Creative Destruction
Why Companies That Are Built to Last Underperform the Market -- and How to Successfully Transform Them
by Richard Foster and Sarah Kaplan

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new businesses, selling off or closing down businesses or divisions whose growth is slowing down, as well as abandoning outdated, ingrown structures and rules and adopting new decision-making processes, control systems, and mental models.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.

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. Foster lives in New York City.

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

"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 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 Frères.

"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.

The following is an excerpt from Creative Destruction: Why Companies That Are Built to Last Underperform the Market -- and How to Successfully Transform Them by Richard Foster and Sarah Kaplan
Published by Doubleday; April 2001; $27.50US/$39.95CAN; 0-385-50133-1


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.

Creative Destruction

Creative Destruction
Why Companies That Are Built to Last Underperform the Market -- and How to Successfully Transform Them

by Richard Foster and Sarah Kaplan
Published by Doubleday April 2001; $27.50US/$39.95CAN; 0-385-50133-1

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