Illustration by Peter Stark
When disruption strikes a business, it is natural for its leaders to try to defend it by focusing on core business activities and improving current products and practices, even while creating a sense of urgency to bring about change. In a survey of 486 global CEOs PwC undertook in 2019, a significant majority said this was a good response to disruptive new entrants.
On the face of it, this reaction appears to be a no-brainer. And there are numerous examples of companies whose defense succeeded. Take Sky, a European media and entertainment company that responded to disruption by digitizing its existing processes and at the same time developing new digital products for its customers — all of which aimed to improve Sky’s core business. Similarly, Walmart invested heavily in robotics to improve the efficiency of its retailing operations while also leveraging its 4,789 physical stores in 49 U.S. states to deliver online orders quickly and cheaply. In both cases, the strategy of improving the existing business proved to be a successful response to disruption.
But other companies failed by taking this approach. One key reason for Kodak’s demise was its insistence on using the digital photography disruption to improve its core film and printing business. In the mid-1990s, Kodak introduced the Advantix Preview film and digital camera system and spent almost US$500 million promoting it. So as not to cannibalize the film business, the Advantix required users to use film and print their photos. A decade later, Kodak filed for bankruptcy. So why was improving its existing business the wrong thing to do?
The answer sounds simple: A company needs to assess whether the core business is worth saving or improving before deciding whether it should use new technologies to improve it. Kodak should have asked: “Given the new realities, is the printing of photos a viable business for us to fight for?” If the core business is marching toward oblivion, there is no sense in trying to improve it. When IBM, for example, saw the threat to its electric typewriter business from word processing, it didn’t invest in better typewriters — instead, it gradually exited the typewriter business.
Why didn’t Kodak ask this question? It’s possible it did and made the assessment that the core business was worth fighting for, a likely result if the question was put to the managers of the core business who had spent their entire careers protecting and growing that business. It is hard to see faults in your own “baby,” and it’s even harder to make an unemotional decision when it comes to the survival of a business you’ve spent a professional lifetime caring for.
This all carries huge implications for leaders who need to develop a strategy in response to disruption: They must step outside the mind-set of focusing on the core business and think from a different perspective. For example, an entrepreneur would ask: “If I were considering entry into this new market created by disruption, what strategy would I adopt?”
Auto Trader, the U.K.’s top online marketplace for car buyers, approached its digital transformation like an entrepreneur. It started life in 1977 as a print magazine featuring classified advertisements. In 1996, it embarked on a digital transformation that culminated in 2013 with the closing of all print operations and a complete move into digital operations. Its stated purpose was to be a trusted leader in the U.K.’s digital automotive space and to serve customers, both dealers and car buyers. From the CEO down, everyone at the company invested time in determining what their customers needed and wanted by involving customers in the transformation. They didn’t focus on the “laggards” (those readers who wanted to keep the magazine and represented only around 10 percent of the customer base), because the company felt they would slow down innovation. Auto Trader worked with dealers to develop products that would give the end consumer the best prices and service.
Easier said than done
Auto Trader is the exception rather than the rule. It’s hard for companies to take an entrepreneurial approach in the face of disruption. The incentives in the system, the short-term pressures to respond to disruption, the desire to utilize rather than waste the assets and competencies of the business, and people’s emotional attachment to the core business all act in powerful ways to distort the thinking of senior leaders. Something more than rational argument is needed to force people into what we like to call active thinking. Creating a sense of urgency can kick-start active thinking. But leaders also have to be aware of the pitfalls here.
PwC’s unpublished research showed that 74 percent of CEOs agree with the need to create a sense of urgency in the face of disruption and believe that this can be achieved through the creation of a “burning platform.” The academic evidence, however, shows that this kind of threat framing — “Our business will fail if we don’t change now” — can create urgency, but that urgency can also dissipate too quickly to have a substantive effect. People are prone to returning to the familiar even in dire circumstances. In his book Change or Die, Alan Deutschman reported an alarming statistic: 90 percent of patients who undergo coronary artery bypass surgery fail to change the behaviors that led them to have heart problems in the first place.
Trying to scare people, in other words, doesn’t create sustainable change. So, what does? Psychologists advise making the need for change positive, personal, and emotional. For example, in 2008, in the early stages of the transformation of Ørsted (then called DONG) from a Danish state-owned fossil fuel energy producer to a commercial global renewables organization, Anders Eldrup, the then CEO, wrote an op-ed piece in Denmark’s Politiken newspaper to explain the new strategy to the public; it was a passionate plea for change, building from greater societal awareness of climate change issues. The company announced targets to reduce the use of its fossil fuels producing electricity from 85 percent to 15 percent by 2040, a positive ambition for its people and stakeholders. It set out a long-term, viable strategy that people could buy into.
