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.


From Library Journal
In this new book by two McKinsey consultants, the central question is a very simple one: why do good companies fail? The focus of the book is not so much on corporate continuity as "discontinuity," or companies' constant need to destroy and re-create themselves in order to adapt to changing business conditions. Reflecting a "corporate Darwinism," the authors feel that "destruction is a mechanism that allows the market to maintain freshness by eliminating those elements that are no longer needed." From their research of over 1000 American companies, they show that even successful corporations over time invariably underperform. Examples of companies that chose to "destroy" themselves and reemerge phoenixlike include such well-known names as General Electric, Intel, and Enron. The authors are certainly onto something, but the conclusions aren't all that new. The book comes across as a slick client presentation loaded with graphs, charts, and plenty of business jargon that is often numbing to read. A more satisfying book on this subject is Clayton Christensen's The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. (Harvard Business, 1997). Not recommended. Richard Drezen, Washington Post/NYC Bureau, New York Copyright 2001 Reed Business Information, Inc.


From Booklist
The "perennial gale of creative destruction" is a phrase coined by economist Joseph Schumpeter. Although he died in 1950, his name has been invoked regularly during the past year to explain the "gale" of dot.com failures. Foster is a senior partner at consulting powerhouse McKinsey & Co., where coauthor Kaplan worked for many years. They also cite Schumpeter to make the case that companies that fail to reinvent themselves and continually innovate will fall by the wayside. They back their assertion using the McKinsey Corporate Performance Database. It tracks the performance of 1,000 companies in 15 industries over four decades. Foster and Kaplan warn that companies must overcome their inability to change their corporate cultures ("cultural lock-in") and their corporate control systems. McKinsey's data shows that the market's overall rate of change ("discontinuity") will continue to accelerate; the authors stress that companies must "act more like the market" and prescribe ways for doing so. David Rouse
Copyright © American Library Association. All rights reserved


Jorma Ollila, Chairman and CEO, Nokia Corporation
Foster and Kaplan get right to the heart of one of today's central themes.


Review
Advance acclaim for Creative Destruction:

"A thoroughly researched, masterfully written, and somewhat frightening explanation of how competitive advantage is built and inevitably erodes. Anyone who is interested in staying ahead of the competition should read this book. It's good."
—Clayton Christensen, Associate Professor, Harvard Business School, and author of The Innovator's Dilemma.

"[Offers] invaluable insight into business building and dealing with the challenge of dynamic growth. Foster and Kaplan get right to the heart of one of today's central themes. An instructive and insightful guide for managers to navigate the twenty-first century."
—Jorma Ollila, Chairman and CEO, Nokia Corporation

"It was clear the game had changed, but until this book it was never clear by how much. Creative Destruction will reverberate in corporate boardrooms for some time to come, changing the basic premises of corporate success. There is no doubt that, in order to survive in the future, inspiration can be found in Foster's and Kaplan's book"
—Antony Burgmans, Chairman, Unilever, N.V., the Netherlands

"Creative Destruction is a phenomenal book. It reveals what it takes for an enterprise to thrive in the age of discontinuities yet meet the pressures of continuous performance. Wise, sweeping, balanced, grounded in facts and yet highly imaginative, it is unquestionably the best business book I have ever read Countless numbers of CEOs will wish they could have read it sooner—and so will their shareholders."
—John Seely Brown, President, Xerox Palo Alto Research Center

"Creative Destruction has clarified for me the challenges of sustaining business success. It is the freshest view of the challenges before us that I have seen. It also shows where we have to change to be successful. Compelling."
—Vernon Jordan, Lazard Frres.

"Creative Destruction is a sharp stick in the eye for corporate conventional wisdom and orthodoxy. Foster and Kaplan have captured the essence of market-driven counterinitiative thinking. A wake-up call for CEOs and investment strategists!"
—Joe L. Roby, Chairman, Credit Suisse First Boston Corporation


John Seely Brown, President, Xerox Palo Alto Research Center
Creative Destruction is a phenomenal book.


