Heskett Column (Built to Last or Bought to Sell?)

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?

And what about the social responsibility?

Ultimate return to investor would certainly be tough on employees/communities. But the government sectors sometimes produce the products at the cost of net gain and serve the state as part of the state. Corporations may not produce these products due to low profit earnings or lower returns to investors.

We should recognize the fact that between the lines of continuity and discontinuity there is the line of serving the state, where the profit does not always come first as with the space industry or the railways.

The investor is not the only one a corporation affects. 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.

Companies have been a basic locus of urban community life, and their role in society is all set to grow in the future in proportion to their understanding of the fact that they have a great social responsibility. (That social performance pays off for companies too has been illustrated in Joshua D. Margolis and James P. Walsh's working paper, on the HBSWK home page. Readers might be interested in reading this article in this context.)

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.

If you ask me, I would stick to operational excellence complemented with a dynamic ability to change.

1. I believe Southwest Airlines has used creative destruction to invent and develop a new way of service in the airlines industry, without any cultural lock-in. Perhaps because they have selected, prepared, and motivated their people correctly.

2. Return to investor should be one of many ways of measuring value creation. The leadership and future competitive advantages of the company should be valued, too.

3. Companies should motivate employees with success stories and reward their improvements.

If the company does not have innovative ideas it will fail to compete on pricing and quality of service, which seems to be the norm. For instance, when a company successfully changes its industry business model, that can render its competitor's business obsolete.