Of course, this was only the start. There was considerable resistance to moving away from fossil fuels, which represented the company’s core business; there were also challenges along the way, including a downgrade of DONG’s debt rating by S&P in 2012, which forced the company to focus. It sold eight businesses, including all of its gas businesses as well as its hydro- and waste-fired power plants, leaving offshore wind, oil, and gas. By 2016, it had completed an IPO, and the following year it sold its North Sea oil and gas business. This created a company concentrated solely on renewable energy, innovating with offshore technology and investing in new offshore wind farms. And all of this in a decade — 20 years ahead of schedule. Ørsted reduced its greenhouse emissions by 83 percent between 2006 and 2020, and it expects to be carbon neutral by 2025. In June 2020, Henrik Poulsen, the CEO who carried through Eldrup’s vision in his eight years at Ørsted’s helm, announced his departure, having seen the company’s stock price more than double since the IPO in 2016.
A compelling purpose
Having a compelling purpose helps kick-start active thinking. People need to understand why they must change, and why this course of action will have a positive result faster or more easily than what they are currently doing. This impact has to be based on meeting, if not surpassing, the needs of customers in a distinctive way. It’s critical that there be workable mechanisms that embed the changes the new mind-sets, norms, and habits needed to deliver the purpose after the initial emotional high. As Christina Gravert, assistant professor of economics at the University of Copenhagen, argued, triggering emotions is not enough. She used the example of trying to encourage people to use stairs instead of an escalator by converting the staircase steps of a subway in Sweden into piano keys that played notes as people used them. This, Gravert argued, was an ineffectual way to encourage people to exercise — it worked for only a few days because the novelty wore off quickly. By contrast, shifting vegetarian choices to the top of a menu was more likely to lead to healthier meal choices because it didn’t appear to be a gimmick.
Having a compelling purpose helps kick-start active thinking. People need to understand why they must change, and why this course of action will have a positive result faster or more easily than what they are currently doing.
David Pemsel took this more considered approach when he was appointed CEO of the Guardian Media Group in 2015, as the company was losing money and facing disruptive new entrants. During his first 50 days on the job, he asked eight employees to find what he called “unvarnished truths” about the business. What came back to him in a dispassionate, straight-talking style scared both him and the board. The company needed to address: its overreliance on a single revenue stream (advertising); its overconfidence in turning an audience into a revenue stream (Pemsel told us “Reach is a validation of journalism, not the basis of a business model”); its poor performance management; and its lack of coherent goals across the organization. The journalists were focused on winning prizes, the digital engineers on making great online products, and the commercial managers on making money — but no one was focused on the whole market.
Pemsel and Katharine Viner, the newly appointed editor-in-chief, used the purpose of the Guardian — to be the world’s leading liberal voice of independent, high-quality journalism — as a guiding light in the changes they enacted, linked closely to the financial framework they developed. They presented a one-page strategy based on four pillars: how to build relationships with readers; how to build these relationships into financial ones; how to navigate the new digital advertising world; and how to control costs and break even in three years.
They set a target of reducing costs by 20 percent by the 2018–19 fiscal year (which they achieved). In that time, 450 jobs were cut, including those of 120 journalists. The executives also introduced a disciplined approach to performance measurement based on the objectives and key results approach developed by Silicon Valley pioneer Andy Grove of Intel. This involved agreeing on objectives every three months, creating cross-divisional teams to focus on initiatives aligned with one or more of the four strategic pillars, and embedding agile-style work (often used in software development) based on high levels of autonomy. Every quarter, two people per team would present their work in seven minutes to the whole organization; everyone was invited, including board members.
The Guardian asked readers to contribute to the paper at the end of each story, tying their passion for the purpose of the paper to the commercial contribution it needed to survive. This was a contrast to the strategy of paywalls deployed by many of its competitors at the time: Pay first, then read. The Guardian broke even in May 2019 after years of losses. It had emerged as a “reader-funded, more digital, more international business,” according to Pemsel, who left in October 2019. By the end of March 2020, 821,000 readers were making regular monthly contributions.
Responding to disruption requires leaders to start with the right perspective: Take a fresh look at the needs of your customers as if you were an entrepreneur. But adopting this perspective in the heat of the battle is easier said than done. You need to first create a sense of urgency that is more sustainable than a burning platform. You have to make the need for change personal and emotional by giving people a positive reason to change, and then selling it to them to win their emotional commitment. This will help you achieve the “right” kind of urgency — and this, in turn, will help you escape the myopia of sticking to a core business that is destined to disappear.
- Constantinos C. Markides is a professor of strategy and entrepreneurship at the London Business School and an author of numerous books, including Game-Changing Strategies: How to Create New Market Space in Established Industries by Breaking the Rules (Jossey-Bass, 2008).
- David Lancefield is a strategist and coach who has advised more than 35 CEOs and has led 15 digital transformations. He is a contributing editor of strategy+business, and he also hosts the interview series Lancefield on the Line and publishes the email newsletter Flashes+Sparks. Lancefield was a senior partner with Strategy&, PwC’s strategy consulting business.