Captains in Disruption


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Even when facing a crisis, some CEOs know how to anticipate the worst, plan a response, and navigate to advantage. You can do the same.

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Captains in Disruption

  1. 1. strategy+businessBY KEN FAVARO, PER-OLA KARLSSON,AND GARY L. NEILSONTHE 2012 GLOBAL CHIEF EXECUTIVE STUDYCaptains in DisruptionEven when facing a crisis, some CEOs know how to anticipate theworst, plan a response, and navigate to advantage. You can do the same.FORTHCOMING IN ISSUE 71 SUMMER 2013PREPRINT 00182
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  3. 3. IllustrationbyGérardDuBoisSooner or later, every corporation will face disrup-tion. It may be the result of a decrease in its competi-tive advantage, a shift in the regulatory environment,or some catastrophic event that affects its ability to op-erate. No matter what the underlying cause, the chiefexecutive is the person most accountable for managingthe disruption. He or she must recognize its dynamics,anticipate its likely effect, develop a response, managethat response, and sustain the necessary changes. If theCEO is not directly involved in guiding his or her com-pany through the storm, the entire company is likely tosuffer—and, in extreme cases, disappear entirely.There is no single formula for managing a disrup-tion, because it can come in any number of forms. Anyevent that has the potential to adversely affect a com-pany’s business model or ongoing operations is disrup-tive. Some disruptions involve shifts in the dynamics ofcompetitive advantage for an industry, stemming froma variety of causes—technological breakthroughs thatfavor new rivals, global changes in labor arbitrage, shiftsin cost structure, or new rivals entering markets fromadjacent sectors. Some are instigated by regulatory up-heaval, such as the structural changes to the U.S. health-care market set in motion by the Affordable Care Act.Virtually every CEO of a hospital system in the U.S. isconfronting a major disruption to its business model asa result (see “Putting an I in Healthcare,” by Gil Irwin,Jack Topdjian, and Ashish Kaura, s+b, Summer 2013).There are also event-specific disruptions, such as eco-nomic downturns, idiosyncratic geopolitical and natu-CAPTAINSINDISRUPTIONEVEN WHEN facingacrisis,someCEOsknowhowtoanticipatetheworst,planaresponse,andnavigatetoadvantage.Youcandothesame.byKenFavaro,Per-OlaKarlsson,andGaryL.NeilsonDISRUPTIONfeaturestrategy&leadership2
  4. 4. 3strategy+businessissue71Ken Favaroken.favaro@booz.comis a senior partner with Booz &Company based in New York.He leads the firm’s work in en-terprise strategy and finance.Per-Ola Karlssonper-ola.karlsson@booz.comis a senior partner with Booz& Company based in Stock-holm. He serves clients acrossEurope and the Middle East onissues related to organization,change, and leadership.Gary L. Neilsongary.neilson@booz.comis a senior partner with Booz &Company based in Chicago.He focuses on operatingmodels and organizationaltransformation.Also contributing to this articlewere Booz & Company seniorpartner Alan Gemes and seniormanager Josselyn Simpson,and s+b contributing editorEdward H. Baker.ral events, and unforeseen internal company events suchas sudden major trading losses or public scandals.The severity of these events can vary considerably,as can the duration. Some disruptions, like the rise ofthe Japanese auto industry in the 1970s that eventuallycrept up on U.S. and British carmakers, are so gradualthat, like a frog in a pot of water, company leaders maynever realize they are slowly boiling to death. Others aresudden and devastating, like the 2011 floods in Thai-land that crippled the country’s hard-drive manufactur-ing sector and revealed extreme vulnerabilities in theindustry’s supply chain.Since the mid-1990s, disruptive events have becomeincreasingly difficult to deal with. Technological evolu-tion, ongoing globalization, two huge financial bubbles,the rapid pace of change in emerging economies, the de-regulation and re-regulation of a number of industries,and waves of political turbulence in some regions havemade the world a more challenging place to do business.For example, banks and financial institutions have hadto rethink their business models after the financial cri-sis. And retailers and many parts of the media industryhave seen their revenue streams fall away with the rise ofnew, technologically enabled competitors.Yet even in the worst disruptions, some companiesdo better than others. These companies have leaderswho recognize the crisis and act accordingly, either inadvance or in time to recover. Some of the most cele-brated cases are those of IBM, which shifted to businessservices