Creative Destruction and Tackling Change

Introduction
In his 1962 book, Capitalism, Socialism and Democracy1 Joseph Schumpeter suggests
that most business leaders believe that the market economy sustains existing societal
structures when, in reality, it creates and destroys them. Having read Schumpeters
theory, two McKinsey consultants, Richard Foster and Sarah Kaplan, set about applying
its fundamentals to corporate change.2 Their conclusions were both drastic and thought
provoking.
Foster and Kaplan looked at the wide variety of organisations McKinsey and Co have
worked with over the years (in fact researching the performance of over 1000
companies over nearly 40 years). In doing so, they were struck by one thing; not even
the most renowned and efficient companies seem able to sustain a position at the top of
the market for more than fifteen years.
They came to the conclusion that organisations need to behave like capital markets,
constantly creating and destroying new business, setting out to find new competitive
advantage and tackling cultural resistance to change. They need to create and destroy
at the speed of the markets without losing control of the running of the business.
The authors also suggest that the main barrier to this state is human and organisational
resistance. This resistance helps to explain why change leaders are often dissatisfied
with the speed at which their organisations change and innovate.
There is also a conflict between the smooth day-to-day running of the business and the
need to innovate. Many changes may have to be considered including acquisition, the
selling-off of traditional assets and altering the distribution and supply chains.
In what seems like an incredibly broad statement, the authors claim that no firm will
survive unless it completely abandons the concept of continuity.
1.

Cultural lock-in

As mentioned earlier, human resistance or cultural lock-in is a huge threat to creative

destruction. The authors define lock-in formally as the inability to change in the face of
clear market threats. They claim that processes, value and culture stiffen to the point
where the organisation cannot change. Once lock-in sets in, decline is inevitable.
Foster and Kaplan claim that the following are three common signs of cultural lock-in:

fear of expansions and acquisitions

fear of losing market share

inability to deliver to previous customer care standards

The point is that the market shares none of these fears.

1
2

Joseph Schumpeter, Capitalism, Socialism and Democracy (HarperCollins, 1962).

Richard Foster & Sarah Kaplan, Creative Destruction (Doubleday, 2001).

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Creative Destruction and Tackling Change

2.

Causes of lock-in

Lock-in is caused by the formation of mental models, unwritten rules that govern how an
organisation behaves. These are the fundamental behaviours and values of an
organisation.
Mental models are most obviously manifested in central corporate controls such as
capital and personnel processes. While these do serve a purpose, they can trigger
defensive routines such as the failure to challenge existing behaviour and the failure to
challenge superiors.
These systems are built on convergent thinking. Convergent thinking focuses on clear
problems. It thrives on the unambiguous. Convergent thinking is great for incremental
change. However, the authors suggest that it is wholly unsuited to transformational
change.
What is required instead is divergent thinking which focuses on dialogue, refection and
careful observation.
3.

How markets enable change

Markets, on the other hand, have no mental models. With the possible exception of
government intervention, markets simply do what is efficient. As a result, they innovate
a great deal more.
The only firms that the authors studied who continually succeeded in behaving like
markets are venture capitalists and principal investing firms. They look at intermediate
as opposed to long-term value creation.
In effect, they do the two things that markets do better than firms:

Creation they allow firms or new ways of doing business to enter with much
greater ease

Destruction they eliminate the inefficient ruthlessly

4.

What should be done?

The authors make the following recommendations:

control the selection of employees carefully, but not their actions once they have
been employed

careful attention to measurement of trends

willingness to remove people, departments or products when they are no longer

efficient

control systems built to increase the rate of creative destruction

control of as few things as possible

less intermediaries

increased speed on all actions and decisions

behave like the market.

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