4. Creative Destruction and Sustainability

More than 50 years ago, economist Joseph Schumpeter described the dynamic pattern in which innovative upstarts unseat established firms as “creative destruction.”¹ Whereas most twentieth-century economists focused on competition under conditions of static equilibrium, Schumpeter insisted that disequilibrium was the driving force of capitalism. There is now little doubt that the economy is driven by firms that are able to capitalize on the “new combinations” described by Schumpeter: Coal Age technologies gave way to Oil Age technologies that are now giving way to Information Age technologies. With each change, the technological and economic infrastructure of society experiences dramatic transformation, with new institutions, enterprises, and geographic patterns of development.

Not surprisingly, the notion of creative destruction makes many managers uncomfortable—and it should. Frequently, incumbent firms either have discounted the significance of emerging technology or have reacted to changes by becoming more committed to existing products and markets. Incumbents that survive episodes of creative destruction do so because they display more foresight than their peers; they invest and form partnerships to acquire new competencies and experiment in new, untested markets.² They are not held hostage by their current technology or market position.³

Mark Milstein and I have argued that the emerging challenges associated with global sustainability are, in reality, catalysts for a new round of creative destruction that offers unprecedented business opportunities.⁴ Today’s corporations can seize the opportunity for sustainable development, but to do so, they must look beyond the incremental improvements associated with pollution prevention and product stewardship in the current business. Instead, companies must make obsolete the very technologies and product systems upon which they currently depend.⁵

Continuous Improvement Versus Creative Destruction

Episodes of creative destruction are usually driven by waves of scientific and technological discovery or major periods of sociopolitical change. We are now in the early stages of such a revolution—the transformation toward a sustainable global enterprise. Most existing large corporations evolved in an era of abundant raw materials, cheap energy, and seemingly limitless sinks for waste disposal. During the past few decades, however, it has become increasingly clear that many of the technologies developed during this period are unsustainable. Indeed, the specters of toxic contamination, depleted forests and fisheries, eroded soils, loss of biodiversity, global climate change, burgeoning populations, and a widening gap between rich and poor are explicit signals that companies must take more seriously the social and environmental impacts of their technologies and businesses.

In fact, only by replacing many of today’s unsustainable technologies with those that are inherently clean, renewable, and nontoxic can we make rapid progress toward a more sustainable world. Just as nature enables some species to out-compete others through a process of natural selection and succession, so the sustainability revolution will enable those firms with more sustainable strategies to outperform—and, ultimately, replace—those with outmoded strategies and damaging technologies. No amount of greening will save firms from the gales of creative destruction that are likely to ensue in the coming decades. In short, most truly sustainable technologies are likely to be disruptive—but not all disruptive technologies will be sustainable. Learning the difference could hold the key to long-term survival.

Greening = Continuous Improvement

Strategies for greening generally serve to incrementally improve the performance of existing products and processes (see Exhibit 4.1). Initiatives in pollution prevention and product stewardship solidify incumbents’ competitive positions by rewriting the rules of the game in their favor. Greening perpetuates the current industry structure; it fosters continuous improvement rather than reinvention or fundamental innovation. In the long run, however, the dynamics of creative destruction will work against firms that rely only on incremental improvements and fail to change the fundamental manner in which they provide products, processes, and services.

Exhibit 4.1. Continuous Improvement Versus Creative Destruction

An example of incremental innovation is the Chemical Manufacturers Association’s (CMA) Responsible Care program, which helped rescue the industry from near oblivion but has not led its members to revolutionize practices. Following the Bhopal disaster in 1984 (in which 3,000 residents of Bhopal, India, died as a result of a toxic chemical explosion at a Union Carbide plant), leading chemical companies, including Dow, DuPont, and Monsanto, pressed for self-regulation in the face of public hostility and calls for stricter regulatory measures that threatened industry survival. In 1988, the CMA adopted Responsible Care, a statement of environmental principles and codes of management practices that included provisions for pollution prevention, product stewardship, and community advisory panels. To strengthen the program, the principles and codes were made mandatory for CMA member companies, which make up 90 percent of the chemical capacity in the United States; noncompliance was grounds for expulsion from the CMA. Since 1988, Responsible Care has transformed the chemical industry’s environmental behavior and helped to change the public’s perception of the industry from shameless polluter to more responsible actor.