before the rest of the computer industry did;BMW, which rebounded decisively from near-bank-ruptcy in the late 1950s; Ericsson, which reinvented it-self in 2002–03 after nearly being driven out of businessby sudden competition from Asia; and Lego, which re-built its supply chain and regained profitability after itsretail channels dramatically changed.In this article, based in part on our research onchief executive performance, we consider the steps thatmany CEOs are taking to become effective captainsduring disruption—captains who can not only managethrough it, but turn it to their advantage. We have alsodirectly observed CEOs managing disruption at a num-ber of companies, and have drawn on interviews withtwo people who understand the issues in depth. AntonyJenkins took over as CEO of Barclays PLC to managethe bank through its response to the LIBOR rate-fixingscandal that struck in the summer of 2012. ClaytonM. Christensen, the professor and management authorwho first charted the dynamics of disruption in TheInnovator’s Dilemma: When New Technologies CauseGreat Firms to Fail (Harvard Business School Press,1997), has explored a variety of disruption dimensions,including the personal impact in his new book, HowWill You Measure Your Life? (with James Allworth andKaren Dillon; HarperBusiness, 2012).To act effectively as captain of their company in atime of disruption, CEOs must lead in three ways. Firstis preparation: The CEO must make sure his or hercompany anticipates potential disruptions and puts inplace the capabilities that will be needed when the timecomes. Second is response: When a disruptive eventoccurs, leaders must develop the appropriate strategicand operational plans, which could include focusingon fewer products and services, engaging in large-scalebusiness transformation, reorganizing the company’sstructure, initiating mergers and acquisitions, launch-ing a new wave of innovation, or making a change inleadership. Finally, there is implementation: CEOs needfeaturestrategy&leadership3
  5. 5. featurestitleofthearticle4inherent in the subprime mortgage market soon discov-ered that their confidence was overstated.The key to the problem, says Clayton Christensen,lies in the nature of data itself. “How can you makesense of the future,” he asks, “when you only have dataabout the past? That’s the role of theory, to look into thefuture.” In other words, you have to think through thereasons that the pattern of behavior in the data in thiscase appears to be different. Christensen adds that inmost companies, top executives do not have access tocandid insights from people at all levels—perspectivesthat they need if they are to plan for future disruptions.“Data is heavy. It wants to go down, not up, in an or-ganization,” he says. “Information about problems thussinks to the bottom, out of the eyesight and earshot ofthe senior managers.”In Christensen’s view, chief executives (and othersenior leaders) can compensate for these limitations onlyby learning to ask better questions. “Instead of lookingat the data about today’s performance, I [need to] keepmy attention on the questions I need to ask so I cancatch the issues of the future…. For instance, if you’reconcerned about disruption, you ask: ‘Which competi-tors are threatening me and which am I more likely tothreaten?’ Disruption is a question about who’s going tokill whom.”It falls to the CEO to ask questions this way, and tooversee the enterprise-wide thinking required to assesspotential disruptions. Executives within business unitsand functional silos tend to focus on making progresstoward their unit’s business objectives, and not to thinkdeeply about longer-term threats to the whole company.Only the CEO can ensure that the company is taking amultifaceted approach to sensing and recognizing trou-ble. Chief executives must be willing to lead the effortdirectly, drawing on past methods of gauging risks anddisruptions, while also admitting that the old ways ofdoing business are no longer adequate.Plan and RespondOnce a potential disruption has been recognized as areal threat, it is time to develop a plan and initiate thefirst wave of reaction. The wake-up call will likely hap-pen in one of two ways: Either the company’s leaderswill realize that it is vulnerable to a potential disruptionand thus needs to be shaken up proactively or an event-driven disruption will occur, and the leaders will seethat the company must respond immediately.Sometimes a CEO must plan a response to a sud-to set the response in motion and carry it out sustain-ably, ensuring that their company reaches the end goal.Anticipate and PrepareFor every company in every industry, the first stage inmanaging disruptions is to learn to anticipate them andrecognize their