Creative Destruction - Deepstash
Creative Destruction

Creative Destruction

Richard Foster, Sarah Kaplan

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Survival and Performance in the Era of Discontinuity

Survival and Performance in the Era of Discontinuity

Of all the companies listed on the Forbes 100 list in 1917, 61 of them no longer existed 70 years later. Only 18 companies had managed to stay in the top 100, and none of these 18 were very good performers. Looking at the S&P 500 over the last 50 years shows similar results: few companies survive in the long haul, and those that do aren’t great performers.

Discontinuity isn’t a new thing, but the pace of discontinuity has increased, especially because of changes in technology. Companies have to adjust to the new paradigm.

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Clinging To The Old Ways

Managers think the challenge lies in keeping their existing operations running smoothly while fostering an environment where new ideas can flourish and old ideas can be put down. But they cling too tightly to the idea of continuity.

Some companies won’t make needed changes even when there are obvious threats to their existence. This “cultural lock-in” is a clear sign that a company is in decline.

Corporations must be redesigned to behave more like markets. They need to eliminate cultural lock-in and accept the business world as a discontinuous place.

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How Creative Destruction Works

There are any number of causes for discontinuity. Basically, change happens. Change is not new, but the rate of change has been accelerating in the past 90 years or so.

Creative disruption is inherent to capitalism. Discontinuities create under and over performance. Companies need to keep up with change in the market in order to outperform it.

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Cultural Lock-In

Mental models are the biggest obstacle to change. While such models are useful, they can be liabilities. Our model of the world is based on experience, meaning it is backward looking. When change happens, we are working from old models. So sometimes we have to change our models. It can be hard to get rid of the old beliefs (people do all sorts of things to avoid seeing what they don’t want to see), but persisting with an incorrect model is a big mistake.

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The Decision Making Process

The decision making process includes elements like planning systems, calendar management, agenda setting, decision criteria and so forth. These systems need to be consistent with mental models. For example, consumer retailers typically make decisions based on seasonal considerations, deciding when to increase inventory and when to lower prices to decrease inventory.

Mental models also determine how staffing decisions are made, impacting how many employees are required to meet the company’s goals, as well as what kind of expertise and experience is needed from staff.

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Control Processes

Control processes include things like operational control processes, compensation systems and capital allocation. A company with slim margins will strive to control costs on a day-to-day basis. A company that relies on innovation is likely to give more rein to engineers and scientists as they develop new products.

These elements constitute the architecture of the company: Models, Information, Decisions, Actions and Systems of Control. Corporate architecture changes as companies age and mental models change, and there is a pattern to the natural evolution of corporate architecture.

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The Four Stages Of A Company

  • Foundation: Newly founded companies are focused on opportunity.
  • Growth: Companies that survive the foundation stage usually see rapid growth.
  • Dominate: A company will, by and large, be considered successful by those outside of the company as well as those within it at this stage. Management systems are refined; acquisitions are frequent.
  • Cultural lock-in: The company fights for its survival. Prices are cut to head off competition, but this tactic won’t work indefinitely.

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Operating Vs. Creating

Since the dawn of the first industrial revolution, companies spend their energy and other resources on production, logistics, selling and billing. These are the activities that are supposed to make the company run smoothly.

Managers are focused on operations, sometimes because they don’t know what else to do. This strategy wasn’t so bad back in the day (attending to operations has helped thousands of companies over hundreds of years), but times have changed.

The tools and requirements of an innovative corporation are different from those needed in an environment of continuity.

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The Different Kinds Of Innovation

  • Transformational innovation is the harbinger of major and permanent change.
  • Substantial innovation leads to great big changes, but it is not as groundbreaking as transformational changes. Sometimes substantial innovation comes after transformational innovation, like tremors after an earthquake.
  • Incremental innovation brings smaller, sustaining changes — the sort of ordinary changes that are common in business.

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Discovery Using Divergent Thinking

There are two ways to discover things: divergent thinking and convergent thinking. 

Divergent thinking means zooming out to look at the big picture, examining the entire context of a problem. This process includes three phases.

  • First, search for inconsistencies between current theory and new data. Any anomalies usually represent problems or opportunities.
  • Incubation is next, which is a period of rumination where these anomalies are considered without any preconceived notions.
  • Ultimately, a good idea will be recognized, heralding collision between contradictory information and perspectives.

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Discovery Using Convergent Thinking

Convergent thinking is a process of immersion in details. The situation is broken into its smallest components to find novel ways of bringing the pieces back together again — or perhaps to switch some of the components for new ones.

Creativity is the foundation of all innovation, and the environment is important in fostering creativity. Creative people need conversational skills, observational skills and reflective skills. It’s not easy to blend these skills — in some ways they are in opposition with each other — and ultimately some people are just more creative than others.

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The Gale of Destruction

Change requires us to change our mental models. But it can take companies a long time to overcome cultural lock in. Adjusting to corporate change is like adjusting to terminal illness — the psychological process is similar. There is a sequence of emotions, including denial, anger, bargaining, depression and acceptance, and these emotions interfere with the ability to analyse a situation accurately. And so poor decisions are often made.

