Turning conventional wisdom on its head, a Senior Partner and an Innovation Specialist from McKinsey & Company debunk the myth that high-octane, built-to-last companies can continue to excel year after year and reveal the dynamic strategies of discontinuity and creative destruction these corporations must adopt in order to maintain excellence and remain competitive.
In striking contrast to such bibles of business literature as In Search of Excellence and Built to Last, Richard N. Foster and Sarah Kaplan draw on research they conducted at McKinsey & Company of more than one thousand corporations in fifteen industries over a thirty-six-year period. The industries they examined included old-economy industries such as pulp and paper and chemicals, and new-economy industries like semiconductors and software. Using this enormous fact base, Foster and Kaplan show that even the best-run and most widely admired companies included in their sample are unable to sustain their market-beating levels of performance for more than ten to fifteen years. Foster and Kaplan's long-term studies of corporate birth, survival, and death in America show that the corporate equivalent of El Dorado, the golden company that continually outperforms the market, has never existed. It is a myth.
Corporations operate with management philosophies based on the assumption of continuity; as a result, in the long term, they cannot change or create value at the pace and scale of the markets. Their control processes, the very processes that enable them to survive over the long haul, deaden them to the vital and constant need for change. Proposing a radical new business paradigm, Foster and Kaplan argue that redesigning the corporation to change at the pace and scale of the capital markets rather than merely operate well will require more than simple adjustments. They explain how companies like Johnson and Johnson , Enron, Corning, and GE are overcoming cultural "lock-in" by transforming rather than incrementally improving their companies. They are doing this by creating new businesses, selling off or closing down businesses or divisions whose growth is slowing down, as well as abandoning outdated, ingrown structures and rules and adopting new decision-making processes, control systems, and mental models. Corporations, they argue, must learn to be as dynamic and responsive as the market itself if they are to sustain superior returns and thrive over the long term.
In a book that is sure to shake the business world to its foundations, Creative Destruction, like Re-Engineering the Corporation before it, offers a new paradigm that will change the way we think about business.
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.