What explains the decline of once successful, even highly innovative companies such as Kodak, Nokia and so many others? The question is still relevant, and to find an answer we can be inspired by the work of historian Arnold Toynbee, who attributes the declines to an erosion of creative capacity. How does that happen?
Toynbee is the famous author of History, a monumental 6,000-page book on the history of civilizations. Fortunately, there is an abridged version that allows you to capture the essence of the author’s erudition and virtuosity in just… 1,200 pages. According to him, a civilization grows when its elite generates internal and external support through its creative capacity. It ceases to grow when a rupture occurs and that elite ceases to be creative and is gradually transformed into a dominant minority that operates by a logic of control. When the logic shifts from adherence to control, the unity of civilization breaks down and two types of what he calls the proletariat appear, i.e., two groups that no longer feel part of the whole: an internal group (dissident) and an external group (barbarians).
Interestingly, Toynbee notes that the effects of this breakdown are not immediately visible: civilization can continue for quite a long time on its own, so to speak, even benefiting from the efficiency that results from elite domination. These are the three main points of Toynbee’s thesis:
1. The source of decline (breakdown) is the loss of the creative capacity of the civilization;
2. The creative elite gradually gives way to a dominant minority, i.e., civilization moves from a logic of compliance to a logic of control;
3. The effects of the breakdown in performance are not immediately visible. Sometimes they appear a long time later.
Decline of organizations
We can apply this thesis to business. In this context, we can define creative capacity, broadly speaking, as the ability to successfully introduce radically new products and services (defined in terms of diffusion, profitability, and volume). Performance, on the other hand, is defined in classical economic terms: sales, profit, return on capital, etc. When we combine creativity and performance, we have four possible scenarios:
Case 1: Companies that are creative but not performant. Typical examples are start-ups (some of which are not yet successful).
Case 2: Companies that are both creative and high performing; this is the ideal state. Amazon, Tesla, Apple, and Netflix fall into this category today.
Case 3: Companies that are still high-performing but have stopped being creative. This was the case, for example, with Microsoft in 2012, which was still posting record profits, but many of its new products were flops (especially mobile and social networking).
Case 4: Companies that are no longer creative or performing, and for which the challenge is to turn around and avoid death. This was the case with Apple in 1996, Kodak in 2010, and IBM today.
Rise of the dominant minority
The second point concerns the transformation of the creative elite into the dominant minority. Any growing organization must implement management systems that structure its activity. These systems, by definition, rigidify the functioning of the company that implements them. At the same time, the organization recruits managers who gradually transform the entrepreneurial spirit into a managerial one. This phenomenon is also accompanied by a growing compliance with institutional norms, especially if the company is listed: sensitivity to analysts’ recommendations, management fashions, and so on. The introduction of an IT system such as SAP is generally a further step towards rigidity. In the short term, these developments are beneficial: the organization is better managed. In the long run, however, the rigidity of systems and culture gradually eliminates the ability to innovate and erodes creativity. I recently spoke with a senior executive of a large SME who described with great concern how the entrepreneurial spirit in his company was gradually disappearing. Innovation was now entirely driven by the business units – a guarantee to avoid any disruptive innovation; and any innovative project now had to pass the hurdle of a business case with precise financial projections. As we all know, only incremental innovation can pass this hurdle. Creative capacity was stifled by the – a priori rational – demand for measurement and predictability.
The third point of Toynbee’s thesis concerns the time lag between the collapse and its effects. To what, for example, can we attribute the decline of General Motors that led to its bankruptcy in 2009? The rise in oil prices in 2008? The Japanese invasion in the 1970s? Some authors even trace the cause back to an organizational decision made by a new CEO in… 1958. In that year, the directors of the company’s various divisions were removed from the Executive Committee, confirming the separation of strategic and operational functions. From then on, strategy was developed with diminishing knowledge of the field, while the field was merely the recipient of strategic decisions ill-adapted to local realities: the creative and operational dynamic was broken. This was the source of the company’s early failures. In the same way, Kodak was the darling of the stock market in the 1990s because of its excellent financial performance, even though its creative core had been exhausted; a kind of “supernova” effect.
Of course, there are limits to applying a theory from one field to another, but this exercise helps us better understand the phenomenon of an organization’s decline if we analyze it as a loss of creative capacity.
Why the loss of creative capacity?
What could be the source of such a loss? Perhaps in the people who are hired in companies. It is an article of faith taught in all business schools that entrepreneurs must quickly make way for professional managers once the company begins to grow. Unfortunately, this is the surest way to replace the creative elite with a dominant minority. Basically, the question raised by Toynbee’s theory in the field of organization is the question of corporate governance and, above all, the question of recruiting its managerial elite. What kind of managers do we want so that the necessary efficiency does not rhyme with collapse? We also need to think about how to train these managers so that they are not agents of domination and control, but agents of creation within the companies they join. Henry Mintzberg, one of the most respected management researchers, has long expressed skepticism about management training, most notably in a prescient 2007 article (“How productivity killed the American enterprise”): “A 2005 OECD report found a ‘significant decline’ in American R&D intensity. America built its economy on its ability to innovate – to explore. American engineers were admired around the world. By 2008, as MBAs, financiers and lawyers completed their takeover of American industry, all that exploration had turned to exploitation.” This is overly pessimistic, as American business is still quite innovative, but it contains a grain of truth.
Clayton Christensen, a leading authority on innovation, shares this analysis, believing, for example, that Sony’s decline was the result of the retirement in the 1980s of its founder, Morita, an engineer, and his replacement by an army of MBAs well versed in the techniques of management conceived as a means of controlling one’s environment.
Toynbee’s insights into the rise and fall of civilizations offer valuable parallels to the dynamics of organizations. The erosion of creative capacity within organizations, like the transformation of a creative elite into a dominant minority, can lead to decline. This interplay between creativity, performance, and control can be observed in scenarios ranging from start-ups to industry giants. The time lag between collapse and its effects resonates throughout the business world, underscoring the importance of timely intervention. Reevaluating hiring practices and leadership training is one way to avoid this fate. Ensuring that leadership fosters creativity rather than control is essential to sustaining organizational vitality. By drawing lessons from the past and applying them to today’s business context, we can avoid the stagnation that has befallen many once-successful companies throughout history.
📖 This article is an excerpt from my book A Manager’s Guide to Disruptive Innovation
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🇫🇷French version of this article here.
[Updated August, 2023]