Kieran Levis.com

4 November 2009

Tim asks what the difference is ‘between peaceful evolution and continuous revolution.  Is CD a revolutionary argument that peaceful evolution does not exist?’

I suspect that what he has in mind by peaceful evolution is something close to what Clayton Christensen calls sustaining innovation, the kind that goes on all the time, especially in long-established companies, making a succession of incremental improvements to established technologies. Of course it exists and its cumulative value is enormous.

What Schumpeter was talking about was something much more radical: ‘competition from the new commodity, the new technology, the new source of supply, the new type of organization . . .   competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations’.

That is essentially the same argument that Christensen (and Richard Foster who identified the concept) made about disruptive technologies, which ultimately displace established ones and industry leaders. Disruptive change nearly always comes from outsiders rather than incumbents, so it makes sense to think of them as revolutionaries. However, as I show in some of the stories in Winners and Losers, not many of them deliberately set out to overturn the old regime.

Bill Gates didn’t mean to destroy the business model of printed encyclopaedias when he brought out Encarta on a CD-ROM – he was merely trying to expand the consumer market for PCs. He probably didn’t intend to topple IBM from its throne either – he just wanted to make Microsoft the dominant supplier of desktop software. Rupert Murdoch and Sky, on the other hand, were on a mission to break up the duopoly of the BBC and ITV that had dominated British broadcasting. Ironically, both of these revolutionaries were remarkably successful at establishing their own near-monopolies.

Tim points out that there are no coffins and devastation in Australian telecom yet and that BT and AT&T played a big part in their own falls from grace, which they certainly did. ‘Destruction’ is not always the best word for the damage caused by disruptive technologies and business models, and no two stories are exactly alike. What are nearly always destroyed when the rules of engagement change are  the competitive advantage of incumbents, their business models and the jobs of many employees. IBM lost leadership of the old IT industry in the 1980s, but in the 1990s reinvented itself and remains a very important company. Kodak has not been destroyed by the near collapse of its film processing business (see its story in the Introduction), but it is a smaller and much less profitable company than it was in 2000. Both of these companies laid off thousands of people, as have telephone companies around the world.  For the people concerned, who thought they had jobs for life, this was pretty devastating.

As for the broader question of evolution versus revolution, the distinction is not clear-cut, since each word has multiple, overlapping meanings. Schumpeter occasionally used biological imagery and Eric Beinhocker, a former protégé of Richard Foster at McKinsey, has argued convincingly in The Origin of Wealth that wealth creation is an essentially evolutionary process – the economy is ‘a complex adaptive system’. According to Daniel Dennett, evolution is a search algorithm that ‘finds needles of good design in the haystack of possibility.’ The vast majority, including those that enjoy considerable success for a while, are discarded. So in the course of the grand evolutionary journey there are many revolutions.

In a business context of course all these terms are metaphors, not scientific laws. Like all metaphors they have their limitations, but help us to see patterns in a turbulent, apparently chaotic environment. Whatever terminology we use, the crucial points to remember are that change is constant and that nobody should expect to be a winner forever.