Vernon Jordan, Lazard Frres.
Creative Destruction has clarified for me the challenges of sustaining business success.


Review
Advance acclaim for Creative Destruction:

"A thoroughly researched, masterfully written, and somewhat frightening explanation of how competitive advantage is built and inevitably erodes. Anyone who is interested in staying ahead of the competition should read this book. It's good."
?Clayton Christensen, Associate Professor, Harvard Business School, and author of The Innovator's Dilemma.

"[Offers] invaluable insight into business building and dealing with the challenge of dynamic growth. Foster and Kaplan get right to the heart of one of today's central themes. An instructive and insightful guide for managers to navigate the twenty-first century."
?Jorma Ollila, Chairman and CEO, Nokia Corporation

"It was clear the game had changed, but until this book it was never clear by how much. Creative Destruction will reverberate in corporate boardrooms for some time to come, changing the basic premises of corporate success. There is no doubt that, in order to survive in the future, inspiration can be found in Foster's and Kaplan's book"
?Antony Burgmans, Chairman, Unilever, N.V., the Netherlands

"Creative Destruction is a phenomenal book. It reveals what it takes for an enterprise to thrive in the age of discontinuities yet meet the pressures of continuous performance. Wise, sweeping, balanced, grounded in facts and yet highly imaginative, it is unquestionably the best business book I have ever read Countless numbers of CEOs will wish they could have read it sooner?and so will their shareholders."
?John Seely Brown, President, Xerox Palo Alto Research Center

"Creative Destruction has clarified for me the challenges of sustaining business success. It is the freshest view of the challenges before us that I have seen. It also shows where we have to change to be successful. Compelling."
?Vernon Jordan, Lazard Frres.

"Creative Destruction is a sharp stick in the eye for corporate conventional wisdom and orthodoxy. Foster and Kaplan have captured the essence of market-driven counterinitiative thinking. A wake-up call for CEOs and investment strategists!"
?Joe L. Roby, Chairman, Credit Suisse First Boston Corporation


Book Description
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.



From the Inside Flap
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.


From the Back Cover
Advance acclaim for Creative Destruction:

"A thoroughly researched, masterfully written, and somewhat frightening explanation of how competitive advantage is built and inevitably erodes. Anyone who is interested in staying ahead of the competition should read this book. It's good."
—Clayton Christensen, Associate Professor, Harvard Business School, and author of The Innovator's Dilemma.

"[Offers] invaluable insight into business building and dealing with the challenge of dynamic growth. Foster and Kaplan get right to the heart of one of today's central themes. An instructive and insightful guide for managers to navigate the twenty-first century."


About the Author
Richard Foster is a senior partner and director at McKinsey & Company and the author of the bestselling Innovation: The Attacker's Advantage, named one of the best business books of the year by The Wall Street Journal.

Sarah Kaplan worked at McKinsey & Company for many years, specializing in innovation and technology management. Foster lives in New York City, and Kaplan in Boston.


Excerpt. © Reprinted by permission. All rights reserved.
Survival and Performance in the Era of Discontinuity

This company will be going strong one hundred and even five hundred years from now.
- C. Jay Parkinson, President of Anaconda Mines, statement made three years in advance of Anaconda's bankruptcy

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 one hundred largest American companies. The firms were ranked by assets, since sales data were not accurately compiled in those days. In 1987, Forbes republished its original "Forbes 100" list and compared it to its 1987 list of top companies. Of the original group, 61 had ceased to exist.

Of the remaining thirty-nine, eighteen had managed to stay in the top one hundred. These eighteen companies--which included Kodak, DuPont, General Electric, Ford, General Motors, Procter & Gamble, and a dozen other corporations--had clearly earned the nation's respect. Skilled in the arts of survival, these enterprises had weathered the Great Depression, the Second World War, the Korean conflict, the roaring '60s, the oil and inflation shocks of the '70s, and unprecedented technological change in the chemicals, pharmaceuticals, computers, software, radio and television, and global telecommunications industries.

