In this article, based in part on our research on chief executive performance, we consider the steps that many CEOs are taking to become effective captains during disruption—captains who can not only manage through it, but turn it to their advantage. We have also directly observed CEOs managing disruption at a number of companies, and have drawn on interviews with two people who understand the issues in depth. Antony Jenkins took over as CEO of Barclays PLC to manage the bank through its response to the LIBOR rate-fixing scandal that struck in the summer of 2012. Clayton M. Christensen, the professor and management author who first charted the dynamics of disruption in The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (Harvard Business School Press, 1997), has explored a variety of disruption dimensions, including the personal impact in his new book, How Will You Measure Your Life? (with James Allworth and Karen Dillon; HarperBusiness, 2012).
To act effectively as captain of their company in a time of disruption, CEOs must lead in three ways. First is preparation: The CEO must make sure his or her company anticipates potential disruptions and puts in place the capabilities that will be needed when the time comes. Second is response: When a disruptive event occurs, leaders must develop the appropriate strategic and operational plans, which could include focusing on fewer products and services, engaging in large-scale business transformation, reorganizing the company’s structure, initiating mergers and acquisitions, launching a new wave of innovation, or making a change in leadership. Finally, there is implementation: CEOs need to set the response in motion and carry it out sustainably, ensuring that their company reaches the end goal.
Anticipate and Prepare
For every company in every industry, the first stage in managing disruptions is to learn to anticipate them and recognize their signs before they hit. You can’t predict every future challenge. But you can think about the kinds of disruptions that might be particularly devastating to your company, and prepare accordingly, shaping the degree of preparation to the nature and likelihood of the risk. Even environmental and natural disasters can be—and must be—prepared for. It’s particularly important for companies to pay attention to risks that they feel shielded from because of their own competence and capabilities. These can even include environmental and natural disasters. For example, though the earthquake that caused a tsunami to hit Japan in March 2011 was one of the strongest ever recorded anywhere, more than 75 deadly earthquakes have been recorded in Japan since 1900. Should Toyota have been able to anticipate and prepare for the effect an earthquake might have on its highly concentrated network of suppliers in northeast Japan? Perhaps the company’s confidence in its just-in-time manufacturing system blinded it to the vulnerability of its supply chain. Might your company be similarly vulnerable to the disruption of strengths that you have built up over time, and that you currently take for granted?
Anticipating disruption goes beyond the conventional practices of risk management. Virtually every company now employs a process to assess and address risk. These practices typically concentrate on day-to-day risks, those run in the ordinary course of business, including credit and foreign exchange risk, data security issues, and operational risks inherent in managing large-scale projects.
For truly disruptive events, many companies adopt a similar approach at a larger scale: They build analytic models assigning a probability and potential loss value to various kinds of risks, and then design preparations for each of them depending on their likelihood and potential for loss. Several recent events, however, have highlighted the limitations of this approach. Highly improbable events do occur, and failure to anticipate them—or even to imagine them—can be devastating. A further limitation lies in the relative strength of the risk models themselves. The financial firms that concluded in the mid-2000s that they had tamed the risks inherent in the subprime mortgage market soon discovered that their confidence was overstated.