But although it has been successful in reestablishing the legitimacy of an industry under tremendous public pressure, Responsible Care has failed to address the fundamental underlying problems associated with the chemical industry: Many of its products and processes are highly toxic, resource-intensive, and inherently unsustainable. As an industry-level collaborative process, the Responsible Care program has fostered incremental improvement by forcing hundreds of smaller chemical firms to mimic the leaders in terms of environmental management and community involvement. This has left the leading firms such as DuPont and Dow in a stronger competitive position by helping to shore up support for their right to operate but, ironically, has reduced the likelihood of fundamental innovation by chemical company incumbents. Indeed, research now shows that the biggest gains in environmental performance occurred not within the Responsible Care firms, but among those firms that decided not to join.⁶

Beyond Greening = Creative Destruction

If we reflect on the generally accepted definition of sustainable development as the ability of the current generation to meet its needs without compromising the ability of future generations to meet theirs, we can see how most existing products and processes fail to meet this criterion.⁷ Growing data suggests that today’s extractive and material-intensive industries (for example, mining, energy, chemicals, forest products, agriculture, and transportation) are not sustainable. If the entire world were as material-intensive as North America, it would take more than three planet Earths to support the material requirements of the current world population.⁸ We should therefore see global sustainability as a major disruptive force, with the power to radically transform the structure of many industries.

Visionary companies have an opportunity to drive the redefinition and redesign of their industries. Material- and energy-intensive industries will find global sustainability to be a competency-destroying challenge that calls for radical repositioning and new competency development. Information- and service-intensive industries will find global sustainability to be a competency-enhancing challenge that offers significant potential for substitution and leapfrogging over existing unsustainable technologies.

Unlike greening, which works through the existing supply chain to effect continuous improvement in the current business system, “beyond greening” strategies focus on emerging technologies, new markets, and unconventional partners and stakeholders. Such strategies are thus disruptive to current industry structure and raise the possibility of significant repositioning, enabling new players to establish leading positions as the process of creative destruction unfolds.

In the chemical industry, we can also see the early stages of creative destruction, as key incumbents begin to reposition themselves for the clean technology revolution. Consider the case of DuPont. In the late 1800s, the company transformed itself from a manufacturer of gunpowder and explosives into a chemical company focused on the production of synthetic materials using petroleum feedstocks. This strategy produced nearly a century of success, with such well-known blockbuster products as Nylon, Lycra, Teflon, Corian, and Kevlar.

In the late 1900s, DuPont embarked on its second major transformation—from an energy-intensive petrochemical company to a renewable resource company focused on sustainable growth.⁹ To realize this transformation, the company has pursued a strategy of acquisition, divestiture, and internal technology development. Within the past decade, for example, DuPont has invested more than $15 billion in biotechnology, including the acquisition of Pioneer Hi-Bred, a major player in the agricultural biotech business. It has also divested resource- and energy-intensive businesses such as its oil subsidiary (Conoco) in the 1990s, and, most recently, its core Nylon and Lycra businesses in 2004.

In an effort to dramatically shrink its footprint, the company has set bold targets for 2010: to reduce greenhouse gas emissions by two-thirds while holding total energy use flat, and to increase its use of renewable resources to 10 percent of global energy needs. To hit such ambitious targets while continuing to grow as a company, the firm must reorient its technology base toward biology (for example, genomics and biomimicry), renewable energy (for example, fuel cells), and information (for example, knowledge-intensive rather than resource-intensive products). To accelerate this process, DuPont is seeding internal ventures focused on sustainable technology development and innovations aimed at the developing world.¹⁰

