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Published: May 28, 2013
 / Summer 2013 / Issue 71

 
 

Captains in Disruption

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.

Sooner or later, every corporation will face disruption. It may be the result of a decrease in its competitive advantage, a shift in the regulatory environment, or some catastrophic event that affects its ability to operate. No matter what the underlying cause, the chief executive is the person most accountable for managing the disruption. He or she must recognize its dynamics, anticipate its likely effect, develop a response, manage that response, and sustain the necessary changes. If the CEO is not directly involved in guiding his or her company through the storm, the entire company is likely to suffer—and, in extreme cases, disappear entirely.

The 2012 Chief Executive Study: Learn More

More insights from the 2012 study are available on booz.com, including:

You can also find Booz & Company’s past studies there.

There is no single formula for managing a disruption, because it can come in any number of forms. Any event that has the potential to adversely affect a company’s business model or ongoing operations is disruptive. Some disruptions involve shifts in the dynamics of competitive advantage for an industry, stemming from a variety of causes—technological breakthroughs that favor new rivals, global changes in labor arbitrage, shifts in cost structure, or new rivals entering markets from adjacent sectors. Some are instigated by regulatory upheaval, such as the structural changes to the U.S. healthcare market set in motion by the Affordable Care Act. Virtually every CEO of a hospital system in the U.S. is confronting a major disruption to its business model as a 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 economic downturns, idiosyncratic geopolitical and natural events, and unforeseen internal company events such as sudden major trading losses or public scandals.

The severity of these events can vary considerably, as can the duration. Some disruptions, like the rise of the Japanese auto industry in the 1970s that eventually crept up on U.S. and British carmakers, are so gradual that, like a frog in a pot of water, company leaders may never realize they are slowly boiling to death. Others are sudden and devastating, like the 2011 floods in Thailand that crippled the country’s hard-drive manufacturing sector and revealed extreme vulnerabilities in the industry’s supply chain.

Since the mid-1990s, disruptive events have become increasingly difficult to deal with. Technological evolution, ongoing globalization, two huge financial bubbles, the rapid pace of change in emerging economies, the deregulation and re-regulation of a number of industries, and waves of political turbulence in some regions have made the world a more challenging place to do business. For example, banks and financial institutions have had to rethink their business models after the financial crisis. And retailers and many parts of the media industry have seen their revenue streams fall away with the rise of new, technologically enabled competitors.

Yet even in the worst disruptions, some companies do better than others. These companies have leaders who recognize the crisis and act accordingly, either in advance or in time to recover. Some of the most celebrated cases are those of IBM, which shifted to business services before the rest of the computer industry did; BMW, which rebounded decisively from near-bankruptcy in the late 1950s; Ericsson, which reinvented itself in 2002–03 after nearly being driven out of business by sudden competition from Asia; and Lego, which rebuilt its supply chain and regained profitability after its retail channels dramatically changed.

 
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Resources

  1. Amy Bernstein, “Yossi Sheffi: The Thought Leader Interview,” s+b, Spring 2006: MIT’s leading supply chain expert says business leaders have to figure out how to bounce back from the unthinkable.
  2. Christopher Dann, Matthew Le Merle, and Christopher Pencavel, “The Lesson of Lost Value,” s+b, Winter 2012: A study of companies with shrinking shareholder returns shows that strategic risk—self-induced disruption—is the number one cause.
  3. Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, “CEO Succession 2011: The New CEO’s First Year,” s+b, Summer 2012: Last year’s study focused on guidance for the incoming captain of the company.
  4. Art Kleiner, “The Discipline of Managing Disruption,” s+b [online only], Mar. 11, 2013: The interview with Clayton M. Christensen where the quotes in this article first appeared.
  5. Gary Neilson and Julie M. Wulf, “How Many Direct Reports?Harvard Business Review, Apr. 1, 2012: During the past 20 years, the CEO’s average span of control has doubled, giving fresh relevance to the question, How much should the chief executive take on?
  6. For more thought leadership on this topic, see the s+b website at: strategy-business.com/strategy_and_leadership.