The Schumpeter’s
Effect:

Joseph A. Schumpeter an Austrian-born
American economist and political scientist who became known for his
contributions to economic theory in the area of innovation and
entrepreneurship. This entry introduces Schumpeter’s philosophy as well as his
theoretical construct of creative destruction. He is often credited for
starting modern growth theory that is based on the inevitable by-product of the
process of development and innovation. Schumpeter’s description of the
innovation process and its diffusion continues to be characteristic in the
contemporary knowledge- and technologically driven global economy. Schumpeter’s
creative destruction and three firm reactions to innovation:

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

·        
Exit,

·        
Switch and

·        
The Sailing Ship
Effect

Creative destruction was Schumpeter’s term during 1943 for the process
by which innovation destroys existing firms and their technologies. It includes
the process of substitution of a new technology for an existing technology for
some defined market. Schumpeter had nothing to say about the possible reaction
of the established firms to this process, but we know from work in the
management area that there sometimes is an active response to the threat of
creative destruction (Cooper and Schendel 1988, Cooper and Smith 1992, Foster
1988). From this literature we can identify three generic strategies of
response to the process of substitution, which can be referred to as exit,
switch (to the new technology) and the sailing ship effect (the acceleration of
innovation in the old technology in response to the threat from the new).
Before we analyse this last we should say something of the other two. ‘Exit’
may of course be a forced outcome of creative destruction, via liquidation.
However, it is a strategic response if the incumbent firm anticipates problems
from future innovation and elects to exit the threatened market early and to
its advantage over ‘forced’ exit.

The decision to ‘switch’ from the old to the new technology is
particularly interesting and has been the focus for the papers cited above,
especially Cooper and Smith 1992. This paper examines eight product lines that
experienced substitution effects; these range from ball point versus ink pens,
to diesel-electric versus steam locomotives. Much of the analysis concerns the
behavior of 27 established firms, selected by Cooper and Smith for their
dominant market position in the old technology. All of these entered the new
technology, but few managed to establish as dominant a position in the new
technology as they had in the old. A diverse range of problems faced those
wishing to switch; these included the problems of internal groups which
recognized that the advancement of the new technology threatened their
expertise and power; to the problems of judging how the new technology would
develop and which old competencies could be retained and which should be shed.

 

Technology S-curve

The technology life cycle
which is concerned with the time and performance of developing the technology,
the timeline of recovering cost, and modes of making the technology yield a
profit proportionate to the costs and risks involved. The
four phases of the technology life-cycle:

Research and Development (R) phase:  when incomes from inputs are negative and
where the prospects of failure are high
Ascent phase when out-of-pocket costs have been recovered and the
technology begins to gather strength.
Maturity phase when gain is high and
stable i.e. the region going into saturation
Decline phase of reducing fortunes and
utility of the technology.