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 / Fourth Quarter 2001 / Issue 25(originally published by Booz & Company)


Best Business Books: Strategy

This theme of management by self-control has, of course, long been central to the writings of Peter F. Drucker. He stated it best nearly 30 years ago in his massive Management: Tasks, Responsibilities, Practices (1974). The ultimate objective of management, he argued, is to produce a “self-governing work community,” which requires productive work, feedback for self-control, and continuous learning. Perhaps this is why so much writing on management during the past decades reads like footnotes to Drucker.

The Myth of Excellence
Creative Destruction (2001), by consultants Richard N. Foster and Sarah Kaplan, casts new light on the organizational environments that produce superior performance. The subtitle of the book, Why Companies That Are Built to Last Underperform the Market — and How to Successfully Transform Them, summarizes their message. They use a custom-built database to track 1,008 companies in 15 industries from 1962 to 1998 and show that long-lived corporations typically underperform market averages as represented by the S&P 500. Thus the notion of excellence, of a corporation surviving indefinitely while producing superior returns, is revealed to be a myth. It’s the new entrants into an industry that produce superior returns and then usually go through an aging process accompanied by declining performance as they enter “cultural lock-in.” Thus markets produce better returns than corporations.

The authors suggest that creative destruction is necessary within corporations if they are to mimic the scale and pace of change of a marketplace. They cite the venture-capital firm Kleiner Perkins Caufield & Byers and buyout specialists Kohlberg Kravis Roberts & Co. as examples of organizations that create, operate, and trade in ways that encourage creative destruction. The example of the process within a single firm is drawn from the authors’ work with Johnson & Johnson, where they ran a series of corporate dialogues that resemble in spirit, if not in mechanical detail, the councils espoused by Jim Collins in Good to Great.

Foster and Kaplan’s significant contribution is the analysis that shows the existence of the process of creative destruction in the American economy and, in fact, shows that its pace is increasing. In the 1920s, a corporation on the S&P 500 could expect to be there for 60 years or more. Today that expectation is down to 20 years, and if the acceleration continues, it could be as little as 10 years by 2025. Such knowledge should concentrate the minds of senior managers wonderfully! Foster and Kaplan’s recommendations for how companies can avoid dropping from the S&P 500 are less detailed and compelling than those offered in Good to Great and The Strategy-Focused Organization, but one wonders whether any of them can do anything other than stave off the inevitable decline.

Harvard Business School Professor Clayton M. Christensen, in The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (1997), has examined in detail why organizations seem incapable of reinventing themselves. (See “Clayton M. Christensen, The Thought Leader Interview”) He was fascinated by the experience of the computer disk-drive industry, where the leaders in one generation of drives seemed incapable of staying atop the market in the next generation. Smaller entrants who attacked from “underneath,” using what Christensen called “disruptive technology,” displaced the older players. Christensen has since regretted using the term and now prefers to talk about “disruptive business models,” for often the new technology was not radically different from the old. Rather, the differences lay in the resources, processes, and values required to exploit the new technology. Thus Christensen has outlined what is effectively a corporate process of maturation and aging whereby the strengths and relationships developed to exploit one situation turn out to be weaknesses and constraints in other contexts. Capability and disability are two sides of the same coin, and one is replaced by the other as contexts change.

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