Creative Destruction

One need only look to market indices over the past century to realize that highly revered and much-touted “built-to-last” corporations tended to underperform the market by a significant amount. McKinsey consultants, Foster and Kaplan, rely on their own experience, and McKinsey’s vast database, to explain that this phenomenon is due to the differing principles under which capital markets and corporations operate. Markets, built on the assumption of discontinuity, “enable, manage, and control the processes of creative destruction” by encouraging new entrants that produce superior results and value and by “remorselessly” replacing weak performers that consume wealth. This process has always been at the heart of capitalism, but the pace of change is accelerating, to the extent that we have entered what Peter Drucker calls the Age of Discontinuity. In contrast, most corporations continue to be operated according to an assumption of continuity and are susceptible to a “cultural lock-in” paralysis that prevents them from keeping step with the dynamics of the market. Their quest for perpetuity is characterized by a blind adherence to mental models that impede creativity. Moreover, as corporations grow and become more complex, they become mired down by rules and procedures that discourage innovation. Corporations seeking to succeed, not just survive, must redesign themselves from top to bottom and adopt policies that will allow them to “change at the pace and scale of the market.” While corporations historically have focused on operations, rather than evolution, now they must incorporate discontinuity into the design and stimulate the rate of creative destruction, without losing control of operations. They must begin to “act like the market” by adjusting planning and development efforts, paring control systems, and relying on divergent as well as convergent thinking. This requires that they focus more on asking the right questions than on having the right answers and that they select, equip, and motivate the right employees, rather than control them.