During the past decade, de-mergers, spin-offs, acquisitions, and significant new technology developments have structurally transformed the chemical industry. Monsanto, Hoechst, and Rhone-Poulenc have spun off their chemical businesses to concentrate on life sciences, food, pharmaceuticals, and biotechnology. ICI, Sandoz, and Ciba-Geigy have refocused on chemicals by spinning off their life sciences and biotechnology investments (for example, the creation of Zeneca and Novartis). Dow is ramping up significant investments in biotechnology. Other firms, such as Novo Nordisk, the fast-growing Danish pharmaceutical and biotechnology company, and Empresas La Moderna, an emerging life sciences powerhouse, are exploring “green chemistry” and finding biological substitutes for synthetic chemicals. In fact, many of the new technologies being developed by these firms will make existing petrochemically based products and applications obsolete.

Almost every energy- and material-intensive industry, from energy and automobiles to food and forest products, is experiencing similar changes. Every firm must strike a balance between the incremental change and continuous improvement associated with greening, and the disruptive innovation and creative destruction associated with beyond greening. In the past, competitive advantage was based largely upon lowering cost or gaining differentiation in existing industries and businesses. In the future, however, it appears that competitive advantage will depend more upon the capacity to generate disruptive innovation and creative destruction through competitive imagination. A growing body of scholarly work affirms Joseph Schumpeter’s assertion over a half-century ago that “the problem that is usually being visualized is how capitalism administers existing [industrial] structures, whereas the relevant problem is how it creates and destroys them.”¹¹ Disruption and innovation are more important to corporate success than it has ever been.¹²

In their book Creative Destruction, Foster and Kaplan demonstrate empirically that the base rate of the economy has been accelerating over the past 80 years, with dire consequences for industry incumbents: The turnover rate for the S&P 500 has increased from about 1.5 percent per year in the 1920s to nearly 10 percent today. This implies that the average number of years a firm spends on the Standard and Poor index has declined from 65 in the 1920s and 1930s (S&P 90) to 10 in the 1990s (S&P 500). By 2020, they state, “more than three-quarters of the S&P 500 will consist of companies we don’t know today—new companies drawn into the maelstrom of economic activity from the periphery, springing from insights unrecognized today.”¹³

To date, unfortunately, the lion’s share of effort and activity in most companies has focused on greening—the continuous improvement of existing products and processes. Given the velocity of technological change and the growing significance of sustainability, this no longer appears to be a viable strategy: Creative destruction appears to hold the key not only to the growth industries of the future, but to corporate survival.

From Textile Dyes to Biomaterials

Burlington Chemical Company provides a vivid illustration of continuous improvement versus creative destruction.¹⁴ Founded in the early 1950s in the heart of North Carolina’s textile belt, Burlington focused on producing chemicals and dyes for the many textile companies in the region. The company grew steadily throughout the 1960s and ’70s until the early 1980s, when the State of North Carolina passed a stringent new regulation requiring that fish be able to successfully reproduce in the effluent water coming from textile mills. This requirement presented a formidable challenge to the textile companies in the state. Recognizing that its customers’ problems were its problems, too, Burlington seized the opportunity and began to focus on producing more environmentally friendly textile chemicals and dyes.

Led by Sam Moore, the grandson of the company’s founder, Burlington’s management team adopted the ideals of product stewardship and industrial ecology in 1983. This revolutionary approach led the company into a whole new line of textile chemical products that were low in toxicity, biodegradeable, and much more energy-efficient. Despite the textile industry’s steady decline, by the early 1990s, Burlington had grown to more than $50 million in annual sales and employed more than 150 people. Product stewardship and design-for-environment had enabled the company to thrive in what was otherwise a highly cost-competitive, commodity business. Then came the passage of the North American Free Trade Agreement (NAFTA) in 1995.

