The process whereby old sources of competitive advantage are destroyed and replaced with new ones is referred to as creative destruction. Entrepreneurship by its very nature makes old knowledge redundant and introduces new knowledge through innovations so that firms could further develop and/or sustain competitive advantages.
In this context the spirit of the entrepreneur will always be needed, because the ability to see things differently is precisely at odds with things as they are. The key implication is that entrepreneurial insight is something non-rational which means that although knowledge and rational calculation might be available, there will always be a demand to go beyond the planned and the calculated, or at least to take an unorthodox and unconventional perspective.
According to Joseph A. Schumpeter (1883-1950), entrepreneurship triggers creative destruction. The process of creative destruction ensures “churn” results from the innovations in new products, services, and organizations which in turn creates value, but inevitably displaces or diminishes the value of incumbent products, services and organizations.
An expression that captures the essence of creative destruction is that “you can’t make an omelette without breaking a few eggs.” The unbroken eggs represent current production or existing status quo. The omelette represents something new, different, and better – an innovation. The price of progress is the destruction of the status quo. The creation of the omelette destroys the eggs.
Ideally the labour, capital, land and entrepreneurship that comprised the old would be instantaneously reallocated to the new. However, this seldom happens. Resources used in the old are very rarely suited for production in the new.
The labour, capital, and materials used to produce horses are not the same as those needed for car production. Therefore the end result of this process is that old industries are demonstrably destroyed.
The two cornerstones of the creative destruction process are innovation and entrepreneurship. Entrepreneurship is the driving force that brings innovations to the forefront of the economy – the creation that triggers destruction.
In conclusion I wish to state that in many cases entrepreneurs are also innovators. Creative destruction is most likely to result when entrepreneurs are also innovators.
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