Reading Passage 1
The Cost of Survival
Most corporations aren't managed for change.
By Peter McGrath
In the go-go years of the late 1990s, no economic theorist looked better than Joseph Schumpeter, the Austrian champion of capitalism who died in 1950. His distinction? A theory he called “creative destruction.” The idea was straight-forward: in with the new, out with the old. Companies had life cycles, just as people do. They were born, they grew up. And when a better competitor came along, they died due to capital starvation. It was the way things were, and the way they should be. The markets had no sentiment. Capitalism was relentless, unforgiving.
In their book “Creative Destruction” (367 pages. Doubleday. $27.50)， Richard N. Foster and Sarah Kaplan of the consulting firm McKinsey & Co. apply Schumpeter's logic in the context of a
technology-driven economy. They want their corporate readers to understand the implications of one basic idea: there is an inescapable conflict between the internal needs of a corporation and the total indifference capital markets have for those needs. Managers care desperately about the survival of their companies. Investors don't give a hoot. This was always true, the authors say, but until recently nobody really noticed because of the relatively languid pace of economic change. No more. In the 1920s, when the first Standard & Poor's index was compiled, a listed company had a life expectancy of more than 65 years. In 1998 the annual turnover rate of S&P firms was nearly 10 percent, implying a corporate lifetime of only 10 years.
How does anyone manage in this environment? Foster and Kaplan argue that companies today must embrace “discontinuity,” the idea that everything they have always done is now irrelevant. Consider Intel:' by its top executives' own accounts, the company had to kill its ground-breaking memory-chip business once it became clear that Japanese companies could deliver essentially the same product at a lower price. Intel then moved into the much more lucrative microprocessor business. It was an obvious decision, but one that was hard to make. Memory chips were Intel's core competence. They were at the heart of the company's self-image. The transition was wrenching, said Intel chief Andrew Grove. But as a result, the company survived and prospered
From now forgotten automobile companies like Studebaker to early technology leaders like Wang, the corporate landscape is littered with the bones of companies that couldn't adapt to change. At bottom, say Foster and Kaplan, corporations are managed for survival.“ They presume continuity in the business environment. They fail to introduce new products for fear of cannibalizing current product lines. They turn down acquisition opportunities to keep from diluting earnings. They prize rational decision making and internal control systems. They resist contrary information, and often punish managers who voice it. And all the while, capital markets are dedicated to finding and funding new competitors. Incumbents ignore this fact to their peril: if they don't cannibalize their product lines, someone else will do it for them. Even the greatest of brand names are not immune. As the authors ask rhetorically, would IBM even exist today had it stuck to its core business in mainframe computers? ”Unless the corporation can learn to overcome the natural bias for denial,“ they write, ”it will, in the long term, fail, or at best underperform.
The successful company, Foster and Kaplan conclude, is one that manages for discontinuity. It presumes change. It is comfortable with fluid and even vague decision making. It has relatively flat hierarchies. In short, it adopts the fearlessness of capital markets themselves. And it doesn't have to be a start-up, or even a young company. Typical success stories include Coming, which shifted its business from glass to optical fiber just in time to capture a growing market, and General Electric, which dumped one fifth of its asset base in the first four years of Jack Welch's tenure as CEO.
Not long ago, it was fashionable to liken business to warfare. Executives were reading Sun-tm, Machiavelli and Clausewitz for guidance on how to overcome the competition. But business differs from war in one vital respect. In war the advantage lies with the defense. In the New Economy, as Foster and Kaplan make clear, it belongs to the attacker.