Creative Destruction.

• Author: RILEY, MICHAEL J.
• Position: Review

Richard Foster

Sarah Kaplan

Published by Doubleday/Currency Books, New York, 367 pages, $27.50

THIS BOOK, Creative Destruction: Why Companies That Are Built to Last Underperform the Market -- and How to Successfully Transform Them, needs the long title since Amazon.com lists two other popular works with the same first two words. Richard Foster, a senior consultant from the prestigious McKinsey & Company firm, and Sarah Kaplan, an ex-McKinsey specialist in innovation, produce advice that is surprising in its wisdom and understanding of what drives breakthrough performance.

The first 24 pages are packed with quotes and logic that are well worth the $27.50 cover price. The remaining 11 chapters explain the concepts using examples, stories, and enough graphs to make a math major ecstatic.

"Creative Destruction" is their description of what has been fueling the boom in the U.S. economy. New companies attack established firms at an ever-increasing rate and create wealth as they drive older firms into bankruptcy, sale/merger, or restructuring. These new entrants change the world and older firms need to manage differently than in the past. Foster and Kaplan tell us that "In the '20s and '30s...a new member of the S&P 90 [its first index] could expect to remain on the list, on average, for more than 65 years. In 1998...an average lifetime on the list (was) 10 years."

The authors praise divergent thinkers as necessary to take advantage of "discontinuities" in the market. Divergent thinking "focuses on broadening -- diverging -- the context of decision making. It is initially more concerned with questions than getting to the answer in the fastest possible way.... We refer to these three skills -- conversation, observation and reflection -- as the COR skills of divergent thinking." In my experience, the truly great board members often exhibit these skills.

The skills of the venture capitalist have produced the best returns in the 40 years, surpassing all of the best companies. Several characteristics make the difference: the time horizon (four to seven years); the incentive systems used; the relative freedom and lack of traditional controls given to the CEO of the company; and the strong control of the supply of cash to fund each stage. "Control what you must, not what you can" suggest the authors.

The reasons that companies fail to innovate internally are that they apply the reverse. They do the wrong things: focus too short -- 18 months -- for...