signs before they hit. You can’t predictevery future challenge. But you can think about thekinds of disruptions that might be particularly devastat-ing to your company, and prepare accordingly, shapingthe degree of preparation to the nature and likelihoodof the risk. Even environmental and natural disasterscan be—and must be—prepared for. It’s particularlyimportant for companies to pay attention to risks thatthey feel shielded from because of their own compe-tence and capabilities. These can even include environ-mental and natural disasters. For example, though theearthquake that caused a tsunami to hit Japan in March2011 was one of the strongest ever recorded anywhere,more than 75 deadly earthquakes have been recorded inJapan since 1900. Should Toyota have been able to an-ticipate and prepare for the effect an earthquake mighthave on its highly concentrated network of suppliers innortheast Japan? Perhaps the company’s confidence inits just-in-time manufacturing system blinded it to thevulnerability of its supply chain. Might your companybe similarly vulnerable to the disruption of strengthsthat you have built up over time, and that you currentlytake for granted?Anticipating disruption goes beyond the conven-tional practices of risk management. Virtually everycompany now employs a process to assess and addressrisk. These practices typically concentrate on day-to-day risks, those run in the ordinary course of business,including credit and foreign exchange risk, data secu-rity issues, and operational risks inherent in managinglarge-scale projects.For truly disruptive events, many companies adopta similar approach at a larger scale: They build analyticmodels assigning a probability and potential loss valueto various kinds of risks, and then design preparationsfor each of them depending on their likelihood andpotential for loss. Several recent events, however, havehighlighted the limitations of this approach. Highlyimprobable events do occur, and failure to anticipatethem—or even to imagine them—can be devastating.A further limitation lies in the relative strength of therisk models themselves. The financial firms that con-cluded in the mid-2000s that they had tamed the risksfeaturestrategy&leadership4
  6. 6. 5strategy+businessissue71profitability. We needed to think more broadly aboutthe stakeholders we serve. The existential crisis helpedme in this regard.”Jenkins emphasizes the need to involve all stake-holders in asking the right questions and finding theright way forward. In managing the reaction to theLIBOR scandal, he spoke with politicians, the media,consumer groups, and regulators, in addition to bankemployees. The day after the new strategy was madepublic, in February, he hosted a stakeholder breakfast.Some of the comments he heard were not easy to take,but it showed that he was willing to engage. “You haveto meet stakeholders with humility, be prepared to lis-ten, and then lay out a clear plan,” he notes. “And bewilling to talk to those who do not necessarily agreewith you.”According to Jenkins, the precepts for leading alarge company through a highly disruptive crisis arestraightforward: Make sure you have a clearly definedobjective and a compelling reason for it, develop a vi-able and credible plan for reaching that objective, andrelentlessly and authentically pursue it. So far, so good:The day after the announcement of the new strategy,Barclays’ stock price rose 9 percent.When planning a response to disruptive events, allchief executives should bear in mind several principles:1. The CEO is the single most critical player in craft-ing and carrying out a response. The CEO must takeimmediate responsibility for the situation and be will-ing to hold him- or herself accountable for the ultimatesuccess of the company’s response. For example, at Bar-clays, Jenkins knew he had to personally make clear hislack of tolerance for the kinds of activities that had ledto the bank’s problems.den, unexpected disruption. When the LIBOR rate-rigging scandal broke in mid-2012, Antony Jenkinswas the very successful head of the retail and businessbanking division of Barclays, then the U.K.’s second-largest bank. After both the bank’s chairman and itsCEO resigned, Jenkins took on the role of CEO. Heknew that the entire organization had to confront thescandal along with the pain that executives and staff feltabout how Barclays was being portrayed in the press. Atthe same time, the financial-services industry as a wholewas still navigating the collapse in trust that had fol-lowed the crisis of 2008–09—along with the reversalof globalization, heavier regulation, and a more adversemacroeconomic environment. This was a new and dif-ficult situation for every bank.Upon his appointment, Jenkins immediately madeit clear to the bank’s 140,000 employees that short-termthinking and a focus on immediate profits—attitudesthat had contributed to the LIBOR scandal and toaggressive tax practices in the structured capital marketsdivision—would no longer be tolerated. (Barclays an-nouncedtheclosureofthestructuredcapitalmarketsdivi-sioninFebruary2013.)Hecarriedoutastrategicreviewofthe bank’s business units, which numbered more than70. He then developed an overall strategy and newdirection for the bank called TRANSFORM (Turn-around; Return Acceptable Numbers; and Sustain For-ward Momentum).