I was reading CNN Money recently, and the concept of Creative Destruction came back to me in a very vivid way.  This isn’t a concept invented here at Bootstrap, but one which most investors should be aware of.  This quote from Wikipedia explains:

“The economist Joseph Schumpeter popularized and used the term to describe the process of transformation that accompanies radical innovation. In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power.”

This concept was brought home with a couple of articles on Garmin and Apple.  Neither are companies that I own, but both are companies that I have thought about investing in.  But here’s how creative destruction plays out.  First with Garmin, for those not familiar with Garmin, they are one of the largest makers of Global Positioning Systems (GPS).  The company (and stock price) have soared as GPS technology has gone main stream and users have adopted the technology.  This has been truly ground breaking technology and has only become available to consumer within the last 10 years or so.  Recently, their growth has slowed and the stock price has been punished – that is usually when I get interested.  What the article in Money pointed out (which is here if you are interested) is that GPS makers are now loading up their devices with more features in order to be able to compete with cell phones like the Ipod which are becoming GPS enabled.  The story of Garmin is creative destruction in action.  Garmin creates or popularizes a new technology, thrives for a period of time as it becomes mainstream, and then fades (some like to call this “sunsetting” in corporate speak) as competing technologies take away their competitive advantage.  I’ve never owned Garmin and now, I probably never will.  I can’t imagine a future where they can remain competitive if every cell phone out there can have a GPS add on…

The other article that illustrated this concept was a seemingly insignificant article about how Microsoft Office runs even better on a Mac than it does on a PC (the article is here if you are interested).  I have owned Microsoft in the past (and still own a small portion).  Although on the surface, this is an article that is favorable to MS Office, it got me thinking about the MS/PC franchise.  Microsoft is dominant in corporate PC operating systems and software.  It is by far their largest strength.  But this article makes me think that soon, Apple will begin chipping away at that near monopoly.  They are already achieving this with the Iphone – pretty much every hipster corporate employee has two phones – their “company” Blackberry and their “personal” Iphone.  It’s just a matter of time until the IT departments are forced to support the Iphone.  The same trend could happen with computers.  First the “creative” departments adopt Macs (for their better graphics and photo editing capabilities), now that Office runs as well or better and Macs can successfully run Windows programs, all the other corporate hipsters could start demanding Macs as well (I mean they MUST match their Iphones, right?).

I’m not here to have a lengthy debate on the merits of Apple v. PC or the ascent/descent on Microsoft (although if you do want to debate it – drop me a comment and maybe we can discuss in an upcoming post); but rather to highlight the risks and opportunities in creative destruction.  For me, creative destruction is often a risk.  I’m not a technology expert.  I have no superior knowledge of the next best technology displacement.  As a result, I tend to look for areas where creative destruction is less likely (or less devastating).  I’ve recently written about a restaurant and a tow truck manufacturer.  Although these industries may change, the odds of huge disruptions are less than the tech industry.  People have to eat, right?  Cars will always break down right?  Now, the auto industry is going through a transition right now, and we will likely see more hybrids, electric cars, etc.  But at the end of the day, they’ll probably still break down occasionally.

On the flip side – if you are a technology expert – you could potentially use your knowledge of creative destruction to great advantage.  Anyone who years ago identified software as a service might successfully have predicted the ascent of Salesforce.com.  For investors who prefer shorter holding periods, creative destruction could be a great advantage, as it turns the tables relatively rapidly which can create opportunities for those with the knowledge and skill to take advantage of them.

Here at Bootstrap, I take the former stance.  For me, investing in areas where creative destruction is minimized allows me to make better projections as to the future of the business and allows me to sleep a little better knowing that there is not an army of PhDs out there trying to steal the competitive advantage of my companies.  No industry is totally immune, so a working knowledge of creative destruction is imperative for an investor.