Customer Reviews

Creative Destruction: A Six-Stage Process for Transforming the Organization

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Anyone with organization experience will appreciate the struggle to adjust to the information economy. The authors call for the creative destruction of the old, to be replaced by a new flexible, agile, IT-enabled network. Networkers will quickly see that the old corporate structure is aiming to change into exactly what network marketers already have. Tomorrow's successful companies will look more like networks of independent entrepreneurs held together by the need to collaborate to succeed. Remuneration will also change to look more like the pay for performance networkers already enjoy. From the networkers point of view it is heartening to see how envious organization workers will soon become of the networker's position. This book gives a six stage process for CEOs to transform their organizations into what networkers already have. - Dick Canfiel

There are three recent publications with the same title (Creative Destruction) whose authors correlate Joseph Schumpeter's concept of "creative destruction" with the contemporary business world. Foster and Kaplan explain "why companies that are built to last underperform the market -- and how to successfully transform them" whereas in their work, Nolan and Croson offer "a six-stage process for transforming the organization." In the third volume co-edited by McKnight, Vaaler, and Katz, various authors and co-authors of 13 anthologized essays examine various "business survival strategies for the global Internet economy." I highly recommend all three volumes as well as two of Schumpeter's works: Capitalism, Socialism and Democracy, and, Essays: On Entrepreneurs, Innovations, Business Cycles, and the Evolution of Capitalism.

As already indicated, Nolan and Croson present and explain a "six-stage process for transforming the organization" at a time when there are extraordinary demands upon today's executives. For example, they must have or quickly gain mastery of new information technologies, new organizational structures, and managing a new dominant sector of employment: professional entrepreneurs. Worse yet, they confront what the authors characterize as "four main sources of inertia": business as usual, IT that locks in "business as usual", not evolving into an IT-enabled organizational structure, and finally, workers who are not going to fire themselves. What to do? In Chapter One, the authors recommend 20 information economy management principles, half of which have been "salvaged" from the industrial economy. (See Exhibit 1-2 on pages 16-17.) Then in Chapter Two, they introduce what they call "The Six Stages of Creative Destruction": Downsize!, Seek Dynamic Balance, Develop a Market-Access Strategy, Become Customer Driven, Develop a Market-Foreclosure Strategy, and finally, Pursue Global Scope. The authors devote a separate chapter to each of these "Stages", explaining with eloquence as well as practicality HOW to complete what is indeed an immensely difficult process.

It is important to keep in mind that Schumpeter was an advocate of "dynamic disequilibrium": entrepreneurship is the rule, NOT the exception. Entrepreneurs (by nature) engage in a process of creative destruction as they challenge what O'Toole characterizes (in Leading Change) as "the ideology of comfort and the tyranny of custom." They dismantle the old order of economic activity (technological, organizational, and managerial) and simultaneously invent and build a new one. Nolan and Croson are quite correct when suggesting that "creative destruction" must be driven by an entrepreneurial spirit but also requires leadership and management skills of the very highest order.

In the final chapter, the authors suggest that an organization's starting point when embarking on "The Six Stages of Creative Destruction" determines which of two scenarios to follow: "The first, and easiest, takes an organization from a hierarchy with an established, but still informal, shadow network, to a fully IT-enabled network organization....A second transformation scenario, rather more difficult that the first, takes a traditional functional hierarchy directly to a fully IT-enabled network organization, without passing through the shadow network to rest." ABB, ADP, AT&T, FedEx, GE, General Mills, Intel, Microsoft, Motorola, Morgan Stanley, and PepsiCo are among the corporate organizations which have successfully completed "The Six Stages of Creative Destruction", transforming themselves to become viable information economy competitors. They have exhibited extraordinary discipline in the consistency and efficiency while doing so. Although the authors cite major organizations such as these to illustrate key points, my own opinion is that, with appropriate modification, "The Six Stages of Creative Destruction" can also help small-to-midsize organizations to transform themselves as well.