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Living In A Constant State Of Flux

People should structure their lives so they have the tools to be professionally successful in a world of constant change. They should aspire to continuous education. They should be ready to make changes in their career direction as needed.

Like innovation, destruction can be incremental, substantial or transformational. Companies face incremental change on a regular basis. Substantial destruction carries risk, but it must be dealt with to remain competitive. Transformational destruction alters the entire firm, leading to permanent change.

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Balancing Destruction and Creation

Companies mostly start out full of creative energy. Eventually they become more rational and make decisions based on careful analysis. At some point, however, they slip into denial that prevents them from seeing that they are becoming uncompetitive. But this trajectory isn’t inevitable. Some companies have successfully escaped from this trap.

When companies mature and focus on operations, they should put some of their attention to innovation and destruction. Some companies do this a little too fast and end up harming themselves, but doing it too slowly will ultimately be just as harmful.

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Continuity Vs Discontinuity

Companies think the name of the game is continuity when they should really embrace discontinuity. The trick is to balance continuity and change, pursue destruction and creation at the same time. It’s hard to get the balance right, and people in the company, the board and the shareholders will resist the destruction of legacy products and departments, at least until it becomes clear that the strategy is a rewarding one.

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Designed to Change

To survive in this rapidly changing environment, companies must act like the market. Not only do they have to change as quickly as the market, but they also must broaden the decision making processes to include more of the collective wisdom of the company. Companies should sustain multiple mental models at one time. There’s more than one thing going on in the market at any given time, after all.

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Leading Creative Destruction

Management committees are often dominated by routine. They believe their mission is to keep operations running smoothly. They look at proposals for new ideas that are brought to them, but they don’t come up with any initiatives of their own.

Managers need to understand the environment in order to see opportunities and dangers. They have to know where the market is going, but it’s not easy to predict future consumer behaviour. It’s also not easy to take care of operations and manage change all at once. Between these two, innovation management suffers.

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Increasing Creation by Tenfold

Established companies that want to stay innovative must master divergent thinking. This is the key to creativity. The objective is to find new ideas at the pace and scale of the market. It’s a process of discovering unmet needs and potential solutions. And it helps to look to the periphery for new ideas, seeing what competitors at the boundaries of your market are doing. Usually innovation occurs out on the edge.

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Discussions To Enable Innovation

There are several tactics that can be used to help stimulate discussion. For example, you can change the context, looking at the problem from a different angle. One way to do this is by including a mix of participants with unique perspectives, perhaps inviting managers from different divisions or even different countries. It’s always good to bounce ideas off someone. You might consider an exercise where the group breaks into pairs and talks over their ideas. Look to create synergy by pairing people together who have different roles and backgrounds.

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Real-World Research

To prepare the team for discussion on one of the issues presented, you might need to do some fairly deep research. For example, managers at Nike go to basketball games or visit schools and meet street basketball players. These activities allow them to understand the needs of their customers so they can bring that understanding with them into the discussion.

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The Corporate World: Control Systems

Corporations have all kinds of control systems, elements that make sure things stay on track (for example, rules and processes, standards, checklists). The control systems in a company can be complex, and can sometimes come in conflict with one another. Control systems can also inhibit performance by reinforcing a tendency towards denial, encouraging simplistic thinking and suppressing creativity. Capital markets don’t behave like this — they meet change without trying to establish dominance over it.

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The Corporate World: Permission

The opposite of control is permission, which means being able to make decisions and act without having to check with upper management. Managers need the freedom to take risks and explore new solutions. But to give permission is to give up control, so it’s hard for people to do, even when they say they’re going to do it. It’s always something of a challenge to strike the right balance between control and permission, but it’s important to find this balance.

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Change Vs Continuity

If change is considered more valuable than continuity, then change will happen. If it’s believed that change will bring less value, then continuity is embraced. Many corporations follow this path. If the values of change and continuity are perceived to be roughly equal, then the tendency is to follow the status quo. Strong leadership, however, can make the case for change.

Leadership is the key to establishing the balance between continuity and change. Leaders can help set the pace and scale of change, ensuring that it matches the rate and scope of change in the market.

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How To Make Company Changes Work

  • Determine what to measure and control. Each level must be empowered to make the change.
  • Measure and control the right things. Don’t exert power just because you can.
  • Make information systems as flexible as possible. Try to be nimble.
  • Give greater permission to experiment. 
  • Use incentives to encourage permission-giving.
  • Taking risks, even when they don’t pan out, should be positively reinforced. Be tolerant of mistakes.
  • Senior management must support change, including making sure junior management knows there will be repercussions for blocking it

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CURATED BY

coab

Education officer at museum

CURATOR'S NOTE

Corporations need to change at the pace and scale of the capital markets in order to stay competitive. This is accomplished not only by creating new businesses and products, but also through paring off functions that no longer facilitate growth.

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