Confronting Reality

This week I posted a link to one of the most important statistics that a business leader should know: the fact that the half-life of most Fortune 500 companies is between 40 and 50 years.

A commenter, Shawn, made me appreciate turning on comments by writing:

So I guess the big question I have is whether or not this constant turnover of big companies is a good thing or a bad thing? It’s not like when a company dies that that economic activity is lost forever, it just moves somewhere else.

Insightful.

I’m actually a huge fan of the concept of Creative Destruction. It’s the perpetual cycle that lets amazing startups take out entrenched incumbents and completely redefine industries. The problem is that as a manager, it’s your job to lead your company to success over time. Over time companies die, so therefore, how can you stop your company from dying?

The question a manager should ask themselves is “What am I doing to ensure that the process of creative destruction perpetuates itself within the walls of my company?”1

Creative Destruction

Joseph Schumpeter coined “Creative Destruction” as the life cycle of economic activity where companies are born and die over time.

Creative Destruction is the force that sustains long-term economic growth through radical innovation. There’s a bit of a downside that comes with creative destruction: the fact that it completely obliterates the value of established companies that enjoyed a certain degree of monopoly power. This is what causes continuous progress and improves the standards of living for everyone.

The problem faced by businesses is that it’s scary to take a multi-million dollar business and throw it out the window to start over. Heck, I don’t know that I’d have the guts to do it if I were in the position of many CEOs.

From a big picture point of view, Creative Destruction is great. For an individual company, it’s the single most terrifying thing that can happen.

Zombie Economics

Merlin Mann wrote:

Here’s my point: businesses don’t get to pick the timetable for when their preferred model takes a permanent dirt nap.

The process of creative destruction can be artificially stopped. It’s not healthy and can lead to a lot of lost money in the long run. For example, in the airline industry many companies lease their planes. That means that when an airline like US Airways goes bankrupt twice (and is resurrected each time), there are an abundance of jets from these leasing companies. Often times they’ll help reorganize the bankrupt airline and relaunch it with nearly free lease contracts. This props up the airline to sustain itself (the leasing company) with an unsustainable business model.

Businesses can either fight the shifts that come with time, or do the right thing: adjust their business model to take advantage of it. The successful ones, the IBMs of the world, are the ones that can readjust to survive. The ones who don’t are going to fail.

Strategic Agility

While some companies are able to temporarily shelter themselves from the demand for strategic agility, others thrive on agility.

It’s an agility that allows them to not only learn to make fast turns and transform themselves without losing momentum but also instills a desire of the CEOs and top teams to have higher ambitions: to make companies permanently and regularly able to take advantage of change and disruption. This should be a process where nothing can be taken for granted, where no competitive edge may last, and where innovation and constant development of new capabilities are the only source of advantage.

Lou Gerstner said it best when he took over IBM in the early 1990s and turned them around into the behemoth they are today:

“Move fast. If we make mistakes, let them be because we are too fast rather than too slow.”

History has given us too many examples of companies that were destroyed by their own hubris due to years of market domination. What is your company doing to ensure that innovation is not just a process, but a culture?

Learn to confront reality. Admit when your business model doesn’t work, and then have some creativity to find ways to monetize the shifting demographics. Don’t make a carbon copy of your existing business in a new medium. Be willing to to throw it out and start over.

Bossidy & Charan in their excellent book, Confronting Reality, ask the question: “What’s the most fundamental element of any business?”

Answer: whether you can realistically make the money you hope to in the game you are playing.

Peter Drucker once pointed out that new business models are seldom pioneered by old companies because old companies loath to cannibalize their existing businesses. Creative Destruction is good, but to change the world twice like Apple did2, you’re going to have to confront reality.

  1. Seriously, I don’t mean this in a protectionist way. If the answer to this question is anything that protects your existing business model, you’re doing it wrong. []
  2. First with the PC, then with the iPhone []
May 5, 2011