They survived. But they did not perform. As a group these great companies earned a long-term return for their investors during the 1917-1987 period 20% less than that of the overall market. Only two of them, General Electric and Eastman Kodak, performed better than the averages, and Kodak has since fallen on harder times.

One reaches the same conclusion from an examination of the S&P 500. Of the five hundred companies originally making up the S&P 500 in 1957, only seventy-four remained on the list through 1997. And of these seventy-four, only twelve outperformed the S&P 500 index itself over the 1957-1998 period. Moreover, the list included companies from two industries, pharmaceuticals and food, that were strong performers during this period. If today's S&P 500 today were made up of only those companies that were on the list when it was formed in 1957, the overall performance of the S&P 500 would have been about 20% less per year than it actually has been.

For the last several decades we have celebrated the big corporate survivors, praising their "excellence" and their longevity, their ability to last. These, we have assumed, are the bedrock companies of the American economy. These are the companies that "patient" investors pour their money into--investments that would certainly reward richly at the end of a lifetime. But our findings--based on the thirty-eight years of data compiled in the McKinsey Corporate Performance Database, discussed in the Introduction--have shown that they do not perform as we might suspect. An investor following the logic of patiently investing money in these survivors will do substantially less well than an investor who merely invests in market index funds.

McKinsey's long-term studies of corporate birth, survival, and death in America clearly show that 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.

The Assumption of Continuity

How could this be? How could a stock market index such as the Dow Jones Industrial average or the S&P 500 average--which, unlike companies, lack skilled managers, boards of experienced directors, carefully crafted organizational structures, the most advanced management methods, privileged assets, and special relationships with anyone of their choosing--perform better, over the long haul, than all but two of Forbes's strongest survivors, General Electric and Eastman Kodak? Are the capital markets, as represented by the stock market averages, "wiser" than managers who think about performance all the time?

The answer is that the capital markets, and the indices that reflect them, encourage the creation of corporations, permit their efficient operations (as long as they remain competitive), and then rapidly--and remorselessly--remove them when they lose their ability to perform. Corporations, which operate with management philosophies based on the assumption of continuity, are not able to change at the pace and scale of the markets. As a result, in the long term, they do not create value at the pace and scale of the markets.

It is among the relatively new entrants to the economy--for example, Intel, Amgen, and Cisco--where one finds superior performance, at least for a time. The structure and mechanisms of the capital markets enable these companies to produce results superior to even the best surviving corporations. Moreover, it is the corporations that have lost their ability to meet investor expectations (no matter how unreasonable these expectations might be) that consume the wealth of the economy. The capital markets remove these weaker performers at a greater rate than even the best-performing companies. Joseph Alois Schumpeter, the great Austrian-American economist of the 1930s and '40s, called this process of creation and removal "the gales of creative destruction." So great is the challenge of running the operations of a corporation today that few corporate leaders have the energy or time to manage the processes of creative destruction, especially at the pace and scale necessary to compete with the market. Yet that is precisely what is required to sustain market levels of long-term performance.

The essential difference between corporations and capital markets is in the way they enable, manage, and control the processes of creative destruction. Corporations are built on the assumption of continuity; their focus is on operations. Capital markets are built on the assumption of discontinuity; their focus is on creation and destruction. The market encourages rapid and extensive creation, and hence greater wealth-building. It is less tolerant than the corporation is of long-term underperformance. Outstanding corporations do win the right to survive, but not the ability to earn above-average or even average shareholder returns over the long term. Why? Because their control processes--the very processes that help them to survive over the long haul--deaden them to the need for change.

The Reality of Discontinuity

This distinction between the way corporations and markets approach the processes of creative destruction is not an artifact of our times or an outgrowth of the "dot.com" generation. It has been smoldering for decades, like a fire in a wall, ready to erupt at any moment. The market turmoil we see today is a logical extension of trends that began decades ago.

