Creative Destruction: An Industry Association Perspective

Creative Destruction: An Industry Association Perspective

This piece was originally published in the July 2018 issue of electroindustry.

Clark R. Silcox, General Counsel, NEMA

Although “disruption” has been a buzzword for decades, in economics dates back to Joseph Schumpeter’s 1942 book, Capitalism, Socialism and Democracy. In it, he coined the term “creative destruction” to refer to “the incessant product and process innovation mechanism by which new production units replace outdated ones.” He called it an “essential fact about capitalism.”

Applied more broadly, creative destruction arguably has its roots in the works of Karl Marx, Friedrich Engels, and Charles Darwin. Mr. Schumpeter used the term to describe the transformation of the global economy over the 19th and 20th centuries from predominantly agrarian to industrial. Something similar has been underway in the late 20th and early 21st centuries with the transformation of economic infrastructure technology from primarily mechanical to increasingly electronic.

More recently, MIT economist Ricardo Caballero, PhD, described the restructuring process associated with creative destruction in both macroeconomic and microeconomic terms.

“This restructuring process permeates major aspects of macroeconomic performance, not only long-run growth but also economic fluctuations, structural adjustment and the functioning of factor markets,” he wrote.[1] “Over the long run, the process of creative destruction accounts for over 50 percent of productivity growth. Obstacles to the process of creative destruction can have severe short- and long-run macroeconomic consequences.”

At the microeconomic level, creative destruction is characterized by countless decisions, which are often complex and involve multiple parties as well as strategic and technological considerations.

“The efficiency of those decisions not only depends on managerial talent but also hinges on the existence of sound institutions that provide a proper transactional framework. Failure along this dimension can have severe macroeconomic consequences,” he reasoned.

“Some of these limitations are natural . . . others are man-made, with their origins ranging from ill-conceived economic ideas to the achievement of higher human goals, such as the inalienability of human capital.”[2]

Industries are challenged to forecast what and how the process of creative destruction may visit upon their production, supply chains, employees, investors, distribution channels, and customers. They also must focus on the present by managing challenges that may be manifestations of potentially disruptive creative destruction to their business model.

Creative destruction is visible across numerous industry sectors: telephone landlines are disappearing in favor of mobile devices; light-emitting diodes (LEDs) are replacing shorter-life incandescent lighting; and factory automation is driving improved productivity in ways that are material to current manufacturing workers.

Associations React

When an industry association and its Members observe creative destruction and market transformation, how should they react?

First, it should heed the observations of economists like Mr. Schumpeter and Dr. Caballero: Do not get in the way of this natural economic phenomenon. Creative destruction will present both losses and opportunities for economic actors in the short run, but generally economic benefits in the long run.

Industry trade associations are typically rule-structured on a foundation based in antitrust and competition law principles that serve as useful guideposts. Collusion to restrict new technology and deprive consumers of their preferences is forbidden. However, legitimate industry collaboration to address technological, economic, and political challenges can help suggests a role and opportunity for the association by helping Members navigate the creative storm and emerge in a better position.

Second, the association should take note that, in the words of Dr. Caballero, Members may be preoccupied with making “countless decisions to create and destroy production [and supply chain] arrangements” that “are often complex, involving multiple parties as well as strategic and technological considerations.”

These Members need timely information to understand trends, opportunities, and emerging risks. There is an important role for the association in providing data about:

  • Government policies that present barriers or those that create incentives and opportunities
  • How and how fast the market transformation is occurring
  • Technological solutions to problems facing manufacturers, the supply chain, and customers

Continuously engaging with Members to understand their information gaps and working to fill them is an essential association role.

Data, Advocacy, and Standards

Lighting is arguably the most visible NEMA sector undergoing creative destruction. Not only does market transformation present significant costs for traditional products, production, supply chain relationships, and consumers, but it also provides significant opportunities.

Today’s circumstance began nearly 20 years ago when longer-lasting, more efficient fluorescent (CFL) technology became an alternative to incandescent technologies. As governments incentivized energy efficiency, significant quantities of longer-life (5–8 years) fluorescent lamps began occupying more “sockets” once illuminated by shorter-life incandescent lamps (1–2 years). Sales of replacement lamps of the latter steadily declined. Meanwhile, consumer awareness of the value of energy efficiency trended upward. With the economic viability of consumer LEDs established in 2015, longer-life light bulbs of all types occupy an even greater part of the market.

As the industry association for lighting, NEMA was not merely observing this phenomenon. A key question was how quickly the transformation would unfold. New data was needed. NEMA efforts to collect data began in 2012 when more efficient halogen lamps began replacing traditional incandescent ones. While LED lamps had not reached the consumer market by 2012, it was foreseeable that LEDs would be available in consumer channels in the business-feasible timeframe.

Data reporting began for LED lamps even though shipments were miniscule. An index was created that would measure year-over-year quarterly growth. When LED sales began to show significant growth in 2015, sizable imports of LEDs were part of that growth, yet they were not measured in NEMA reports, nor was the U.S. government capturing them.

NEMA lobbied the government to begin collecting LED import data. Its data, when supplemented with the government’s, confirmed that shipments of residential LEDs surpassed shipments of halogen incandescent in 2017 and are poised to capture 60 percent more of shipments in 2018. With estimates of lamp life in residential sockets in hand, manufacturers could (and do) sharpen their estimates of declining lighting products as well as increasing longer-life LED lamps. In turn they can plan the rationalization of their production assets accordingly.

NEMA’s advocacy team also recommended government support for cutting-edge research that could make LEDs more affordable more quickly. NEMA advocated for policies that would let consumers and competition lead the transformation, rather than government mandates.

Industry Standards were also needed to solve technical issues, meet consumer expectations, ensure a common lexicon, and address safety attributes. In the most dynamic early days of LED market penetration, products became obsolete seemingly within months. Beginning in 2010, several NEMA and ANSI lighting Standards were adopted for LED products or amended to add new specifications.

Lighting’s creative destruction shows no sign of ending soon. Instead of replacing a light bulb, the consumer may soon replace an entire fixture with embedded light sources with remote or mobile communications connections capable of responding to inputs or transmitting data.

NEMA’s three-pronged approach is consistent with the recommendation of Mr. Schumpeter and Dr. Caballero to avoid hindering economic change during a time of creative destruction but to quickly capitalize on opportunities. It also is in line with counting on competition and consumers to drive transformation.

Creative destruction is not limited to lighting. It may be coming soon to all NEMA divisions.

[1] Ricardo J. Caballero, “creative destruction,” from The New Palgrave Dictionary of Economics, Second Edition, 2008, edited by Steven N. Durlauf and Lawrence E. Blume

[2] Ricardo J. Caballero, “Specificity and the Macroeconomics of Restructuring,” MIT Press Books, vol. 1, 2007

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