Creative Destruction - Jan. 2008

I just finished Alan Greenspan’s new book, The Age of Turbulence. The first two-thirds can be tough sledding, as Greenspan writes the way he talks. There was some interesting economic history with a little “inside” stuff to make it a little more readable. The last third, in which he gives his opinion on the US and the global economy of recent past and anticipated future, is quite interesting.

Greenspan refers to economist Joseph Schumpeter, who coined the term“creative destruction.” The concept behind the term is simple: In a capitalist system, things are ever-changing, with the new and improved replacing the old. Capital will always seek the most efficient use or return on investment.

I Googled “creative destruction” and got a segment of the original publication from 1942. Schumpeter states, “This process of creative destruction is the essential fact about capitalism.” Later, Schumpeter uses the words “perennial gale of creative destruction.” All of us in business live the words of Joseph Schumpeter every day. There’s no denying the simple and powerful truth of his idea. Of course, when you’re struggling to survive, none of this seems a bit creative.

Our industry got some bad news recently with the announcement that one our best young plant growers, Glass Corner Greenhouses, was halting operations because it couldn’t make ends meet. In the same week, one of the country’s great independent garden center chains, Pike Family Nursery, announced that it would seek protection under Chapter 11 bankruptcy. The Pike situation is in no way related to the process of “creative destruction”; its struggle was caused by natural disaster, drought. I’m certain there are scores of businesses going through the same or worse as this terrible drought continues in the Southeast. Natural disaster causes huge amounts of destruction, both of the wealth and property sort, without any sort of creative upside.

We’ve chosen an industry that’s vulnerable to both natural disasters and creative destruction. With so much risk all the time, we should be a very profitable industry. Unfortunately, we also have an almost perfectly competitive industry. Perfectly competitive industries are characterized by large numbers of sellers, with no one seller having enough market clout to affect prices upward. The number of buyers has been going down and consolidating into a few large chains. We also compete with every other consumer product, including all those cheap imports from China, looking to capture the disposable income of the American consumer.

Since competition is inevitable, we must think about how each of us will survive or thrive in our businesses. There’s no one answer to the question of how to compete effectively. Some compete by being the low-cost producer, while others stake out the high end of the market with lots of service. Some companies develop a very high level of expertise in a narrow range of goods of which they can dominate the production.

In his book, Greenspan says that the economy can only grow at a rate of 3% sustained over time, although invention and science are advancing much more rapidly. His explanation for this is that humans, whose brains have not changed significantly since the times of ancient Greece, are just not smart enough to take advantage of all the invention around us. This, coming from one the smartest guys around, was a little hard to read. It may be true, but I hope not. Even if it is true, that means to effectively compete, you need to improve your product, your operation or yourself at a rate greater than 3% each year. If you improve things 5%a year, then in 10 years, thanks to compounding, you’ll be more than 20% ahead of your average competitors. We all know that self-improvement is a good thing, but it may be a requirement for economic survival.
The good news is there are tons of ways to engage in self-improvement. Community colleges are a great place to take courses, for example. Self-improvement won’t happen by itself; and it may not ensure we survive a natural disaster, but it should serve to make us more competitive in normal times.