With NAFTA, the slow decline of the textile industry in North Carolina turned into a mass exodus. Textile mills across the state shut down and moved to Mexico to take advantage of the dramatically lower labor costs there. Between 1995 and 2000, Burlington’s revenues declined by more than 50 percent, and more than 60 percent of its customers went out of business. Even worse, the average selling price of its products dropped by more than half. Burlington was forced to lay off more than 100 of its employees. Fortunately, given the company’s strong focus on employee training and advanced technological competence, laid-off workers found jobs that paid at least as well within a few months. It was clear, however, that if the company were to survive, it would need new “lifeboat” businesses outside the textile industry. The company’s managers thus committed themselves to a strategy of “creative destruction.”

Burlington’s investment in product stewardship and industrial ecology during the 1980s paid off: After two failed attempts to sell its textile chemical and dyes business (one acquirer would have shut down the operation, displacing the remaining workers), the firm succeeded in selling it to a German company in 2003. Under the terms of the agreement, Burlington retained exclusive manufacturing rights, and the new owner agreed to hire all Burlington’s salespeople. The German firm was then able to leverage Burlington’s clean textile dye technology throughout its extensive textile operations in Asia—a win-win, both financially and environmentally.

During the same period, Burlington built manufacturing facilities to focus on the development and production of new, bio-based lubricants, catalysts, and additives. In 2000, it launched a new Luberos lubricants division. The sale of the textile chemicals business freed assets with which to expand the new vision, which is focused on bio-based sustainable chemistry for manufacturing and service industries. New products include lubricants manufactured from used vegetable oils, soy-based fabric softeners, and new cleaning systems for the transportation industry. By 2004, the company had begun to turn the corner, realizing a positive cash flow for the first time in six years and an improving balance sheet. The new vision provided vast opportunities for future growth in emerging industries, with tremendous upside potential. The company’s early commitment to industrial ecology had provided it the intellectual and physical capital to make the leap into a whole new technology and business space. In short, an early commitment to sustainability saved the company.

Using Carbon Dioxide to Change the World

During the mid-1990s, an innovative new venture was spun out of the University of North Carolina at Chapel Hill. Spearheaded by chemistry professor Joe DeSimone, Micell Technologies and its research arm, the Kenan Center for the Utilization of Carbon Dioxide in Manufacturing, focused on the growing demand for green manufacturing methods. Creative destruction has been the company’s stock and trade. Micell Technologies is dedicated to the vision that liquid (supercritical) carbon dioxide can reduce water-based waste streams and replace a significant amount of the 30 billion pounds of organic and halogenated solvents used and released each year. DuPont has already benefited directly from this work in the form of a new process for making Teflon in carbon dioxide in place of the current method, which is water- and solvent-intensive.

Micell is also seeking to revolutionize the semiconductor industry, in which chip fabrication currently uses massive quantities of both water and toxic solvents. Through its innovative technology, the company has developed applications that complete the most chemical- and water-intensive steps of the chip-production in a liquid carbon dioxide environment, eliminating the use of water and solvents for cleaning—and reducing the costs of production in the process. Ultimately, the company aims to creatively destroy the entire chip-fabrication process through its carbon dioxide–based approach, making the process a virtually closed system and eliminating entirely the need for expensive clean room technology.

One of Micell’s most interesting business applications is in dry cleaning. Current dry cleaning technology uses a highly toxic chemical, perchloroethelene, as the cleaning agent. This chemical not only contaminates the sites where it is used (making virtually every dry cleaning shop a hazardous waste site), but it is also very hard on fabrics, shortening the useful life of clothing items. DeSimone and Micell have designed a set of soaps and surfactants that work especially well in a liquid carbon dioxide environment. Under pressure in a specially designed washing machine, carbon dioxide turns to a supercritical liquid; clothes are then “washed” with the specially designed surfactants. Upon completion of the process, the pressure is released, allowing the carbon dioxide to return to a gas; the surfactants are separated from the dirt and captured for reuse. The clean clothes are ready, without the need for any form of drying. The entire process is a closed system, eliminating all forms of waste, pollution, and emissions.

Micell’s franchise operation, Hanger’s Cleaners, is now being rolled out across North America. The clean and safe nature of the workplace, combined with the more sophisticated nature of the technology, enables Hangers to create jobs with a higher skill and wage base. There are now a handful of other carbon dioxide–based dry cleaning plays on the market. It is only a matter of time before the toxic dry cleaning sweatshops of today are relegated to the scrap heap of history.

