Creative Destruction Whips through Corporate America

Transcription

1 Excutiv Bifing Wint 2012 Cativ Dstuction Whips though Copoat Amica To suviv and thiv businss lads must cat, opat, and tad without losing contol

2 Av agc ompanyl i f s panons &PI nd xi ny a s( ol l i ng7y aav ag ) P oj consba s d onc u ntda t a

3 Cativ Dstuction Whips though Copoat Amica Lifspans of top companis a shinking, accoding to an Innosight study of th S&P 500 Indx A s 2011 cam to a clos, vitually vy nws outlt in th wold mad not of th fact that th valu of th S&P 500 hadly changd with th indx dopping 0.4% fo th ya. Yt whil th makt s pfomanc is always wll known, what aly gts potd is that th makup of th indx itslf has bn changing adically. Ov th past coupl of yas, a numb of iconic Amican companis among thm Eastman Kodak (2010), Radio Shack (2011) and Th Nw Yok Tims (2010) w movd fom th S&P 500 Indx, th baomt list of companis with th lagst U.S. stock makt capitalizations. This kind of chun happns gulaly. Kodak was placd by a cloud computing fim, whil th NY Tims Co. was placd by Ntflix. If moval fom th S&P 500 is not du to an a c q u i s i t i o n, i t c a n b a j o l t t h a t mphasizs th ugncy of a tunaound ffot (as with th NY Tims) o it can b a plud to dlisting and th that of bankuptcy (as with Kodak.) Th moval in 2003 of Amican Ailins pant AMR fom th S&P 500 was a plud to th dlisting of AMR on th v of its Chapt 11 dclaation. S&P 500 Chun Ov th Past Dcad Sampl companis that hav ntd and xitd th indx sinc 2002 Entd th indx: Exitd th indx: Excu'v Bifing Wint

4 In 2011, a total of 23 companis w movd fom th list, ith du to dclins in makt valu (fo instanc, Radio Shack s stock no long qualifid as of Jun) o though an acquisition (fo instanc, National Smiconducto was bought by Txas Instumnts in Sptmb). On avag, an S&P 500 company is now bing placd about onc vy two wks. And th chun at of companis has bn acclating ov tim. Accoding to th Innosight study of almost a cntuy s woth of makt data, copoations in th S&P 500 in 1958 lastd in th indx fo 61 yas, on avag. By 1980, th avag tnu had shunk to about 25 yas. Today, it stands at just 18 yas basd on svn ya olling avags. Th Tajctoy of Cativ Dstuction Th tm cativ dstuction is widly cditd to th Austian-Amican conomist Josph Schumpt ( ). Schumpt studid th fomation and bankuptcy of companis in Euop and th Unitd Stats. H concludd that conomic pogss, in capitalist socity, mans tumoil. Richad Fost, in his 2001 book Cativ Dstuction, applid Schumpt s thoy to th modn pactics of managmnt and innovation. Accoding to Fost, th lif span of a copoation is dtmind by balancing th managmnt impativs: 1) unning opations ffctivly, 2) cating nw businsss which mt custom nds, and 3) shdding businss that onc might hav bn co but now no long mt company standads fo gowth and tun. Th poblm is that th innovation that is ndd to cat significant nw businsss can oftn dictly conflict with th opational ffctivnss of th cunt businss. Und ths cicumstancs lag companis slowly fall bhind th pac of Ultimatly, th challng facd by all companis is to gow at o abov th pac of thi industy without losing contol of thi opations. Th Innosight study shows that vy fw companis achiv this goal. chang of th conomy. Most companis nd up succumbing to th sin call of continuing on thi cunt cous ath than managing fo long tm volution of thi poduct lins to kp pac with th ovall changs in th conomy. Ultimatly, th challng facd by all companis is to gow at o abov th pac of thi industy without losing contol of thi opations. Th Innosight study shows that vy fw companis achiv this goal. Most copoations fad, maning that most fims s thi pfomanc and thi stock pic with as nw tchnologis and statups with nw businss modls nt th conomy. As Kodak and oths illustat, fad is vy difficult fo managmnt to fight. Yt it is woth th tim and ffot of copoat ladship to undstand how to fight th fad that will vntually lad to a fim s dmis. Ov th past dcad, about half of th S&P 500 has bn placd. This chat on pag 3 shows sampl copoations that hav ntd th indx and oths that hav xitd du to a dop in makt valu o via an acquisition o pivat quity buyout. Excu'v Bifing Wint

