Creative Destruction: Why Companies That Are Built to Last Underperform the Market--and How to...

Creative Destruction: Why Companies That Are Built to Last Underperform the Market--and How to Successfully Transform Them; Richard N. Foster and Sarah Kaplan; Doubleday/Currency, New York, NY; 2001; 366 pp., $27.50.

"If history is a guide," Richard N. Foster wrote in the January-February

2000 Research * Technology Management, "almost half of the major companies existing today will be not be around in 25 years." Those that will, Foster continued, will have learned how to innovate aggressively at the same time as they are able to achieve operational excellence. In Creative Destruction, he and his former McKinsey & Co. colleague Sarah Kaplan argue that to accomplish this, companies must adapt strategies of discontinuity and creative destruction.

From research they conducted at McKinsey on more than 1,000 corporations in 15 industries over 36 years, they conclude that even the best run and most widely admired companies in their sample were unable to sustain their market-beating levels of performance for more than 10-15 years. In short, they write, "the corporate equivalent of El Dorado, the golden company that continually performs better than the markets, has never existed. It is a myth. Managing for survival, even among the best and most revered corporations, does not guarantee strong long-term performance for shareholders. In fact, just the opposite is true. In the long run, markets always win."

Foster and Kaplan observe that 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. The same control processes that enable them to survive over the long haul deaden them to the vital and constant need for change. Instead, "we believe that corporations must be redesigned from top to bottom based on the assumption of discontinuity. Management must stimulate the rate of creative destruction through the generation or acquisition of new firms and the elimination of marginal performers--without losing control of operations." Moreover, "to create new businesses at a faster rate, corporations also need to ponder the details of divergent thinking ... a prelude to creativity."

"Managing for divergent thinking," Foster and Kaplan continue, "requires establishing a `rich context' of information as a stimulus to posing the right questions. It requires control through the selection and motivation of employees rather than through control of people's actions; ample resources, including time, to achieve results; knowing what to measure and when to measure it; and genuine respect for others' capabilities and potential. It also requires the willingness to remove people from responsibility when it becomes clear they cannot perform up to standard. In the end, both divergent and convergent thinking must successfully coexist."

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. Without offering any step-by-step "prescription," they explain how companies like Johnson and Johnson, Enron, Coming, 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, Foster and Kaplan conclude, "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."