“While there are many great things about Bar-clays,” Jenkins says, “the organization had had a cata-clysmic experience. As a result, people were prepared tolisten. The staff recognized that the environment hadfundamentally changed and that we needed to respond.We could no longer focus exclusively on short-termIn most companies, top executivesdo not have access to candidinsights from people at all levels—perspectives they need if they areto plan for future disruptions.featurestrategy&leadership5
  7. 7. featurestitleofthearticle6the organization, executives can waste time defendingtheir past behavior and actions.When communicating the need for change, CEOsshould describe the path ahead as clearly as possible,including the specific steps that will get the companythrough to the other side. For example, a few of the companies facing the disruptive changes ofhealthcare reform have developed a strategic commu-nications process in which they explicitly lay out—forinvestors and employees alike—the decisions that muststill be made in executing their strategy for managingdisruption. On a regular basis, these executive leadersformally review the company’s choices and progress, asktheir board to approve major changes, and reevaluatetheir components.3. CEOs must make cogent decisions about the teamof top executives. They must give people a chance tocome on board with the new system and remove thosewho resist. If anyone visibly resists the changes, it soonbecomes evident—to them and everyone else—thatthey are now at the wrong company. This process canbe designed in ways that treat everyone, including thosewho exit, with respect. Nokia CEO Stephen Elop keptthe senior leadership team largely intact, but set up aninitiative, called the Challenger Mind-Set, in whichexecutives were given a chance to show how well theycould adapt. It was clear that those who could not per-form would be better off elsewhere. Changes in topmanagement must of course be made carefully, but evenone or two visible changes can dramatically reinforcepeople’s awareness that the situation is serious.4. It is often important to choose a small team of topdecision makers to lead the response. Paradoxically, themore profound the changes planned, the faster theyneed to take place. A small team of top leaders can ma-neuver more nimbly than a large group.Implement and SustainAll too many companies, when faced with business cri-ses, have initiated appropriate responses but have thenbeen unable or unwilling to carry them to comple-tion. When that happens, the issues that scuttled theresponse remain unaddressed, and the company willWhether the cause of the disruption is internal orexternal, foreseeable or entirely unpredictable, it is up tothe CEO to set the pace of change. Sometimes it is nec-essary to short-circuit things; to force action, decisions,and transparency. After the first swift reaction, thingsmay slow down a bit as decision makers deal with thelong-term consequences of the disruption, but the com-pany should still retain most of its momentum.2. It is critical to begin breaking down human inertia.Complacency in the face of change comes naturally toany large organization. The chief executive must explainthe situation and describe the new agenda in simple,clear terms. He or she must find simple but compellingmessages to show that the old ways of being successfulwon’t work anymore. The changed nature of the gamemust be communicated to all stakeholders, both insideand outside the company, in a way that galvanizes thisparticular culture.When Stephen Elop became CEO of the NokiaCorporation in 2010, he wrote a note, now famouswithin the company, in which he likened Nokia’s situ-ation to standing on a blazing oil platform. The com-pany faced not just a fairly new competitor with Ap-ple’s iPhone, but a rapidly rising new product category,the smartphone, which Nokia had not found a way tocounter. “We have to go faster, and harder, and moreaggressively now than we’ve ever gone before,” he said.Employees, he added, have two choices: Either jumpinto the water, even if it’s 100 meters deep and freezingcold, or get burned. The note was controversial becausesome felt it pushed Nokia toward too much change,too quickly—but aggression was its point. It provideda clear statement that the company would be fearless infacing up to its dire competitive situation.At the same time, a CEO should make clear thatthe company needs to be forward-looking, and declarea kind of amnesty for past activity. Decisions made andactions taken in previous years may have made sense atthe time, but they must change as the situation chang-es. A new marketplace requires different ways of doingbusiness, and it won’t work to simply carry on with leg-acy practices (and, in some cases, legacy products or ser-vices). If this requirement isn’t understood throughoutfeaturestrategy&leadership6