5 How to Cat, Opat, and Tad at th Pac and Scal of th Makt Th takaway lsson is that a company must apply makt pincipls to itslf. In oth wods, th only way to fight fad is to mbac cativ dstuction at you company, bfo th makt dos it fo you. Makts outpfom companis thy always hav, with only occasional xcptions, says Fost. And you want to b on of th xcptions. Th fist stp in th pocss of mbacing cativ dstuction is to nvision th copoation as if it is a makt itslf: on that must cat, opat and tad its assts without losing contol of its opations. This must b don at th pac and scal of th ovall makt. An xampl of on of th fw companis that is hanssing cativ dstuction though both cation and tading is Poct & Gambl. P&G s ability to innovat is wll known. Lss wll known is that th consum poducts giant dcidd in th aly pat of th last dcad to divst, o tad, its food poduct bands fo instanc slling Jif, Cisco and Folgs to th J.M. Smuck Co. Rcntly, it sold th Pingls band fo $2.7 billion to Kllogg. Th $82 billion company has bn dploying its fd up capital and soucs to innovat its co psonal ca and houshold bands, as wll as nt nw aas of businss. All this is happning whil P&G maintains a vy tight contol of its magins and its capital. This statgy of cat, opat, tad has hlpd P&G gow and outpac ivals in its industy. Impoving Pfomanc via Cat, Opat, and Tad Sinc 2002, th lag companis that hav mbacd th modl of cat, opat & tad without losing contol hav not only suvivd but hav outpacd th S&P 500 Indx by a wid magin Stock Makt pfomanc fom Jan 2, 2002 to Jan. 3, % 100% 80% 60% 40% 20% Not: J&J and P&G hav bn clints of Innosight at vaious stags ov th past 10 yas. Excu'v Bifing Wint

6 Oth companis that hav mbacd th cat, opat, and tad without losing contol statgy includ IBM, GE and Johnson & Johnson. Each of ths companis cat, oftn by buying small companis in th makt that a pooly positiond to xpand thi poducts intnationally. Thy also f up capital by divsting businss units at th sam tim all whil maintaining contol of thi magins and tuns. Fost commnds that companis us th makt as thi bnchmak: If th S&P is tuning ov 5% of its companis in a givn ya, a copoation should sk to add 5% to its sals fom nw businsss whil also undtaking th vn mo difficult task of shdding 5% of its cunt sals though divstitu. Th Innosight study shows that such companis not only suviv long, but thy can also outpac th gowth of th makt fo an xtndd piod of tim. Dawing lssons fom ths makt lads, Fost suggsts that th CEO and Excutiv Committ ask thmslvs th qustions: 1) A ou opations wold class? If not, th fist od of businss is to bing cunt opations to wold class lvls. Undtaking th mo dmanding tasks of cating and tading bfo opational xcllnc is stablishd is a fool s and. 2) How fast do w hav to chang to maintain ou position within ou industy? Th pac of chang vais by industy. That said, if on s industy is changing mo slowly than th pac of chang in th conomy, that industy itslf will xpinc gadual fad and oftn placmnt by low cost intnational comptitos. Doubts only hav to think about th stl, auto o pap businsss to find xampls. 3) Do ou contol systms wok ffctivly? Makts outpfom companis thy always hav, with only occasional xcptions, says Dick Fost. And you want to b on of th xcptions. Contol dos not only man financial contol. It also mans opational contols such as manufactuing and sals as wll as social contol, th standads by which businss is don. Companis that los ths standads almost nv com back fom th bink of toubl. Th Outlook fo 2012 and Byond Th Innosight study suggsts that th pac of cativ dstuction will acclat futh as th conomic covy picks up stam, spcially if th stock makt pfoms btt than it did in That s bcaus mgs and acquisitions tnd to incas whn th conomy is gowing, lading to high tuns on quity. Whn th makt fo dals and IPOs is dpssd, as it has bn fo sval yas, dmand fo cativ dstuction builds up. This pnt-up ntpnuial ngy and dmand fo dals typically gts unlashd whn th conomy is stong. In addition, ths phnomna do not only tak plac within th Unitd Stats but globally. As w had into a tim of stong gowth coupld with incas tchnological chang, th mssag fo snio xcutivs is cla: if you aim to maintain contol of you copoation and dliv valu to shaholds and customs, you must mbac cativ dstuction ath than wait to bcom a victim of this unstoppabl foc. Fo mo infomation on this study, o to intviw Richad Fost on th sults, plas visit o contact: colofson@innosight.com Excu'v Bifing Wint