posted by Michelle Harner
In my opening post, I referenced the slow pace of change and how it can be exceedingly painful for individual consumers. I want to follow up on that concept in the business context, where slow change—or the failure to change at all—can be fatal.
Consider, for example, Borders, which recently announced that it was suspending payments to vendors and trying to refinance its debt obligations (see here and here). Borders, like its competitor Barnes & Noble, is struggling to compete with big box retailers that offer steep discounts on traditional books and the growing popularity of e-Books (see here, here and here). Also like many retailers, Borders was hit hard by the economic recession (see here).
Some may say that Borders is a victim of the recession and creative destruction. And that may, in part, be accurate. (For interesting perspectives on the utility of recessions and creative destruction, see here and here.) But anyone who follows the retail industry or is an avid reader had some sense that this was coming (see here, here and here). So why didn’t Borders’ management? Or rather, why didn’t they react more quickly to the changing market and economy?
As a former corporate restructuring lawyer, I often ponder this and similar questions. Why do managers try so hard to salvage rather than innovate? And why is it so hard for them to admit that change—perhaps both financial and operational innovation—is necessary? (For a discussion of the denial often accompanying financial distress, see here.)
Admittedly, it is easy to throw out questions from the cheap seats and much harder to make the calls from the sidelines (or boardroom). I have worked with, and truly appreciate the challenges and difficult decisions faced by, the management of troubled companies. I am not trying to assess blame; I am simply suggesting that we recast creative destruction as creative reconstruction.
Creative reconstruction is not my phrase. Others have used it in a variety of ways, including Chrysler’s CEO, Sergio Marchionne (see here). I use the phrase to describe a company seizing upon the change agents typically associated with creative destruction to reduce inefficiencies or modernize operations. Rather than those change agents destroying the company, they motivate the company to reinvent itself. (For another perspective on creative destruction and firm success, see here.) All too often, those outside of the restructuring community view corporate reorganizations solely as balance sheet restructurings—only to prolong the inevitable. Corporate America and the U.S. bankruptcy system can and should do better (see here).
I will reflect on whether creative reconstruction is working for Chrysler (and GM) in a future post, as well as its prospects under the resolution authority contemplated by the Dodd-Frank Act. (For another perspective on creative destruction and the Dodd-Frank Act, see here.) The concept may not work for every company; some companies should fail. Nevertheless, if the approach encourages troubled companies to analyze their problems sooner and consider implementing change more quickly, it is worth a try.