Creative Reconstruction

In my opening post, I referenced the slow pace of change and how it can be exceedingly painful for individual consumers. I want to follow up on that concept in the business context, where slow change—or the failure to change at all—can be fatal.

Consider, for example, Borders, which recently announced that it was suspending payments to vendors and trying to refinance its debt obligations (see here and here). Borders, like its competitor Barnes & Noble, is struggling to compete with big box retailers that offer steep discounts on traditional books and the growing popularity of e-Books (see here, here and here). Also like many retailers, Borders was hit hard by the economic recession (see here).

Some may say that Borders is a victim of the recession and creative destruction. And that may, in part, be accurate. (For interesting perspectives on the utility of recessions and creative destruction, see here and here.) But anyone who follows the retail industry or is an avid reader had some sense that this was coming (see here, here and here). So why didn’t Borders’ management? Or rather, why didn’t they react more quickly to the changing market and economy?

As a former corporate restructuring lawyer, I often ponder this and similar questions. Why do managers try so hard to salvage rather than innovate? And why is it so hard for them to admit that change—perhaps both financial and operational innovation—is necessary? (For a discussion of the denial often accompanying financial distress, see here.)

Admittedly, it is easy to throw out questions from the cheap seats and much harder to make the calls from the sidelines (or boardroom). I have worked with, and truly appreciate the challenges and difficult decisions faced by, the management of troubled companies. I am not trying to assess blame; I am simply suggesting that we recast creative destruction as creative reconstruction.

Creative reconstruction is not my phrase. Others have used it in a variety of ways, including Chrysler’s CEO, Sergio Marchionne (see here). I use the phrase to describe a company seizing upon the change agents typically associated with creative destruction to reduce inefficiencies or modernize operations. Rather than those change agents destroying the company, they motivate the company to reinvent itself. (For another perspective on creative destruction and firm success, see here.) All too often, those outside of the restructuring community view corporate reorganizations solely as balance sheet restructurings—only to prolong the inevitable. Corporate America and the U.S. bankruptcy system can and should do better (see here).

I will reflect on whether creative reconstruction is working for Chrysler (and GM) in a future post, as well as its prospects under the resolution authority contemplated by the Dodd-Frank Act. (For another perspective on creative destruction and the Dodd-Frank Act, see here.) The concept may not work for every company; some companies should fail. Nevertheless, if the approach encourages troubled companies to analyze their problems sooner and consider implementing change more quickly, it is worth a try.

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6 Responses

  1. A.J. Sutter says:

    Sorry, I don’t buy this argument. For one thing, it regards “creative destruction” as categorically good, without any nuance. Sometimes it is simply destruction. Without getting into the particulars of the Borders situation, about which I’m ignorant, what are we to make of the decline of news organizations or independent booksellers under market pressures? Are we to blame them for failing to “innovate”? What about the qualitative losses occasioned by the disappearance of certain “inefficient” businesses?

    It’s worth reflecting on where “creative destruction” comes from. Just as “creative reconstruction” isn’t Michelle’s phrase, “creative destruction” (in German, “schöpferische Zerstörung) isn’t exactly Schumpeter’s, either. Its source is the last page of a 1913 book called “Krieg und Kapitalismus” (“War and Capitalism”), written by his teacher, Werner Sombart. The context was the destruction of European forests because of the use of wood for building battleships. As Sombart says, “Wiederum aber steigt aus der Zerstörung neuer schöpferischer Geist empor” (“Once again, out of destruction a new creative spirit rose up,”) and the Prussian navy made ships out of iron. Today we might well find this glorification of the destruction of forests for the sake of a war machine to be grotesque. Maybe in the future we’ll feel the same about the sort of capitalism this post is so willing to accept.

  2. Michelle Harner says:

    A.J.:

    Thank you for the comment and for the additional information. Your comment is very informative. I take your points; I think they are fair and I did not mean to suggest a full embrace of the creative destruction theory. I think that, like most theories, it does hold some truth, but as you note, one certainly needs to appreciate the nuances.

    My main concern with business failures—whether we cast them as creative reconstruction, creative destruction or just destruction—is the reluctance to change or acknowledge financial or operational difficulties on the part of some (certainly not all) distressed companies. The stigma associated with failure or being a victim of creative destruction seems to paralyze some or at least prevent them from taking actions in a timely manner that could preserve and perhaps enhance their platforms. I continue to search for a phrase or theory that would motivate such action.

    Best regards, Michelle.

  3. Michelle,

    I see your point about the desire to help firms avoid collective self-deception, denial, rigid thinking, and so forth so as to learn to adapt to and creatively confront unavodiable or inevitable economic conditions (something along the lines of the adage that ‘necessity is the mother of invention’), but perhaps you could change your link for “creative destruction” to one more accurate regarding the genesis of the idea and the person first credited with its usage, as A.J. rightly points out. The Wikipedia entry,* for example, is very good on this score, noting how the IDEA begins in the works of Marx and Engels, thus although Marx himself did not use the exact term, he first described the processes labeled and described by Sombart, “whom Engels described as the only German professor who understood Marx’s Capital.” Schumpeter’s view of capitalism is, as Meghnad Desai notes, a dialectical one in which “the good and bad are intextricably intertwined. You cannot have innovations and growth if you protect old technologies and restrict enterprises for fear of losses.” The Wiki entry has an apt quotation from the Marxist social geographer David Harvey: ‘While Marx clearly admired capitalism’s creativity he […] strongly emphasised its self-destructiveness. The Schumpeterians have all along gloried in capitalism’s endless creativity while treating the destructiveness as mostly a matter of the normal costs of doing business.”

    * http://en.wikipedia.org/wiki/Creative_destruction

  4. Michelle Harner says:

    Patrick: Good suggestion. I agree that the link you provide does a better job of explaining the nuances of, and different approaches to, the theory, and I have changed the link. Thank you for the comment. Best regards, Michelle.

  5. A.J. Sutter says:

    Patrick, according to some accounts the origin isn’t Marx, but rather more up your alley as a comparative religions scholar: the Shiva myth from Hinduisim. One line of influence went from J.G. Herder (who’s credited with introducing Hindu myths into German philosophy) -> Goethe (Herder’s patron) -> Sombart. Another went from Herder -> orientalist Friedrich Majer (Herder’s student) -> Schopenhauer -> Nietzsche -> Sombart. See Reinert, Hugo & Erik S. Reinert, “Creative Destruction in Economics: Nietzsche, Sombart, Schumpeter,” in Backhaus, Jürgen and Wolfgang Drechsler (eds.): Friedrich Nietzsche 1844-2000: Economy and Society (New York: Springer Science+Business Media 2006) 55-85.

  6. Thanks A.J.

    The Shiva myth was also mentioned in the Wiki entry. I suspect there may be a confluence of ideas at work here, so: Marx + Indic myth + ? …. And the reference you provided sure looks interesting!