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McKinsey partner Richard Foster and ex-McKinseyite, Sarah Kaplan, combine with an extensive McKinsey database of 60 variables about 1008 large U.S. companies from 1962 to 1998 in 15 industries to measure how the stocks of the companies did versus the S&P 500 and their industries. Since few such stocks outperformed, the authors conclude that large companies need to be better innovators, being more like new industry entrants funded by venture capital firms. The bulk of the book highlights their proposals for encouraging innovation . . . from the top down. Although the ideas may work, they seem counterintuitive and are not supported by any significant research base. The book takes dead aim against the notion that building a company that lasts for a long time is the proper objective. The notion of "built to last" is indirectly challenged here. The book develops a concept of taking Schumpeter's famous concept of how markets foster creative destruction and transferring that inside your company as an organizing principle.
The authors did not look at companies which were not large and those that were not "pure plays." So there is little in here about outstanding stock market successes among large companies like Tyco International and General Electric. Remarkable performers among foreign forms, like Nokia, are also missing.
The model operators are General Electric (I was surprised too, after they were left out of the quantitative study), Johnson & Johnson, Enron, Corning, L'Oreal (yes, I know they are a French company and are not in the quantitative study, also), Kleiner Perkins, and KKR. I guess there were so few good examples of what the authors wanted to share that they had to stretch to find them.
Almost everyone else is a negative example. These include Intel (with DRAMs), Storage Technology, Thermo Electron, and others who experience flops after periods of short-lived success.
The best parts of the book deal with mental models and their strengths and weaknesses. At their worst, these models are wrong and encourage complacency, arrogance, and sluggishness. When the environment changes, they may leave the experienced totally at sea or following incorrect instincts. The prescription is to encourage the creation of new mental models by providing more permissiveness while reducing the amount of control in organizations. You will come away with a good sense of where stalled thinking comes from. On the other hand, the suggested solutions are very institutional as opposed to being focused on changing how each person perceives their own situation.
I have some nits to pick. First, it has been reported for decades that 80 percent of the stocks in the S&P 500 underperform the index each year. No study was needed to report that large companies do not routinely beat the market averages. You can go to many on-line brokers' sites and spot who has outperformed whatever index you want to use over many time periods in a few minutes.
Second, I recently studied dozens of companies who had successfully changed their business models in fundamental ways four or more times in a row and had outperformed the market averages and their competitors. I found only one of these companies mentioned in this book. So the way the sample was drawn excluded many interesting cases.
Third, the authors picked some strange cases to look at. They focus on the failures of Storage Technology, but say almost nothing about EMC, the company that surged ahead of both IBM and Storage Technology in data storage to become the fastest growing stock on the New York Stock Exchange in the 1990s. EMC's market capitalization is one of the largest in the world. They are also very good at making mental model changes. The company's leaders are also very accessible. The omission is puzzling. Could it be that the cases chosen to detail had something to do with who was and was not a McKinsey client at one time or another? I don't know the answer to that question, but my curiosity was piqued.
Fourth, McKinsey has been advising companies on how their decisions affect stock prices by influencing valuation for many years. The book made no reference to that discipline. Is it irrelevant?
Fifth, the database excludes companies who are acquired. So, potentially AOL or Time Warner would have to be viewed as a loser not worthy of further study if they had been part of the group, even though the combination was probably a merger of equals . . . And both company stocks outperformed the market averages for many years in the past.
Sixth, the quantitative and the qualitative parts of this book don't seem to connect very well. It seems to me that you could have written exactly the same book without the quantitative study. So what was the point? I think most people would agree that the rate of change has been speeding up, and will probably do so more in the future.
Seventh, the innovation model they propose may work, but it doesn't match well with what I learned from looking at those who successfully change business models often. Realize that there are other ways to pursue this.
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on July 3, 2002
This book takes some interesting insights from economist Joseph Schumpeter (who coined the term "creative destruction") and leadership expert Ron Heifetz and then goes on to make overly broad generalizations from them, supported by an extensive but questionable data analysis. The authors go on at length about the size and scope of the McKinsey corporate database that provides much of the backbone for the book's conclusions, but anyone who studies excellence or best-practices knows that you dont learn much about them by studying large, general samples; in fact, such samples are designed to rule out the exceptions. (And I'll just overlook the fact that Enron is one of the exceptional performers they highlight.)
At bottom, the book fails to deliver on either of the promises in its subtitle. The primary reason seems to be that little of it is drawn from practical experience with exceptional companies. Despite its scope, the McKinsey database doesn't really answer, from a management point of view, why most companies have underperformed. (Although less systematically presented, you can get more wisdom from a practitioner's book like Tom Kelly's "The Art of Innovation.") This is most obvious as the book moves into suggestions for "how to change" these companies: neither the suggested methodology for strategic planning nor the successful case examples provide anything more than some basic, general ideas that have been better covered elsewhere in the organizational development and management literature.