Whole Systems Thinking

The cases of Burlington Chemical and Micell Technologies make it clear that managing for continuity and efficiency, through cost or differentiation advantages in existing industries and businesses, is no longer enough. In the future, competitive advantage will increasingly shift to the capacity for exploration, disruptive innovation, creative destruction, and corporate imagination.¹⁵ This shift necessitates moving beyond the conventional modes of business analysis, those emphasizing comparison of existing alternatives so prevalent in business schools and firms today.

The logic of marginal analysis—the tracking of incremental changes in costs and benefits—holds that there is an optimum point beyond which it makes no sense to seek additional performance improvements in, say, quality or emissions reduction. Beyond a certain point, in other words, it costs more to achieve an additional increment of improvement than it is worth. Although this form of analysis makes implicit sense in a world of predetermined alternatives and incremental adjustments, it becomes self-defeating when the objective is disruptive change. To succeed in this space, a new logic is required, one based upon whole systems thinking.

In their encyclopedic treatise Natural Capitalism, Paul Hawken, Amory Lovins, and Hunter Lovins make a persuasive case for the logic of whole systems thinking in connection with sustainability.¹⁶ They demonstrate how incremental thinking can blind us to the potential for leapfrog innovation. Using the familiar example of home construction, they show how component-based, marginal analysis leads us to design buildings that fail to realize their full potential. For example, the energy efficiency of buildings is usually determined after the basic structure and utilities have already been put in place by how much insulation is used, what grade of windows are installed, what types of appliances are purchased, and so on. Each of these decisions is made separately using marginal analysis: Additional insulation becomes “uneconomic” beyond a certain point because the initial capital cost will never be recouped through energy savings. This style of analysis has trained us to believe that the only way to realize more energy-efficient homes is to pay the additional cost required to install the necessary conservation technology. Incremental benefits must exceed incremental costs.

But what happens if we step outside the artificial cage imposed by component-based, marginal thinking? To do this, we must abandon the existing design conventions associated with home construction (which means we also have to set aside existing building codes, regulations, and industry best practices). We must start with a clean sheet and embrace the logic of whole systems thinking. When we do this, however, we can readily see that it is possible to “have your cake and eat it, too.” That is, we can design superefficient houses and even cars that actually cost less to build than the original unimproved versions.

How is this possible? The fatal flaw of marginal analysis is its tacit acceptance of current designs and products as given. By accepting the world as it currently exists, we ensure that only incremental improvements are possible. Thus, in seeking a more energy-efficient home, we accept that the current convention (indeed, requirement in most localities in the United States) of having heating systems, ductwork, blowers, air compressors, and so on is necessary and appropriate. The aim is simply to reduce the extent of their use through add-on energy-conservation investments (it should be apparent that this is nothing more than a glorified form of end-of-pipe thinking).

But what if we question the very need for these expensive and potentially unnecessary pieces of capital equipment? What if we invest more in building a well-insulated, passively heated and cooled structure powered by solar energy so that we can eliminate the need for a conventional heating and cooling system altogether? Might this not produce a home of superior functionality, energy efficiency, and cost? Ample evidence demonstrates that, indeed, such a design philosophy can and does work. What holds it back is not technology, but rather restrictive rules, laws, and building codes, and the inertia associated with the current construction industry, particularly material suppliers and contractors, who only know how to build one way: the unsustainable way.

Although implementing the logic of whole systems thinking in a fragmented industry such as home construction is difficult, it may be easier to achieve in industries dominated by large incumbent players with the bargaining power to change the rules of the game. Thus, thinking like a disruptive innovator through the logic of whole systems thinking may hold the key to future growth for incumbents in industries currently mired in low-growth, commodity competition. It may also hold the key to moving us toward a more sustainable world. Consider the possibilities.

