Creative Destruction

Updated July 18,2006 (please see references below). Creative Destruction by Richard Foster and Sarah Kaplan of McKinsey is an excellent book, first published in 2001.  Lots of insights.

First, they show using data from the Mckinsey Performance Database (an internal database which has information about the historical financial performance of companies) and the S&P 500, that the market does a better job of weeding out the non-performers. It appears that as of the writing of this book only 2 companies had beaten the s&p 500 over the long term – GE and Eastman Kodak. Given Kodak’s recent performance, GE maybe the one and only.  Another insight is that the average tenure of a company on the S&P 500 index has fallen from over 65 years in 1920s to about 20 today and by 2020 would fall to 10 years. The key takeaway is that we have reached the age of discontinuity from an age of continuity and so the likelihood of any one company beating the S&P 500 is next to impossible. Given that no company is able to meat the S&P 500 what can companies do? S&P 500 does it by evolving with the economy adding and deleting companies, over time reflecting the broader mix of industries in the economy as a whole. Foster and Kaplan say that companies must also destruct their products at a rate in pace with that of the market or better. For a company to do that, they say that companies should practice more divergent thinking – the type that generates more radical ideas or those that produce transformational innovation. Another interesting idea they propose is that of scanning the periphery. For instance, you can observe which companies in your industry or adjacent industries are obtaining VC funding.  The gales of destruction as they call it start at the periphery.

I think Clayton Christensen’s approach, as described in The Innovator’s Solution, of competing against non-consumption is an excellent technique for monitoring the periphery. If you observe why a certain population of customers is not consuming your product, it can give you clues to the probable birthplace of your next disruptive competitor.  They also cite a few other ideas like how Nike gets a first hand view of customer likes/dislikes through their Nike Town stores. Overall, this is a book which contains another view of how to tackle discontinuities by saying that from now on discontinuities are the only certain thing, continuity is dead. Overall, its an excellent effort by Foster and Kaplan. Negatives:
The whole chapter on how J&J sought McKinsey’s help at the time IBM was in turmoil to ensure they don’t fail in the same way seemed more like a sales pitch than real insights. Even the frameworks process as they call it (discovery, “forcing event”,synthesis are the 3 phases) seems to be pretty basic to be considered path-breaking. The number of times Enron has been praised is a bit jarring. Yes, Enron had not yet melted down then. But it is still jarring. References:
1. Scanning the periphery for weak signals an excellent article in the HBS’S Working Knowledge. <Via Sadagopan>


  1. Anonymous said August 17, 2006, 10:21 am:

    Looks like creative destruction was introduced by Joseph Schumpeter in 1942.

    Irving Wladawsky-Berger who is an IBMer touches upon this topic in this article. Irving’s blog has always been interesting read for me. He touches on a variety of subjects related to technology – including innovation, how society is affected by and shapes technology, what role government has to play etc.

  2. Anonymous said August 24, 2006, 9:02 am:

    You are right Ganesh. Schumpeter is credited with the phrase “gales of creative destruction”. In this book the authors do reference Schumpeter. I missed writing that.

    I am a subscriber to Irving’s blog for a while now. He writes great.