  8. 8. 7strategy+businessissue71ultimately be even less prepared to face the next crisis.Ultimately, to implement a plan and sustain a companyduring disruption means looking closely at both the or-ganizational design and the company’s culture. It’s upto the CEO to make sure that the structure and the cul-ture are ready for the necessary changes and set up tosupport the new strategies and each other.Organizational redesign. In most cases, response todisruption necessitates a shift to a more nimble, focused,and strategically aligned organizational structure—onethat encourages other people to change, rather thantrapping them in outmoded processes or approval gates.The new structure must enable people to cooperate ful-ly across internal boundaries, even if that runs counterto long-standing patterns of communication or control.One example of this type of redesign is AmedisysInc., a provider of healthcare to patients in their homes.The Amedisys business model had long been builtaround payments from Medicare and other insurancecompanies. With pressure on Medicare prices squeezingprofits considerably, Amedisys CEO Bill Borne, whofounded the company and designed its original businessmodel, decided that it would have to change. Amedi-sys should be paid for outcomes rather than offering amenu of narrowly defined services.To pilot the new approach, Borne and the Amedi-sys top team created a “pirate ship”—an organizationalunit kept separate from the mother ship, set up to pro-totype and offer a broader range of care for its clients.With any such skunkworks efforts, it is important tothink through the separation in advance; how soon,and how thoroughly, can the insights and operations ofthe pirate ship be brought back to the main vessel?Ultimately, the kind of organizational change typi-cally needed to respond to disruption must be an on-going effort. Says Barclays’ Jenkins, “It is about beingcontinually dissatisfied with what you are doing. Whatis the next thing to drive for? There will always be anext phase. It is about constantly challenging and creat-ing an organization that is never satisfied.”Culture change. As difficult as organizational rede-sign may be, truly changing a large company’s culturein response to a disruption can be even tougher. But it isno less important. In the case of one large car companyfacing declining sales and a weak cash position, top ex-ecutives had devised both a new strategy and a new op-erating model, but didn’t know what to do about theirculture. They knew it had to be changed: It was slowand bureaucratic. The CEO set up a team of several ofhis best executives, who started defining the company’scultural priorities: speed, willingness to take risks, andgreater accountability.The CEO understood that the only real way tochange a company’s culture is by changing behavior. Hebegan by asking his top team to make decisions in daysand weeks, not months or years. They didn’t announcethe change; rather, they just practiced the new behav-ior themselves, and it spread. Because the top 50 or sosenior executives had become very isolated—the com-pany had as many as 15 layers in its hierarchy—theybegan interacting informally with people lower down inthe structure who actually knew what worked and whatdidn’t. The result was a much clearer picture of how thecompany operated, with the added benefit that the peo-ple involved became zealots about the need for change.The company made sure to act quickly on the best ideasgenerated through the process.At Barclays, Antony Jenkins faced a tough taskwhen he became CEO: to restore the bank’s publicreputation and renew its internal culture. Though hehad spent time at Citibank between 1989 and 2006,he began his career at Barclays in the early 1980s.Despite his time away, he considers himself an insider,which he feels has been a singular advantage since be-coming CEO. In his view, it would have been incred-ibly difficult to come in from the outside and try tochange Barclays. As an insider, he was already familiarwith the strategic and cultural challenges facing theorganization, and having the opportunity to “road-test”different approaches in individual business units wasa significant benefit in taking on the CEO role.