The subtitle also suggests that the book presents a refutation of the arguments for corporate sustainability that Collins and Porras gave in "Built to Last". Interestingly, Foster and Kaplan disdain to address that book directly or even cite it, except in a buried footnote. This is unfortunate because they present data on some of Collins' and Porras' profiled companies that suggest they have performed far more poorly than "Built to Last" would lead you to believe; it would have been helpful to understand who was overstating what. Collins and Porras also stress in detail that built-to-last companies "preserve the core / stimulate progress"; it is not clear that "creative destruction" differs from this in any significant way. In sum, the issue of how to create long-term value will still be a big question when you've finished reading this book.
It is interesting to note, as the authors are current and former McKinsey consultants, that a majority of the underperformers in their database are McKinsey clients. If these companies failed to turn around after investing in McKinsey advice, what is the likelihood that anyone else will do it from ideas they got reading a book?
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on April 22, 2001
Foster and Kaplan take dead aim at the "built-to-last" crowd -- the cluster of authors of a few years ago that trumpeted company longevity as the ultimate goal. Unfortunately for that crowd, "Creative Destruction" presents its case backed up by something the "built-to-last" case lacked -- comprehensive data -- and the data strongly suggest that companies built for longevity consistently under perform the market in shareholder value creation.
What is very clear from the data is that value creation is driven by innovation -- and the innovation tends to come from new entrants. This key point is a validation, through enhanced quantification, of Clayton Christensen's views on the problem of corporate incumbency. What is also clear is that the transition period between new entrant and incumbent is increasingly compressed. Fifty years ago an innovative new business model might have been good for above average returns of a couple of decades -- now perhaps five years is a more realistic outcome. There clearly are examples, though the exception rather than the rule, of companies reinventing themselves in the quest for superior value. Enron is such an example, as is Corning. Schwab is another example. Common characteristics of these re-inventors is that they try a lot of things and they fail a lot -- but they know how to manage the failures and they know how to really ride the winners.
This book should also give pause to any executive who, having recently witnessed the demise of many Internet-based models, is feeling more secure. The reality is that the first wave of barbarians may have been fended off, but they will be back, stronger and smarter than ever . . .
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on July 24, 2001
The authors have taken great pains to fill over three hundred pages with completely inane material. Nothing is good about the book besides the title. You might as well read their Harvard Business Review piece and pocket the money. That article was well written but this book is an unneccesary excursion into places that are totally irrlevant. It does offer pearls of wisdom ..."The basic element of all innovation is creativity" How profound! I am sure McKinsey is silently embarassed about these two. Afterall the McKQuartely is full of excellent articles. The book is also full of very questionable conclusions and of course full of references to another magnum opus by the same author! (I put that book on my shopping list immediately!) For example, they label Snapple an invention that did not generate wealth. They must have very high standards for wealth because the last I heard was that Snapple was sold to Quaker (and later sold by Quaker at a steep loss) for close to $ 2 bn! and I have also heard beverage industry execs. proclaim that Snapple created a whole new marketspace for health and natural drinks. I would call that a transformational innovation, won't you? The Snapple people are probably sitting in the Carribean sipping mixed drinks while these authors are churning out books hoping to get there. In defense of the authors, the only thing good that I can say is that they have a few interesting examples.
The book fails very badly at offering advice to mangers about the processes and structures that need to be in place to handle creative destruction. Look at their checklist of questions they propose a manager ask and answer in defining the "periphery" - the area of the industry where creatively destructive innovations originate: Question 1: Which companies define the periphery of your industry? Question 2: What business strategies are they pursuing? Sounds like Homer Simpson to me. After all if I knew the answers to those questions, wouldn't I be the one initiating creative destruction? If you enjoy reading such mind numbing material, please run to the store and buy your copy. My daughter has already drawn Barney pictures in my copy unfortunately.
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on April 13, 2001
Contrary to popular belief, Foster and Kaplan show that the majority of so-called "buy and hold" companies fail to keep pace with market index funds. Fundamental changes in the marketplace have made it increasingly difficult for companies to remain competitive for sustained periods of time. The authors not only discuss these shifts in the environment, but also uncover the structural factors inhibiting companies from effectively reacting to these market changes. Traditional models of corporate planning and control combined with "cultural lock-in" prevent even the most innovative of companies from taking the difficult decisions required to evolve with the market. Foster and Kaplan convey this message, its implications, and potential remedies through colorful, easy-to-read case studies of successful and unsuccessful companies. So what can an investor do? First, understand the reasons why only a few companies have the ability to continually re-invent themselves for sustained shareholder value. Second, be thankful when an investment outperforms the market for more than a few years time and question your broker's recommendation to "hold on to the winner." Finally, realize that strong past performance is not guarantee of future returns and might even be reason not to invest in a company, since the odds are stacked against continued outperformance. This is a 'must-read' for investors everywhere!