Reinventing the Wheels

Chapter 3, “The Sustainable Value Portfolio,” analyzed the automobile industry’s evolution over the past 50 years in terms of the sustainable value portfolio. It traced the industry’s path from a strictly adversarial command-and-control approach, to the pollution-prevention and product stewardship initiatives of the 1980s and 1990s. By the early twenty-first century, all major car companies had initiated clean technology (fuel cell or alternative) vehicle programs. Unfortunately, all had continued to use the logic of component-based, incremental thinking in these clean technology initiatives, except one: General Motors.

Most fuel cell vehicle programs, like their hybrid vehicle cousins, still envisioned the product in conventional terms: a heavy metal chassis and body with thousands of component parts. Unfortunately, in the early twenty-first century, fuel cells were still many times more expensive to produce than internal-combustion engines. Thus, when a fuel cell (with an electric motor) is seen as a simple replacement for the internal-combustion engine, the result is an overpriced product that few consumers (save the ultragreen) would ever consider purchasing. GM had already been down this path with its overpriced and underperforming electric vehicle, the Impact, in the 1990s. With more than 2,000 pounds of batteries, it failed miserably, even in the regulation-driven California market, where a certain percentage of zero-emission vehicles was required by law. As Amory Lovins likes to say, “Optimizing one element in isolation pessimizes the whole system.”¹⁷

In 2002, General Motors launched the AUTOnomy project, a bold $1 billion initiative to reinvent the automobile around hydrogen fuel cell technology. Unlike its competitors, GM has taken a clean-sheet approach not only to vehicle design, but to the entire manufacturing system. Rather than thinking of the fuel cell as a simple replacement for the engine, GM tried to imagine a different approach. Who said that fuel cells have to be boxlike contraptions that look like batteries or engines? Why couldn’t the fuel cell be integrated into the design of the vehicle in a more functional way? Accordingly, the design team devised a way to build a fuel cell that doubles as the vehicle’s chassis—a fuel cell “skateboard” with four small electric motors to power each of the four wheels independently (see Exhibit 4.2). This design not only delivers superior power and torque, especially at the low end, but it also allows the wheels to be controlled independently, enabling the vehicle to be driven sideways into a parallel parking place.

Exhibit 4.2. GM’s Autonomy

First driveable U.S. fuel cell

Ready for mass market in 2010

“Wireless” steering controls and fuel cell “skateboard” mean more flexible body design

The skateboard forms the backbone for the product concept, which can then take on virtually any form or functionality. Body types and seating capacity can be modularly designed and installed on the skateboard in a way that allows for maximum flexibility. Want an SUV? Lease an SUV body and interior. Want a sedan? Switch to this body type as you see fit. What’s more, GM has moved to radically simplify the vehicle’s design. Apart from the electric motors and the wheels, there are virtually no moving parts: The steering and all the vehicle’s functions are controlled electronically using wireless technology. This so-called Hy-wire approach has allowed GM engineers to reduce the number of component parts from thousands to hundreds, drastically simplifying the supply chain and cycle time of the product. Thus, by radically simplifying the design around a fuel cell that doubles as the vehicle’s chassis, GM hopes to compensate for the higher cost of the fuel cell with much lower sourcing and production costs.¹⁸ This is whole systems thinking at its best.

Yet conceptualizing and building the innovative new product is not enough. Commercialization strategy is also a crucial piece of the puzzle. Here it is not clear that GM, which is famous for creating impressive new technologies only to have them fail in the marketplace, has a compelling lead. GM’s plan is to launch the AUTOnomy in the highly competitive United States market. Unfortunately, given the widespread availability of cheap gasoline in the U.S., it is highly unlikely that a hydrogen fuel infrastructure will be developed anytime soon, unless the federal government has a significant change of heart. Because fuel cells depend on hydrogen for fuel, the only way that GM can bring its product to market in the United States is to add an expensive piece of equipment that “reforms” gasoline into hydrogen to power the fuel cell. Thus, even though the vehicle would be powered by a fuel cell, it would use fossil fuels to supply hydrogen to the cell, effectively nullifying the alternative nature of the technology. In a carbon-constrained world with significant dependence on oil from the Middle East, this would not seem to be a very sustainable strategy.