The origins of modern managerial philosophy can be traced to the eighteenth century, when Adam Smith argued for specialization of tasks and division of labor in order to cut waste. By the late nineteenth century these ideas had culminated in an age of American trusts, European holding companies, and Japanese zaibatsus. These complex giants were designed to convert natural resources into food, energy, clothing, and shelter in the most asset-efficient way--to maximize output and to minimize waste.

By the 1920s, Smith's simple idea had enabled huge enterprises, exploiting the potential of mass production, to flourish. Peter Drucker wrote the seminal guidebook for these corporations in 1946, The Concept of the Corporation. The book laid out the precepts of the then-modern corporation, based on the specialization of labor, mass production, and the efficient use of physical assets.

This approach was in deep harmony with the times. Change came slowly in the '20s, when the first Standard and Poor's index of ninety important U.S. companies was formed. In the '20s and '30s the turnover rate in the S&P 90 averaged about 1.5% per year. A new member of the S&P 90 at that time could expect to remain on the list, on average, for more than sixty-five years. The corporations of these times were built on the assumption of continuity--perpetual continuity, the essence of which Drucker explored in his book. Change was a minor factor. Companies were in business to transform raw materials into final products, to avoid the high costs of interaction between independent companies in the marketplace. This required them to operate at great scale and to control their costs carefully. These vertically integrated configurations were protected from all but incremental change.

We argue that this period of corporate development, lasting for more than seventy years, has come to an end. In 1998, the turnover rate in the S&P 500 was close to 10%, implying an average lifetime on the list of ten years, not sixty-five! Drucker predicted the turning point with his 1969 book The Age of Discontinuity, but his persuasive arguments could not overcome the zeitgeist of the '70s. The '70s were, for many managers, the modern equivalent of the 1930s. Inflation raged, interest rates were at the highest levels since before World War II, and the stock market was languishing. Few entrants dared risk capital or career on the founding of a new company based on Drucker's insights. It was a fallow time for corporate start-ups. As the long-term demands of survival took over, Drucker's advice fell on deaf years.

The pace of change has been accelerating continuously since the '20s. There have been three great waves. The timing and extent of these waves match the rise and fall of the generative and absorptive capabilities of the nation. The first wave came shortly after World War II, when the nation's military buildup gave way to the need to rebuild the consumer infrastructure. Many new companies entered the economy at this time, then rose to economic prominence during the 1940s and 1950s, among them Owens-Corning, Textron, and Seagram.

The second wave began in the 1960s. The rate of turnover in the S&P 90 began to accelerate as the federal defense and aerospace programs once again stimulated the economy, providing funds for the development of logic and memory chips, and later the microprocessor. They were heady days--"bubble days," in the eyes of some. The hot stocks were called "one-decision" stocks: Buy them once and never sell them, and your future fortune was assured.

The bubble burst in 1968. The New York Stock Exchange, which had risen to almost 1000, did not return to that level again until the early 1980s. During this absorptive, or slack, period, when the country was beset with rising oil prices and inflation, and when bonds earned returns substantially greater than equities, few new companies joined--or left--the S&P 500. Interestingly enough, though, despite the worst economic conditions the nation had endured since the Depression, the minimum rate of corporate turnover did not drop to the low rate of turnover seen in the 1950s. The base rate of change in the economy had permanently risen.

Paul Volcker, chairman of the Federal Reserve Bank, finally led the charge that broke the back of inflation, and the number of new companies climbing onto the S&P 500 accelerated. In the 1980s, once again the S&P began substituting new high-growth and high-market-cap companies for the slower-growing and even shrinking-market-cap older companies. The change in the S&P index mix also reflected changes in the economic mix of business in the United States. When the markets collapsed in the late '80s and a short-lived recession hit the American economy in the early '90s, the rate of substitution in the S&P 500 fell off. But again, even at its lowest point, the rate of turnover was higher than it was during the 1970s decline. The minimum level of change in the economy had been quietly building, and was increasing again. This was even more evident as the technology-charged 1990s kicked into gear, accelerating the rate of the S&P Index turnover to levels never seen before. By the end of the 1990s, we were well into what Peter Drucker calls the "Age of Discontinuity." Extrapolating from past patterns, we calculate that by the end of the year 2020, the average lifetime of a corporation on the S&P will have been shortened to about ten years, as fewer and fewer companies fall into the category of "survivors."