“I was able to prototype what I believed in, first atBarclaycard and then at retail and business banking,”he says. “This became the foundation for my thinkingabout how to change the larger organization.”Using his earlier experience, Jenkins developed a vi-sion of a “go-to bank,” and turned it into action in theTRANSFORM program. The program was then ap-proved by the board of directors, and presented publiclyin February 2013. Now the challenge will be to sustainmomentum and to run the bank to serve the interests ofall its stakeholders.Promoting cultural change, in Jenkins’s view, isfeasible. “Leadership drives culture, and culture drivesorganizational performance,” he says. “Organizationslook at how you behave, not what you say, and you can’tdo it if you are not authentic and relentless. Do whatyou believe is right and do not get distracted by all thefeaturestrategy&leadership7
  9. 9. featurestitleofthearticle8CEO] Andy Grove really got the concept of disruption.His famous phrase, ‘Only the paranoid survive,’ wasa statement about how to [anticipate and] respond todisruption.”For any CEO who leads a company successfullythrough a disruption, that success will likely becomehis or her defining moment. If you are a chief executive,that’s the hidden opportunity disruptions provide. Thenext disruption to your company could be the eventthat most determines how you will be regarded andremembered as a leader. +Reprint No. 00182voices outside commenting on your plan.”In this implementation phase of managing througha disruption, what CEOs do is at least as important aswhat they say. Too many leaders in crisis simply sendmemos from on high, rather than determine a courseto do things differently. There is also a risk in tryingto frighten people into changing their ways—the burn-ing platform sometimes just scares them into freezinginstead. Finally, CEOs confronting disruption need toreach out to people throughout the company who canhelp them cross-organizationally, and do so throughinformal interactions. Cross-organizational interactionis by far the biggest accelerator of change (see “Cul-ture and the Chief Executive,” by Jon Katzenbach andDeAnne Aguirre, s+b, Summer 2013).The Defining MomentThe Great Recession gave the CEO of virtually everycompany around the world a strong taste of the im-pact of a deeply disruptive crisis. Some chief executivesthrived, making their company stronger than ever.Others simply muddled through. Still others watched astheir company succumbed to the trauma.ThebestCEOsunderstandthatdisruptionswillhap-pen, and that no company can insulate itself completelyfrom their effects. But they also know that in any crisisthere can be an opportunity. Companies that survivemajor disruptions are likely to come out even stronger,and better able to anticipate and prepare for the nextone. As Clayton Christensen notes, it’s difficult to thinkthis way, because leaders are always tempted towardcomplacency. “Almost all of them,” he says, “probablyincluding me, tend to stop asking good questions—or else their successors do. For example, [former IntelResourcesAmy Bernstein, “Yossi Sheffi: The Thought Leader Interview,” s+b,Spring 2006: MIT’s leading supply chain expert says business leadershave to figure out how to bounce back from the unthinkable.Christopher Dann, Matthew Le Merle, and Christopher Pencavel, “TheLesson of Lost Value,” s+b, Winter 2012: A study of companies withshrinking shareholder returns shows that strategic risk—self-induceddisruption—is the number one cause.Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, “CEO Succession2011: The New CEO’s First Year,” s+b, Summer 2012: Last year’s studyfocused on guidance for the incoming captain of the company.Art Kleiner, “The Discipline of Managing Disruption,” s+b [online only],Mar. 11, 2013: The interview with Clayton M. Christensen where thequotes in this article first appeared.Gary Neilson and Julie M. Wulf, “How Many Direct Reports?” HarvardBusiness Review, Apr. 1, 2012: During the past 20 years, the CEO’s aver-age span of control has doubled, giving fresh relevance to the question,How much should the chief executive take on?For more thought leadership on this topic, see the s+b website any CEO who leads a companysuccessfully through a disruption,that success will likely become hisor her defining moment.featurestrategy&leadership8
  10. 10. © 2013 Booz & Company Inc.strategy+business magazineis published by Booz & Company Inc.To subscribe, visit strategy-business.comor call 1-855-869-4862.For more information about Booz & Company,visit••• Park Ave., 18th Floor, New York, NY 10178