Unfortunately, most car companies persist in viewing the developing world market as consisting only of the rich at the top of the pyramid. GM’s China strategy consists largely of producing Buicks to compete against prestige brands such as Mercedes, BMW, and Lexus in a battle to win the business of China’s wealthiest and most sophisticated consumers. But what if GM connected its recently announced joint venture to produce “minivehicles” in China to its billion-dollar strategy to produce fuel-cell vehicles in the United States? Might it be possible to invent a whole new product category while simultaneously incubating a renewable fuel infrastructure in China?

Technologies of Liberation

Since the dawn of the Industrial Revolution, Western economies have relied on the unsustainable use of raw materials and energy from lesser-developed countries to prosper: timber from South America, oil from the Middle East, minerals from Africa. Economies of scale ruled the day, with massive investments in power plants, pipelines, factories, dams, and highways to more efficiently serve the burgeoning consumption needs of those at the top of the economic pyramid. Industrial-era technologies (such as electricity, petrochemicals, and automobiles) were also closely associated with mass production, the assembly line, and centralized, bureaucratic organization, resulting in the rise of organized labor, worker alienation, and growing social stratification. As Diane Coyle points out in her book Paradoxes of Prosperity, society both shapes the dominant technology and is, in turn, shaped by it.¹⁹

As we enter the new century, the “dark satanic mills” of the Industrial Revolution are giving way to a new generation of technologies that promise to change dramatically the societal, economic, and environmental landscape. The information economy powered by the microchip has already begun to revolutionize society by democratizing access to information, empowering workers, and increasing productivity. In the coming years, bioscience, nanotechnology, new materials, wireless IT, solar, fuel cells, and other forms of distributed energy generation could also dramatically reduce the size of the human footprint on the planet.

Perhaps even more important, given their small scale and distributed nature, such “sustainable” technologies hold the potential to creatively destroy existing hierarchies, bypass corrupt governments and regimes, and usher in an entirely new age of capitalism that brings widely distributed benefits to the entire human community. And rather than depending upon national governments or paternalistic social engineers to design the future for the aspiring masses, these disruptive new technologies may be best brought forward through the power of capitalism—not the capitalism of the Industrial Revolution, which enriched a few at the expense of many, but rather a new, more dynamic form of global capitalism that will uproot established elites and unseat incumbents by creating opportunity at the base of the economic pyramid on a previously unimagined scale.

Eating Your Own Lunch

Joseph Schumpeter was skeptical of the ability and motivation of large, incumbent corporations to drive the process of creative destruction, but he did not dismiss them entirely. He thought that large investments in an installed asset base and misaligned managerial incentives would reduce incumbents’ motivation to make their established positions obsolete. Yet he also recognized that, paradoxically, large corporations have financial, technical, and organizational resources that cannot be matched by small, entrepreneurial new entrants: “[I]t may happen that new combinations should be carried out by the same people who control the productive or commercial process which is to be displaced by the new.”²⁰

Clearly, incumbents in certain industries are structurally more likely than others to pursue the path of creative destruction. Industries characterized by high asset intensity and long asset life (for example, utilities, mining, oil, petrochemicals, and automobiles) may find it the most difficult to engage in the sort of self-disruption described in this chapter. Greening clearly presents the path of least resistance for these incumbents, given their heavy commitment to existing assets in the ground. Why? Fully depreciated assets are very profitable to run; shutting them down prematurely results in a significant performance penalty in the short term.

At the other end of the spectrum are service industries, retailers, and firms based on the emerging “technologies of liberation” described previously. Players in these industries are in a prime position to focus their strategic energy on disruption for sustainability. Because they are not wed to long-lived assets in the ground, firms in these industries can purposefully skip over emphasis on the incremental improvements to current technologies associated with greening. Between these two extremes are industries with intermediate levels of asset life and intensity—electronics, computers, information technology, and consumer products, for example. Incumbents in these industries are well positioned to pursue hybrid strategies of both continuous improvement and creative destruction, given their shorter technology life cycles and more rapid turnover of assets.

