Creative Destruction

Creative destruction means we can’t sit on our business laurels; in fact, we must constantly abandon successes of the past. And, we have to realize that too much of our present day success is going to morph and atrophy – - – evolve in a negative way for our company.

Foster’s (Creative Destruction, 2001) analysis with associate Sarah Kaplan, in a McKinsey & Company study of corporate performance from that 1974 trough, yielded eight insights.

(1) Mature industries basically perform as the economy does. Investing in mature industries does not yield any effective diversification.

(2) Most corporations perform as their industries do – - “your industry is your destiny, which CEOs really hate hearing”.

(3) Some dynamic industries both out-perform and under-perform the economy but such performance is extremely difficult to sustain.

(4) High-return industries attract more competition than lower-return industries.

(5) The pace of change in the American economy is driven by the spread between debt and the long-term equity yield. “The spread acts like a switch on the economy”. A significantly positive spread leads to enormous innovation and productivity growth. A negative spread kills productivity, M&A activity, and initial public offerings.

(6) R&D spending does not correlate in any simple way with shareholder returns. He states internal efforts to generate new technology don’t correlate until a wider view of licensing, acquisitions, information acquisition, and information application are brought into the picture.

(7) Age matters – - young companies are able to grow quickly.

(8) Long-term performance is elusive although there are periods of time when companies have extraordinary performance:

The overriding point is that while businesses can grow quickly during certain periods of time, these periods always end. The strong performance of these companies is not evidence that they had learned the lessons of perpetual exceptional performance, but rather that they had found a formula that lasted for a while, but not forever. No one escapes the pull of economic gravity. Innovation on an ongoing never-ending basis is crucial to sustain growth.