(FORTUNE Magazine) – Okay, so it's unlikely some dot-com startup is going to eat your lunch. And it turns out that the Internet was made for big companies after all. So what? None of this changes the fact that in virtually every industry, newcomers are responsible for most of the wealth created over the past decade. The battle was never between the new economy and the old, nor between the digital and the analog. The struggle has always been between the vanguard and the old guard, between imagination and momentum, unconventional thinking and unthinking ritual. And in recent years the balance of power has shifted even more decisively in favor of the unorthodox.

Take the computer industry. At the end of 2000, the combined market value of U.S.-based computer companies (hardware and software) stood at $2 trillion, up from a comparatively measly $150 billion a decade earlier. From 1990 to 2000, Oracle's market cap as a percentage of the industry's total market value, what I term "share of wealth," zoomed from 0.7% to 8.1%. Cisco came from nowhere to grab a 13.7% share of the market. Microsoft's share of wealth grew from 5.4% to 11.5%, and EMC's from nothing to 7.2%. These upstarts stole right from the veterans: IBM's market cap accounted for more than 40% of the computer industry total in 1990; by the end of the decade it was at 8%. Hewlett Packard's share shrank from 5.5% to 3.2%. NCR's 4.1% share evaporated to 0.2%. Across the board, incumbents were battered by a horde of insurgents brandishing unconventional new business models.

And now a new army of revolutionaries is scaling the ramparts. By the end of February, five relative newcomers--i2 Technologies, BEA Systems, Network Appliance, Juniper Networks, and Brocade Communications Systems--had accumulated a total market value of $66 billion. Compare this with the $55 billion accounted for by Compaq, Apple, Novell, 3Com, and Adobe--onetime revolutionaries that have been struggling to stay relevant.

It's not just in tech. Insurgents are everywhere. Forget Amazon.com: In retailing, most of the challengers have parking lots. Kohl's, a retailer that had its IPO in 1992, is now worth more than $22 billion, $9 billion more than Sears. In broadcasting, it's Sirius and TiVo; FOX in TV news; Britain's Pret a Manger in fast food; Japan's DoCoMo in the wireless Internet; France's Sephora in cosmetics; Austria's Red Bull in New Age beverages. And not all newcomers are newborns. Disney upended a host of theater conventions when it took The Lion King to Broadway.

Not since the French Revolution has the aristocracy been so beset upon.

Sure, there are a few perpetually restless incumbents that have managed to steadily increase their share of wealth; Wal-Mart and Sun Microsystems are two standout examples. But these are the exceptions. Odds are, over the next few years newcomers are going to capture most of the new wealth in your industry. Odds are, your company is going to get its ass kicked by a bunch of irreverent, tradition-defying rebels.

In this age of revolution, the most potent means of creating new wealth is radical innovation.. Yet just about every management principle inherited from the Industrial Age is inimical to innovation. A Web-enabled business is no antidote to the nostalgia and incrementalism that are so often the unintended consequences of industrial-era management practices.

Here are seven of the most toxic, and insidious, industrial-era management beliefs that must be beheaded if your company is going to thrive.

1. Variety is bad. Industrial-era managers valued replication, predictability, and "conformance to requirements" above all else. These virtues allowed companies to master the art of mass production, capture economies of scale, and race down learning curves. Nothing wrong with that, unless the value of conformance metastasizes into an antipathy towards the wacky, the seemingly tangential, and the disruptive. For example, some of Motorola's missed opportunities can certainly be traced to an overemphasis on military-style discipline, inculcated through mandatory training. In the age of revolution, managers must create a climate in which variety is celebrated.

2. Experience counts. When change ambled rather than raced, experience mattered most. Those who had been around the longest knew more and used their knowledge to pass judgment on the ideas and schemes of those less experienced and, therefore, less wise. But too many times, the voice of experience is the voice of orthodoxy. It's typically an outsider, free from convention and ignorant of tradition, who turns an industry on its ear. Make sure that every committee, task force, project team, and review body is heavily weighted with young people, recent hires, and those from the geographic "edges" of your company.

3. Size matters. You hear CEOs say things like "You have to be big to survive," and "Only No. 1 or No. 2 in an industry will make money." They may have been right once. In the Industrial Age, size brought efficiency, and efficiency trumped everything. Yet my research suggests that today there is virtually no correlation between size (as measured by revenue) and profitability (as measured by operating margins). Porsche, a low-volume specialty car maker, has the highest profits per vehicle in the industry. BMW, which has steadfastly avoided merger talks, is in a helluva lot better shape at the moment than DaimlerChrysler, which has been on a global acquisition binge. Most megamergers seem to be based on an assumption that if you create a really, really big dinosaur, it will somehow survive extinction. Never forget, you can be big and irrelevant.

