Cannabis 2023: Schumpeter to the Rescue

“Economic progress, in capitalist society, means turmoil.” Joseph A. Schumpeter, Austrian Political Economist

I was critiqued on a recent post for being “overly pessimistic” towards the cannabis industry.  That was clearly not my intent.  I am bullish (but realistic) on sector prospects, partly because of Herr Schumpeter’s writings.

In 1942, Joseph Schumpeter developed the concept of ‘creative destruction’ (CD) to describe the inevitable and difficult but necessary transition of industries from rawness to maturity.  Schumpeter defined CD as the "process of industrial mutation that continuously revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one".  Mutation could be triggered by any number of industry or technological catalysts.

CD in cannabis

Schumpeter would consider cannabis a relatively immature sector, ripe for CD.  To survive let along thrive, the industry would benefit from a cull that results in fewer but healthier companies. There are a variety of mutation catalysts right now, including too many licenses, onerous regulations, redundant capacity, new market openings and pending innovation in areas like production (e.g., biosynthesis) and genetics (e.g., CRISPR gene editing). 

While CD will be painful and unpopular, it is necessary for cannabis capital, talent and IP to be redirected to smarter, more viable firms.    

The presence of CD is a blind spot for many cannabis executives. People may not want to know or admit their chances of survival are low through no fault of their own. Also, North Americans do not usually look at business through a historical lens, especially one from an obscure Austrian thinker.  We study industry development through ideology, leadership profiles or a clash of business strategies, and then come up with simplistic conclusions.  To wit, many see no profitable publicly-listed cannabis firms (true) as evidence that the industry is irrevocably broken (false).

CD’s inescapable process and repercussions have played out in a variety of other industries that have much in common with today’s cannabis industry structure:  hundreds of similar, undercapitalized, firms selling undifferentiated products at low margins.  

Failure is not inevitable. Here is my Schumpeterian playbook for business survival and prosperity:
   
1) Reinforce CD-insulating values like resilience and pragmatism;

2) Move to a multi-year strategic planning process versus an ad hoc approach;

3) Cut costs that don’t enhance your value proposition or key capabilities;

4) Double down on profitable markets and products where you can win;
 
5) Prioritize cash management activities;
 
6) Hunker down. Today’s CD shall pass.

#growth #schumpeter #disruption #risk #creativedestruction #strategy