The Gales of Discontinuity

The Age of Discontinuity did not arrive in the 1990s by happenstance. It arose from fundamental economic forces. Among these are:

The increasing efficiency of business, due to dramatic declines in capital costs. As industry shifted from goods to services, there was a concurrent decline in interaction and transaction costs. These costs declined because of the advent of information technology and the steady rise in labor productivity due to advances in technology and management methods.

The increasing efficiency of capital markets, due to the increasing accuracy (and transparency) of corporate performance data.

The rise in national liquidity, due to the improved profitability of U.S. corporations, and a favorable bias, unparalleled anywhere else in the world, toward U.S. equities.

Strengthened fiscal management by the federal government, including an effective Federal Reserve, and reduced corporate taxes.

These forces have helped to create the likes of Microsoft, with a market capitalization greater than all but the top ten nations of the world (Microsoft's real assets make up about 1% of its market value). Computer maker Dell has virtually no assets at all. Internet start-up companies begin with almost no capital. For these companies, returns on capital are unimaginably large by previous standards. Productivity is soaring. The pipeline of new technology is robust. There are more than 10,000 Internet business proposals alone waiting for evaluation at venture capital firms, even after the Nasdaq collapse in March and April of 2000. By all reports, the number (if not the quality) of these proposals is increasing all the time. Information technology is not nearing its limits. The effectiveness of software programming continues to grow; communications technology is just beginning. The global GDP will double in the next twenty years, creating approximately $20?$40 trillion in new sales. If, through the productivity improvements the Internet enables, the world can save 2% of the $25 trillion now produced, the market value of those savings will run into the trillions.

Incumbent companies have an unprecedented opportunity to take advantage of these times. But if history is a guide, no more than a third of today's major corporations will survive in an economically important way over the next twenty-five years. Those that do not survive will die a Hindu death of transformation, as they are acquired or merged with part of a larger, stronger organization, rather than a Judeo-Christian death, but it will be death nonetheless. And the demise of these companies will come from a lack of competitive adaptiveness. To be blunt, most of these companies will die or be bought out and absorbed because they are too damn slow to keep pace with change in the market. By 2020, more than three quarters of the S&P 500 will consist of companies we don't know today--new companies drawn into the maelstrom of economic activity from the periphery, springing from insights unrecognized today.

The assumption of continuity, on which most of our leading corporations have been based for years, no longer holds. Discontinuity dominates. The one hundred or so companies in the current S&P 500 that survive into the 2020s will be unlike the corporate survivors today. They will have to be masters of creative destruction--built for discontinuity, remade like the market. Schumpeter anticipated this transformation over a half century ago when he observed: "The problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them."

ANNOTATION

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.

FROM THE PUBLISHER

In a striking challenge to such bibles of business literature as In Search of Excellence and Built to Last, Richard Foster and Sarah Kaplan draw on thirteen years of research to show that, over time, long-established companies, instead of maintaining excellence, almost always underperform the market. Ironically, the very culture and meticulously maintained bureaucracy that fuel the good times cause companies to stall out after a period of ten to fifteen years.

Proposing a radical new business paradigm, Foster and Kaplan argue that instead of focusing on continuity, companies must focus on discontinuity—constantly destroying and recreating themselves in order to remain competitive. In specific, targeted analysis, using examples drawn from old-economy enterprises like paper manufacturing to new-economy, high-tech companies, they explain how to overcome cultural "lock-in" by 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 thrive over the long term.

SYNOPSIS

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 aradical 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.

FROM THE CRITICS

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.

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