4. Your company is its business model. In the Industrial Age, companies were built to do one thing and do it forever. Xerox made copiers. PepsiCo sold brown fizzy liquid. American Airlines moved passengers. There was little in a company's management practices that challenged it to think creatively about its opportunity horizon. A company was defined by what it sold rather than by what it knew (its competencies) or what it owned (its assets). Planning and budgeting focused on getting better at what the company was already doing. As a result, soft drink makers were late to the market for chilled teas (Snapple got there first), for sports drinks (Gatorade rules), for bottled water, and for New Age beverages (SoBe, etc.). Despite its fabled Palo Alto Research Center, Xerox let HP build an insurmountable lead in laser printers--a business that has taken a big bite out of copier usage. American Airlines watched Federal Express build an airline that delivers packages instead of people and is today worth nearly three times as much as AMR, American's parent company. All too often a company's fortunes decline as its initial business model runs out of steam. To avoid this fate, you must excise any management practice that encourages people to define their company as no more than its current business model.

5. The business unit rules. In most companies, business unit heads possess a high degree of autonomy and are quick to defend their prerogatives in the face of meddlesome corporate staff and encroaching peers. Capital budgets, human resource planning, and strategic planning are all aligned by business unit boundaries. Business unit executives are rewarded on the basis of the performance of their division. This would be fine except for one thing: Tomorrow's opportunities seldom line up with today's business unit boundaries. The business unit structure creates a powerful constituency for the status quo. Divisional executives are reluctant to "surrender" good people to opportunities outside their own domain. There is a tendency to hang on to good people, even when the marginal return on their talents might be higher somewhere else. In this way the business unit structure leads to a kind of "squatter's rights." Just because a unit accounts for 50% of a company's profits, managers assume that it should command 50% of the firm's capital budget and 50% of its smartest employees. This is, of course, a recipe for perpetuating the status quo. Moreover, when personal success turns solely on the success of one's own business unit, executives may be tempted to pour more and more resources into a declining business rather than admit that the firm has better opportunities elsewhere. How else can one explain GM's reluctance to more aggressively trim its brand portfolio? When Enron created Enron Communications, its broadband trading business, it moved more than 60 people into the new division--in the space of a week. Companies that are incapable of redeploying resources rapidly across business unit boundaries will find themselves overinvesting in moribund businesses.

6. Resources get allocated. Most companies are more like the old Soviet Union than top management would care to admit. To win resources, an idea must survive a gantlet of skeptical executives as it works its way up the management hierarchy. The fundamental job of top management is to make decisions about how much to invest where. Unconventional ideas seldom survive the tortuous journey to the top, particularly if they threaten to cannibalize existing businesses. Silicon Valley works on resource attraction rather than resource allocation. Would-be entrepreneurs have many potential funding sources. Either an idea attracts capital and talent, or it doesn't. There is no giant CEO brain making global allocation decisions. I believe every company needs a combination of resource allocation and resource attraction. Rather than relegating innovators to some largely peripheral "incubator," work instead to create vibrant internal markets for capital and talent--markets in which anyone with a slightly eccentric idea has the opportunity to solicit funding from anyone with a bit of discretionary budget, and talent from anyone with a few spare cycles.

7. Innovation is an exception. In the age of progress, business innovation was usually an accident, a diversion, from the real work of optimization. Even today, talk to successful innovators, and they're likely to tell you, "I succeeded despite the system." Shocking--if you believe that innovation is the surest route to wealth creation. Nearly every annual report I read celebrates the virtues of innovation, yet not one company out of a hundred has put as much effort into making innovation a capability as it has put into efficiency. Two days of brainstorming at the Ritz-Carlton doesn't add up to a serious commitment to innovation! With the help of Dr. Deming and others, many companies have succeeded in making everyone responsible for quality. We're going to have to do the same for innovation.

What makes these management practices and principles so insidious is that they're not always toxic. Indeed, they are the very foundation of continuous improvement, disciplined execution, and financial efficiency. Yet in the age of revolution, they are often poisonous to the tender shoots of innovation. You can't simply pull the old beliefs and values up by the roots; rather, you must carefully prune them so you create enough space for the seeds of tomorrow's opportunities to take root.

GARY HAMEL is chairman of Strategos, a strategy consulting firm, and the author of Leading the Revolution.