For executives in all manner of organizations, the Appendix ("What Size Is Right? A Theory and Simulation of Firm Design") may be one of the most useful sections in the book. For example, after having observed theoretical organizational behavior under a variety of assumptions over hundreds of situations, Nolan and Croson gained "some interesting insights" into how technology and organization "gradually combine in the downsizing process." They derived these principles which can guide and inform executives: (1) :The lion's share of gains comes from revolution, not evolution (NOTE: Hamel's Leading the Revolution as well as Evans and Wurster's Blown to Bits strongly support this principle.); (2) "Mixed span of control means more revolutions"; and (3) "Random technology means more revolutions." Now more than ever before, incumbent organizations must adopt and then integrate technology ASAP to maintain their competitive advantages. And that adoption must be completed with both rigor and passion as the velocity of creative destruction accelerates globally at a rate Schumpeter could not possibly have envisioned 40-50 years ago.

Like with so many of my other recent book reviews I came across Creative Destruction when researching my book chapter on risks in Virtual Enterprise Networks, modeled along The Networked Enterprise. This book triggered my interest when I became aware of the concept of "creative destruction", where some businesses must die for others to be (re-)born, a concept popularized by Joseph Schumpeter.


Joseph Schumpeter

I had never heard about Joseph Schumpeter before, and I don't even remember where I came across the term "creative destruction", so I searched Wikipedia, next to Google, my nuber 1 source of information:

The Austrian economist Joseph Schumpeter 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.

So, what Schumpeter is saying, is that large corporations eventually become rigid and antiquated and then replaces by faster-moving, responsive and innovative competitors, and one of the ways an economy moves forward is by destroying the old in order to create new opportunities.


The role of IT

One of messages from the book is that the last thing a company should think about is how to to stand the test of time, because once they are successful, companies tend to institutionalize the thinking that allowed them to thrive, and this, in turn, becomes their doom. If you stop innovating, if you do not destroy or transform, you die. And at the heart of the transformation or destruction lies ICT, Information and Communication Technology. Bearing in mind that the book was written in 1995, while I am writing this in 2009, ICT had not even really begun to transform the business world into what we see today, and it that sense the book is a bit outdated as to foreseeing what ICT can do, but essentially the authors are getting it right.


Hail IT and globalization, here we come...

As I said, the book was written in 1995 and is a bit of the typical late 1990's "Hail IT" and "Hail Globalization" books. I will not argue that IT will keep transforming the way we do business, but globalization? Yes, some, or actually, much good has come from it, but in the current financial downturn, we also see the potentially disastrous effects of the global cobweb of interlinked business, where one falling pawn tears down the next one and so on. Or, is this just another form of creative destruction? Speaking of which, after reading the book, it doesn't talk much about innovating, it talks more about making money. And it's not so much about destruction, it's about transformation.


The transformation stages

There are a couple of interesting illustrations in the book, referring to how ICT in the business world has transformed the management the organization and the workforce of businesses from the data processing era of the 1960's, via the microcomputers era of the 1980's, to the proposed network era of the 21st century, where companies need to transform the traditional hierarchical pyramid-shaped organization structure into a network of self-designed teams.


The six stages of creative destruction

The books describes six stages of "creative destruction":

Downsize: Forcefully (and painfully) downsizing at a grand scale (30-50%) reinforces transformation

Seek Dynamic Balance: Develop a sound balance between stakeholders' ROI and internal wages and bonuses

Develop a Market Access Strategy: Focus on delivering quality rather than quantity

Become Customer Driven: "Make and Sell" becomes "Sense and Respond"

Develop a Market Foreclosure Strategy: Products have life cycles, they cannot go on forever

Pursue Global Scope: As some markets close, new markets must open

On the outside, the only "destruction" I see is the downsizing and life-cycle perspective. But that is before I take into account the destruction of the traditional hierarchy and the establishing of functional networks. That is truly a destruction and an innovative transformation re-birth.


Has it begun?

Interestingly, they predict that it will take some 50 years to complete this throughout the business world. Whether it will really happen remains to be seen, but the advent of business networks as in The Networked Enterprise foretells what is to come, and my guess is that it will take far less than 50 years.