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Creative Destruction: Why Companies That Are Built to Last Underperform the Market--And How to Successfully Transform Them Hardcover – April 3, 2001
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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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Having delivered this baleful message, the book distinguishes between typical management techniques - measurement, control, which leads to operational excellence [called convergent thinking], and the type of observation, reflection and debate [called divergent thinking] which may lead to innovation.
The book outlines methodologies which can be used to attempt to combine both convergent and divergent approaches within a firm. The book therefore takes one step further than Clayton Christensen's suggestion of setting up a separate entity to pursue a specific `blue sky' set of ideas. However it in no way underplays the seriousness of the threat of new product or new product cycles to the incumbent, successful corporations - indeed some of the examples given in the book as successes (Cisco, Corning) have since gone through major traumas in subsequent product and economic cycles.
The book seems to take explicit aim at Collin's book `Built to Last', saying that companies which have been longest in the Fortune 500 have underperformed the market - and expands this theme that the market, by having no emotional link to firms, will pick winners and punish the slow remorselessly. From an investors point of view, my interpretation of Foster's guidance would be to periodically pick the top performers in an index and sell those which don't make it to the top, regardless of past position; my interpretation of Collins is that eventually the tried and trusted firms win out.
I think my money would be on Foster.
However in terms of management thinking Foster is definitely in the Thomas Kuhn, Giovanni Dosi, Clayton Christensen, Geoffrey Moore tradition of the intense difficulty of managing to be customer focused, operationally excellent and innovative simultaneously.
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.
This book explores the ways of creative thinking... how to foster it... and what fear mechanisms destroy it in the upper levels of corporations. It gives ideas on how to evaluate affiliations and acquisitions.
On a humorus note, Enron is cited as an example of success based on this approach. They are quoted 'we hire smart people and pay them more than they think they are worth.' and there are 'no punishments for trying (risking).' Seems like it is always best to be careful who you let guard the cookie jar.
Truly a great read by the highly respected Senior Partner and Director of McKinsey & Co.
Five Super Stars