Creative Destruction: Why Companies That Are Built to Last Underperform the Market--And How to Successfully Transform Them (Hardcover)

~ (Author), Sarah Kaplan (Author) "In 1917, shortly before the end of World War I, Bertie Charles (or B.C., as he was known) Forbes formed his first list of the..." (more)
Key Phrases: public equity firms, principal investing firms, transformational innovation, Storage Technology, Thermo Electron, United States (more...)

Editorial Reviews

Amazon.com Review

Striving for excellence or building to last is one thing. Sustaining superior performance over the long haul is another matter entirely, as longtime McKinsey & Company executives Richard Foster and Sarah Kaplan persuasively point out in Creative Destruction. Based on a concept first advanced some 70 years ago by economist Joseph Alois Schumpeter, Foster and Kaplan propose that corporations can outperform capital markets and maintain their leadership positions only if they creatively and continuously reconstruct themselves. In doing so, they can stay ahead of the upstart challengers constantly waiting in the wings. The decidedly radical paradigm that they champion has been urged in one form or another by others since Schumpeter, but this effort is particularly convincing because of the massive research the authors cite to back it up: McKinsey studies of more than 1,000 corporations in 15 industries over 36 years.

Citing the specific reasons behind ups and downs at firms such as Storage Technology, Intel, Johnson & Johnson, and Corning, Foster and Kaplan claim that the process of creative destruction must become an integral part of today's corporations from top to bottom if they truly hope to attain lasting excellence (and beat Wall Street's primary indices for more than a few fleeting years). Firms that have mastered elements of this practice have done so by innovatively shedding detrimental processes and operations while cleverly spotting and appending those that add new value. The authors write that the "key to their success is the balance they have struck between creativity and destruction--between continuity and change." Their book offers impressive insight into the acts of both breaking down and building up. If its analyses of past performance mean anything, it should prove very interesting to savvy managers as well as long-term investors. --Howard Rothman

From Publishers Weekly

In this painstakingly researched, well-documented work, Foster (Innovation: The Attacker's Advantage, 1986) and Kaplan argue that one of the fundamental tenets of American business that a company must be designed to stand the test of time is seriously flawed. Building off the ideas of economist Joseph Schumpeter, who argued in the 1930s and 1940s that capital markets weed out underperformers so that new firms can take their place, Foster and Kaplan contend that once they are successful, companies tend to institutionalize the thinking that allowed them to thrive. However, they say, markets now change too quickly for traditional management structures to keep up. Rather than aiming for continuity, companies should embrace discontinuity, they argue, constructively destroying and re-creating themselves as needed. Aspects of this idea have been proposed for nearly 15 years by authors like Tom Peters and Andy Grove, but Foster and Kaplan's extensive research, drawing on analysis of more than 1,000 companies over four decades, have moved the argument beyond rhetoric. Their prescriptions for forward-looking management increase the pace of change within organizations, open up the decision-making process and relax conventional notions of control are not as fresh as the rest of their argument. But there is no doubt that Foster, a senior partner and director at the consulting firm McKinsey & Co., and Kaplan, a former McKinsey employee who is now a doctoral student at M.I.T., have raised significant questions about how organizations should define long-term success. (May)Forecast: A four-city author tour and print advertising campaign may help attract attention to this book, but it's more likely to be talked about than bought or read.

Copyright 2001 Cahners Business Information, Inc.

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Product Details

• Hardcover: 384 pages
• Publisher: Broadway Business; 1 edition (April 3, 2001)
• Language: English
• ISBN-10: 0385501331
• ISBN-13: 978-0385501330
• Product Dimensions: 9.3 x 6.1 x 1.4 inches
• Shipping Weight: 1.4 pounds
• Average Customer Review: 3.8 out of 5 stars  See all reviews (22 customer reviews)
• Amazon.com Sales Rank: #512,550 in Books (See Bestsellers in Books)

Customer Reviews

Most Helpful Customer Reviews

101 of 104 people found the following review helpful:

4.0 out of 5 stars Hypotheses About How To Teach Dinosaurs to Dance, April 6, 2001

By	Professor Donald Mitchell "Jesus Makes Me a P... (Boston) - See all my reviews (TOP 10 REVIEWER)

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.

21 of 25 people found the following review helpful:

5.0 out of 5 stars An Excellent and Worthwile Read, April 22, 2001

By	Naomi Moneypenny "Executive Editor at ManyWor... - See all my reviews (REAL NAME)

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 . . .

5 of 5 people found the following review helpful:

5.0 out of 5 stars Investors Take Heed -- Buy and Hold is Oversold!, April 13, 2001

By A Customer

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!