Monday, March 26, 2007

Creative Destruction

By HILFRA TANDY (Editor, Chemical Matters)
The unbearable transience of everything.

McKinsey’s Richard Foster and Sarah Kaplan in Creative Destruction (1) note that US companies established and entering the S&P 90 in the 1920s and 1930s could expect to remain on the list for over 65 years. By the late 1990s, the turnover rate of the S&P 500 was around 10% implying an average lifetime on the list of just 10 years.

Foster and Kaplan - writing in 2001 - forecast, “no more than a third of today’s major corporations will survive in an economically important way over the next twenty-five years.”

About a third of the chemical industry’s top 30 revenue generators have gone submarine since 1980; essentially taken-out in what economist Joseph Schumpeter dubbed “the perennial gale of creative destruction” in his seminal 1942 Capitalism Socialism and Democracy (2).

Few have surpassed either the articulate verve or insight that Schumpeter brings to a strategic issue that - 65 years on - preoccupies the corridors of corporate America and Europe. Industrial mutation, the process that “incessantly revolutionizes the economic structure from within (Schumpeter’s italics), incessantly destroying the old ones, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

If you accept that sustained corporate success is the exception, the fact that five of 1980’s top chemical industry revenue generators still dominate the top 10 league is in itself pretty exceptional. Half of 1980’s top 10 -Dow (founded 1897), BASF (1865), Shell (1927), Du Pont (1802) and Bayer (1865) - retain their position in today’s top 10. Exxon forebear Standard Oil (New Jersey) pioneered early petrochemical production in the late 1920s and the 1999 merger with Mobil added 25% to chemical sales underpinning its ascent into the top five chemical revenue-spinners.

Some of these organisations appear to have the knack for developing business models and organisational skills (in BASF’s case across a broad - almost sprawling - portfolio), of nurturing businesses that - at first blush - undermine the very businesses on which their success was built.

Consider this. “But in capitalist reality as distinguished from its textbook picture, it is not (price) competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization - competition which commands a decisive cost or quality advantage which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.”

Schumpeter has, albeit by default, perfectly characterised the dilemma facing established chemical companies. His analysis is apposite to the whole panoply of chemical businesses — commodity or speciality producers. Embracing creative destruction, pro-active portfolio management, creating and breaking paradigms rather than tenaciously hanging on to existing ones is the too often ignored responsibility of management.


Creative Destruction - Why companies that are built to last underperform the market — and how to successfully transform them by Richard Foster and Sarah Kaplan, published 2001 by Doubleday.

Capitalism Socialism and Democracy, J.A. Schumpeter (first published in Britain in 1943), Unwin University Books. Chapter V11 The Process of Creative Destruction in Part 11 Can Capitalism Survive?


Anna said...

Recent rumours of a Dow-Reliance (India) alliance and takeovers by Chinese (Sinopec) and Mideast companies (Sabic) demonstrate that anything is possible and survival is not a given for the old-world companies. The quick ascent of these new companies contrasts with the demise of names such as Hoechst, Sandoz, Rhone-Poulenc, Monsanto, ICI and others.
Where will it end?

ilanit said...

Just to put matters in perspective: Los Angeles private equity and buyout group, Blackstone, is valued at around US$40 billion. It has US$78.7 billion of assets under management. Another US private equity firm, the Carlyle Group, has US$54.5 billion under management and is now raising a US$15 billion leveraged buyout fund in the US.

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