Corporations need to change 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 by paring off functions that no longer facilitate growth.
In this book, the authors use historical data to demonstrate how this theory of creative destruction plays out in capital markets.
Control processes
Operational control processes, compensation systems, and capital allocation are examples of control processes. A company with thin margins will work hard to keep costs under control on a daily basis. A company that relies on innovation is more likely to give engineers and scientists more leeway in developing new products.
These components comprise the company’s architecture, and they are referred to collectively as MIDAS (Models, Information, Decisions, Actions, and Systems of Control).
Cultural isolation
The most difficult barriers to change are mental models. While such models are useful, they can also be problematic. Our worldview is based on experience, which means it is backward looking. When things change, we fall back on old models.
We must occasionally modify our models. It can be difficult to let go of old beliefs, but sticking with an incorrect model is a big mistake.
The making of a decision
Planning systems, calendar management, agenda setting, decision criteria, and so on are all part of the decision-making process. These systems must be compatible with mental models.
Consumers and retailers, for example, typically base their decisions on seasonal considerations, determining when to increase inventory and when to lower prices to decrease inventory.
Continuity vs. Discontinuity
Companies believe that continuity is the name of the game when, in fact, discontinuity is the name of the game.
The trick is to strike a balance between continuity and change, as well as to pursue both destruction and creation at the same time. People in the company, the board, and the shareholders will, predictably, resist the destruction of legacy products and departments, at least until it is clear that the strategy is profitable.
Balancing destruction and creation
Most businesses begin with a lot of creative energy. They eventually become more rational and make decisions based on careful consideration.
Companies should devote some of their attention to innovation and destruction as they mature and focus on operations. Some businesses move too quickly and end up hurting themselves, but moving too slowly is just as dangerous.
The four stages of a company
- Foundation: Newly established businesses are focused on opportunity.
- Growth: Companies that make it through the foundation stage typically experience rapid growth.
- Dominate: At this stage, a company will be considered successful by both those outside of the company and those within it.
- Cultural Lock-In: The company is fighting for its very survival. Prices are reduced to avoid competition, but this strategy will not last forever.
Change Vs Continuity
Change will occur if it is deemed more valuable than continuity. Venture capital firms are one type of organisation that embraces change.
Leadership is essential for striking a balance between continuity and change. Leaders can help set the pace and scale of change, ensuring that it corresponds to the market’s rate and scope of change.
Operating vs. Creating
Companies have spent their energy and other resources on production, logistics, selling, and billing since the beginning of the first industrial revolution. These are the tasks that are supposed to keep the company running smoothly. Managers are often preoccupied with operations because they don’t know what else to do. This strategy wasn’t all that bad back then, but times have changed.
Clinging to old habits
Managers believe the challenge is to keep existing operations running smoothly while fostering an environment in which new ideas can thrive and old ones can die. The world has changed; continuity no longer matters as much as innovation.
Even when their very survival is threatened, some businesses refuse to make the necessary changes. This “cultural lock-in” is a clear indication of a company’s decline.
How To Make Company Changes Work: Part 2
Allow for more experimentation. The corporation should allow for the exploration and pursuit of goals that correspond to the market’s pace and scale.
In order to encourage permission-giving, use incentives. Taking risks, even if they don’t pay off, should be encouraged. Be forgiving of errors.
Survival and performance in a disruptive environment
Sixty-one of the companies listed on the Forbes 100 list in 1917 no longer exist 70 years later. Only 18 companies remained in the top 100, and none of them were particularly strong performers. Looking at the S&P 500 over the last 50 years yields similar results: few companies survive over time, and those that do aren’t great performers.
Discontinuity is not a new phenomenon, but the rate of discontinuity has increased, owing primarily to technological advancements. Businesses must adapt to the new paradigm.
Designed to Change
Companies must act like the market in order to survive in this rapidly changing environment. They must not only change as quickly as the market, but they must also broaden their decision-making processes to include more of the company’s collective wisdom.
Businesses should maintain multiple mental models at the same time. After all, there is more than one thing going on in the market at any given time.
Increasing Creation by Tenfold
Companies that want to remain innovative must master divergent thinking. This is the key to being creative. The goal is to generate new ideas at the market’s pace and scale. It is a process of identifying unmet needs and possible solutions. It also helps to look to the outskirts for new ideas, observing what competitors on the edges of your market are doing. Typically, innovation occurs on the periphery.
Discovery using Divergent Thinking
There are two approaches to learning: divergent thinking and convergent thinking.
Divergent thinking entails zooming out to examine the big picture or the entire context of a problem.
First, look for discrepancies between the current theory and new data. Anomalies typically represent either problems or opportunities.
A good idea will eventually be recognized, heralding a collision of contradictory information and perspectives.
Discovery using Convergent Thinking
Convergent thinking is the process of becoming immersed in specifics. The situation is broken down into its smallest components in order to find novel ways to put the pieces back together—or perhaps to replace some of the components with new ones.
Creativity is the foundation of all innovation, and the environment has a significant impact on creativity. Conversational skills, observational skills, and reflective skills are required for creative people.
What is Creative Destruction?
There are several reasons for discontinuity. Essentially, change occurs. Change is not new, but the rate of change has increased in the last 90 years or so.
Capitalism is built on creative disruption. Discontinuities cause underperformance and overperformance. Companies must keep up with market changes in order to outperform them.
How To Make Company Changes Work: Part 1
Decide what you want to measure and control. Any organisation has different levels, and each level must be empowered to make a change.
Control and measure the right things. Don’t wield power simply because you can.
Ensure that information systems are as adaptable as possible. Make an effort to be agile.
The gale of destruction
Change necessitates a shift in our mental models. However, it can take a long time for businesses to overcome cultural lock-in. The psychological process of adjusting to corporate change is similar to that of adjusting to a terminal illness.
There is an emotional sequence that includes denial, anger, bargaining, depression, and acceptance, and these emotions interfere with the ability to accurately analyze a situation. Poor decisions are the result.
Living in a constant state of flux
People should plan their lives so that they have the tools they need to be professionally successful in a world that is constantly changing.
Destruction, like innovation, can be incremental, significant, or transformational. Companies are constantly subjected to incremental change.
Transformational destruction transforms the entire organisation, resulting in permanent change.
Leading to Creative Destruction
Routine often takes precedence in management committees. Their mission, they believe, is to keep operations running smoothly. They don’t take any initiative of their own.
Managers must understand the environment in order to identify opportunities and risks. They must understand where the market is headed, but forecasting future consumer behaviour is difficult.
The different kinds of innovation
Transformational innovation heralds significant and long-term change.
Substantial innovation results in large-scale changes, but it is not as revolutionary as transformational change. Significant innovation can follow transformational innovation in the same way that tremors follow an earthquake.