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on April 16, 2001
Foster and Kaplan provide a radical new perspective for today's senior managers. Through analysis of over a dozen industries spanning four decades of time, the authors attack the conventional wisdom that companies are "built to last". They show that the turnover rate for companies in the S&P500 has increased six-fold since the first half of the century meaning that just a quarter of today's major corporations will exist in 25 years! Operating on pre-conceived notions of survival, today's managers will fail to transform their companies into organizations that can keep pace with this era's relentless pace of change.
Using clearly written anecdotes and vivid examples from real companies, Foster and Kaplan provide managers with valuable lessons from companies in the past and prescriptions for the future. First, managers need to understand that companies are not destined for continuity and must continually re-invent themselves to survive. New entrants (commonly referred to as "attackers") have become increasingly important parts of the economy -- accounting for as much as three-quarters of the recent superior performance of the markets. Second, companies can benefit by realizing that their industry is their destiny -- that a company's performance largely tracks the industry in which it plays and that sustained out-performance of one's industry is rare and noteworthy. Finally, and perhaps most importantly, Foster and Kaplan help managers understand what prevents change within their organization and how managers can build companies that effectively balance the forces of creation and destruction.
Managers everywhere would benefit from this easy-to-read, thoughtful, and instructive text on today's most pressing management challenges.
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on September 18, 2001
The authors score a direct hit on those - investors and managers alike - looking for the continuous, corporate value creator. It simply does not exist.
There is no question that there is a direct link between innovation and wealth creation. Using a proprietary database developed by McKinsey & Company to study the life cycle of American corporations, the authors demonstrate, what they term as "the corporate equivalent of El Dorado," the company that continually outperforms the stock market does not exist. It is a figment of the "one decision" crowd that resurfaces with each generation of investors.
Capital Markets reward shareholders of competitive corporations and then rapidly, and with no remorse, forget them when they lose their ability to innovate. The McKinsey data show corporations, which operate with management philosophies based on the assumption of continuity, do not change at the pace and scale of the markets. Therefore, in the long run they fail to create value at the pace and scale of the markets.
Corporations are premised on continuity; their focus is on operations. Capital Markets are premised on discontinuity; their focus is on creation and destruction. They are less tolerant than the corporation of underperformance. "Blue Chip" corporations earn the right to survive. They have no claim on superior, or for that matter, even average long-term shareholder returns.
The reason is simple, the authors conclude. Corporate control processes, the very processes that ensure long-term survival, inure them to the need for change.
This is a book every serious investor should read. The message is spiced with case studies of how corporations like Johnson and Johnson, Enron, Corning and GE transform daily themselves rather than opt to incrementally improve operations. Managements need to create new businesses, abandon ingrown rules and structures and be continually adopting new decision-making processes, control systems and mental models.
As the book's subtitle suggests, corporations must strive to be as dynamic and responsive as the capital markets if they are to reward investors with long-term superior returns.
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on December 31, 2006
The book starts of reasonably well. Its general themes explaining why large companies tend to behave in ways that make them less effective at responding to change than the market are well described. As the book tries to show examples of companies that did or did not respond well to the forces of change in business they lose their way. Not only do they extol a number of companies seemingly purely because they were founded by friends from McKinsey, they also use Enron as a successful example! Too many of their examples have not done well since the book was published and that undermines their message. The book also lacks concrete advice, though I must confess to skimming towards the end.

My takeaway? The market as a whole will ALWAYS innovate more effectively than any company so get over it and be prepared for companies to come and go and change constantly. There's not much, if anything, you can do about it.
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on May 18, 2001
Although the authors make very interesting arguments, recognize that creative destruction is nothing new. Max Boisot has been talking about it for years, and Christensen at HBS has also been building a research stream on it. However, this book is more readable, and more grounded in current business settings than the aforementioned. Read it for a non-academic's perspective on the topic, but remember that your competitors might have had access to these ideas through academic researchers for years!
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on July 6, 2001
This book differs from the old fashioned "Built-To-Last" Model. It focuses on creating innovation rather than engaging in operations excellence. I found this book very entertaining yet challenging my mind at the same time.
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