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.
