive or disruptive innovations] Totally new products or services Wright /Edison /Bell – Extension New use or different application of an existing product or service - McDonalds /Atari/Baking Soda – Duplication Creative replication of an existing product or service – Ipod/iphone /Walmart /Easyjet – Synthesis Combinations of existing concepts and factors into new things or services for different or better use - Federal Express/Unique Trust Developing Creativity Recognizing relationships – See things in a new light, new uses, new approaches Developing a functional perspective – Be a pragmatic problem solver Using both of your brains – Left for calculations, right for creativity Eliminate muddling mindsets – Either/or – Security seeking – Stereotyping – Probability thinking – Don’t fear ambiguity Creative problem solving Adaptor 1. Disciplined and precise Innovator 1. Approaches tasks from unusual angles 2. Solves rather than finds problems 2. Finds problems and avenues of solution 3. Refines existing processes 3. Questions basic assumptions related to current practices 4. Is means oriented 4. Has little regard for means, focuses on ends 5. Is capable of extended detail work 5. Has little tolerance for routine 6. Sensitive to group cohesion and cooperation 6. Only seeks ends and cares little or nothing for consensus. Funding Sources Personal savings Family Friends Venture capital Types of Funding Debt Equity Loans I.P.O.s Private Floatation Grants THE ENTREPRENEURIAL CYCLE 1. IDEAS Creative thinking; Systematic logical process, Innovations 2. SCREENING AND CONSULTATIONS Seek guidance, and then go off into the deep 3. BUSINESS PLANNING Plan to succeed and then face the odds 4. FUND RAISING Know how and where to raise money 5. GROWTH Don’t stagnate, you will die VALUATION OF BUSINESS Think business-like always! 1. EXIT STRATEGY It is all about the purpose. Death gives meaning to life. God Be with you. May your life make other people’s lives better.