Industry structure thus determines, at least to some extent, the proclivity of incumbents to pursue beyond greening strategies. Although firms in asset-intensive industries may be the least likely to pursue this path, they paradoxically face the biggest threat if they ignore the challenge: For these firms, continued blind adherence to yesterday’s technology could spell doom, not just a missed opportunity. It is therefore crucial that all firms, especially incumbents in pollution- and asset-intensive industries, begin to accelerate the process of creative destruction for sustainability.

To succeed at creative destruction, innovators—be they large corporations or entrepreneurial start-ups—will need to find the appropriate early markets for the sustainable technologies of the future. As we saw with the GM fuel cell case, forcing clean technologies into the established market at the top of the pyramid may not be the best course of action. Finding the early markets for clean technologies with the potential for creative destruction may instead require a fundamentally different approach. In this context, the base of the economic pyramid, where four billion people’s needs are still unmet, may be the best place to incubate the technologies of the future.

Notes

¹ Joseph Schumpeter. The Theory of Economic Development (Cambridge, MA: Harvard University Press, 1934).

² Clayton Christensen, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (Boston: Harvard Business School Press, 1997).

³ Clayton Christensen, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (Boston: Harvard Business School Press, 1997).

⁴ Portions of the next section are excepted from Stuart Hart and Mark Milstein, “Global Sustainability and the Creative Destruction of Industries,” Sloan Management Review 41(1) (1999): 23–33.

⁵ Stuart Hart and Clayton Christensen, “The Great Leap: Driving Innovation from the Base of the Pyramid,” Sloan Management Review 44(1) (2002): 51–56.

⁶ Andy King and Michael Lenox, “Exploring the Locus of Profitable Pollution Reduction,” Management Science 47(2) (2002): 289–299.

⁷ World Commission on Environment and Development, Our Common Future (Oxford: Oxford University Press, 1987).

⁸ Mathis Wackernagel and William Rees, Our Ecological Footprint (Gabriola Island, B.C.: New Society Publishers, 1996).

⁹ Chad Holliday, “Sustainable Growth, the DuPont Way,” Harvard Business Review 79(8) (2001):129–132.

¹⁰ The information about DuPont comes from personal communications with key executives, including Paul Tebo, Corporate Vice President for Safety, Health, and Environment; and Eduardo Wanick, President of DuPont Latin America.

¹¹ Joseph Schumpeter, Theory of Economic Development.

¹² See, for example, Richard Foster and Sarah Kaplan, Creative Destruction (New York: Doubleday, 2001); Gary Hamel and C. K. Prahalad, Competing for the Future (Boston: Harvard Business School Press, 1994); and Clayton Christensen, The Innovator’s Dilemma.

¹³ Richard Foster and Sarah Kaplan, Creative Destruction.

¹⁴ Many thanks to Sam Moore, Chief Technologist for Burlington Chemical, for the information cited in this case.

¹⁵ James March, “Exploration and Exploitation in Organizational Learning,” Organization Science 2(1) (1991): 71–87; Clayton Christensen, The Innovator’s Dilemma; Stuart Hart and Mark Milstein, “Global Sustainability;” and Gary Hamel, Leading the Revolution (Boston: Harvard Business School Press, 2000).

¹⁶ Paul Hawken, Amory Lovins, and Hunter Lovins, Natural Capitalism (Boston: Little Brown and Co., 1999).

¹⁷ Paul Hawken, Amory Lovins, and Hunter Lovins, Natural Capitalism (Boston: Little Brown and Co., 1999).

¹⁸ David Baum, “GM’s Billion-Dollar Bet,” Wired.com, www.wired.com/wired/archive/10.08/fuelcellcars.html, 2002.

¹⁹ D. Coyle, Paradoxes of Prosperity (New York: Texere Publishing, 2001).

²⁰ Joseph Schumpeter, Theory of Economic Development, p. 66.