Summing Up
The authors of a recently-published book, Creative Destruction, have more work to do to convince our readers of their primary argument that creative destruction, based on an assumption of discontinuity, is a more effective management principle than operational excellence, borne out of an assumption that continuity is more desirable. The problem apparently has much to do with the narrow definition of success, the ability to outperform the stock market that the authors use as the primary criterion for their study.
Jonathan Pinto commented, "An assumption of continuity does not preclude considering the option of knocking down and starting all over again if that's what is best for the business ... (but) Kaplan & Foster [authors of the book] seem to be recommending destruction for its own sake."
Readers also took issue with another shortcoming in the "creative destruction" research. As Devdip Ganguli put it: "The sphere of influence of companies goes beyond themselves and their investors: their decisions encompass social and environmental consequences too. Therefore to say that the ultimate measure of performance is total return to the investor shows a lack of perspective ... While it may be true that the cycle of change is faster today than before and companies have to adapt to it more efficiently and quickly, it would be unwise to submit ourselves to the ideal of creative destruction." Ashok Nayak put it most succinctly: "And what about social responsibility?"
In summary, there seems to be a strong feeling here that if creative destruction is what it takes to outperform the market over long periods of time—the objective measure used for the study—it may not be worth all the costs. It raises once again the debate stimulated by advocates of agency theory over the past two decades. And it brings to mind the old Milton Friedman axiom that the business of business is to make money (presumably more than the average for the market and for long periods of time), thereby providing the means by which society can take of itself. What do you think?
Original Article
Creative Destruction, by Richard Foster and Sarah Kaplan is a compilation of recent research based on a thirty-eight-year database comprising 1,008 selected U.S. corporations. The authors maintain that the primary problem of companies today is that they concentrate on operational excellence based on an assumption of continuity rather than on an assumption of discontinuity: creative destruction. Instead of holding up long-term survivors of corporate warfare as the ideal, they point to private equity investment companies—those that create, operate, and trade with a high degree of market mediated objectivity—as the model for a future where managers struggle hopelessly to keep up with investor-perceived value shifts. They seem to directly challenge the precepts of Built to Last, a widely read study of thirty-six U.S. corporations, published seven years ago. They claim that no company, whether "visionary" or not, can outperform the market for more than ten to fifteen years, and that the companies "built to last" may have survived but have not outperformed the market over long periods of time.
While pitting themselves against the authors of Built to Last (creating the impression that "built to last" is Twentieth Century management thinking) may help sell books, there are perhaps fewer contrasts in the conclusions of the two books than one might realize. Let's assume, however, for the sake of this discussion that Creative Destruction is a guidebook to future corporate management success. What does it suggest? Among other things, as managers we are admonished to:
recognize that the larger organizations get, the more they lose their ability to "change at the pace and scale of the market";
think like private equity fund managers, especially in terms of forming exit strategies at the time of business development;
base decisions on an assumption of increasing competitive discontinuity and impermanence;
avoid "cultural lock-in," the dedication to ideas and people based on preserving continuity;
discard control systems that limit creativity;
discourage too much "convergent" thinking that "thrives on focus";
encourage processes that identify and invest in ideas and organizations "attacking" at the "periphery" of a competitive space.
The ultimate measure of performance is total return to the investor. There is passing reference to the fact that, without new thinking, this philosophy can be tough on employees (and one might add communities). There is recognition that balancing creative destruction and operational excellence is very difficult-borne out by the high ratio of failures to successes in examples cited by the authors.
Questions raised by the study include:
(1) What happened to focus, loyalty, and trust—causes of "cultural lock-in"—as sources of continuing value creation? Southwest Airlines, a highly focused company concentrating on operational excellence based on an assumption of continuity, is included in the sample but otherwise not cited. It has quite likely done a better job of outperforming its industry for a longer period of time than any company in Foster and Kaplan's sample.
(2) Is total return to investors the only measure of performance for an organization, or is it one of many ways of measuring value creation?
(3) Assuming Foster and Kaplan are right, how do we prepare and motivate people to lead and manage in terms of both operational excellence—whether or not based on assumptions of continuity—and "creative destruction?"
What do you think?
