Creative Destruction: Why Companies That Are Built to Last Underperform the Market – and How to Successfully Transform Them
by Richard Foster and Sarah Kaplan
Companies not afraid to destroy will lead long lives. Companies that are built to last usually don’t. The reason, according to Richard Foster and Sarah Kaplan, authors of Creative Destruction, is that they are designed for continuity – that is, to continue to operate under a given set of circumstances and situations that define “business as usual”. Circumstances change, however, and the companies that will truly last are those that are designed for discontinuity, the authors claim. IBM is a classic example of a company that stumbled in the face of discontinuity – specifically, the decline of mainframes.
The issue is not simply to be prepared for change. Instead, the authors maintain, companies must design discontinuity into their processes and strategies. As the authors explain, they must emulate the capital markets. Capital markets encourage the creation of corporations, but remove those corporations mercilessly when they fail. Austrian economist Joseph Schumpeter called this process of creation and removal the “gales of creative destruction”. According to Foster and Kaplan, the most successful companies will be those that are equally capable of creating and removing – of “creative destruction” – as the circumstances demand.
L’Oréal’s creative destruction
In 1986, L’Oréal released under its Lancôme brand a liposome cream to hide wrinkles. Lancôme is one of the high-end brands of L’Oréal, and the wrinkle cream cost US$50 per jar. This was the creative part of creative destruction.
In 1989, when the competition matched L’Oréal’s wrinkle cream, the company decided to add liposomes to its lower-priced Plenitude line. Thus the wrinkle cream could now be bought for US$8 per jar.
Conventional wisdom would tell you that L’Oréal was cannibalising its own product. For L’Oréal, however, “Adding liposome to Plenitude was part of mastering the game of creative destruction,” explain the authors. “Having different brands for different markets allows L’Oréal to introduce new technology to the high-end products first, and over time allows it to migrate to the lower-priced markets, and eventually be replaced.”
For this strategy to work, however, L’Oréal must have new products waiting for Lancôme before it sends its innovations down to the lower-price brands. Thus, innovation is key to successful creative destruction.
Unlike L’Oréal, most companies, the authors write, are afraid of cannibalising their own products. They are also afraid of moving into businesses that would conflict with their customers, and of acquiring companies that might dilute the company’s earnings in the short-term. These three fears combine to create what the authors call “cultural lock-in”. They are, to put it plainly, paralysed by fear, and thus unable to respond to attacks from competitors or to other changes in the marketplace.
The key to breaking free of cultural lock-in and launching a successful creative destruction strategy is to balance the operational focus of the company with a creative focus.
Operational vs creative focus
Most companies are designed to be effective as an operational company. Operational companies, however, can find themselves doing the wrong things right if a new competitor arrives with a better product or process.
For example, as Storage Technology Corporation – a company created by ex-IBMers – developed tape and disk drive systems for IBM computers, it displayed both innovative excellence and operational efficiency. The company was so successful at making and selling better drives than IBM that it was soon ready to challenge IBM in the mainframe business. The goal was, in the words of the CEO, to become a “mini-IBM”.
When the company started to expand to mainframes, however, the balance between operational and innovative excellence was shattered. First, it focused on developing mainframes as well as optical storage drives – which the company believed would replace magnetic drives. As it focused its resources on this innovation, it became less operationally excellent. For example, to meet demand, Storage Technology acquired parts from suppliers that did not meet specifications – with the result that Storage Technology products started to fail. While the company was scrambling to regroup operationally, IBM moved forward on the innovation side. Eventually, IBM won on both fronts: innovative and operational.
In Creative Destruction, the authors show how to build up the innovation side of your business – and how to balance innovation with operational excellence to avoid becoming one of the many companies so intent on continuing the present that they are unable to react to the future.