Global Advisors | Quantified Strategy Consulting

By Scott D. Anthony and Michael Putz

We’ve known for decades what causes disruption. So why are companies still allowing themselves to be vulnerable? The answer starts at the top.

Ever since the 1997 publication ofThe Innovator’s Dilemma, researchers, management experts, and businesspeople have discussed, dissected, and debated Clayton Christensen’s Theory of Disruptive Innovation. By now, the arc of disruption is well established: We know how disrupters enter the market, and we know how incumbents typically bungle their responses to such seemingly insignificant competition. Numerous books and articles have offered to solve the dilemma of disruption, including Christensen’s ownThe Innovator’s Solution (a 2003 book coauthored with Michael Raynor), which suggests that leaders who understand how disruption transpires can inoculate themselves against the threats and seize the opportunities.

Yet, despite so much insight and advice, the dilemma persists: 63% of companies are currently experiencing disruption, and 44% are highly susceptible to it, according to research by Accenture. And in a thorough analysis of more than 1,500 publicly listed companies, growth strategy consultancy Innosight found that only 52 of them, about 3% of the sample set, had made material progress in strategically transforming their organizations. The default positions, it seems, are to squeeze extra points from profit margins, search for companies to acquire, or simply pay lip service to innovation by setting up token incubators or having executives wear jeans and the occasional hoodie.

Why are companies still so vulnerable to disruptive threats? Our view is that it isn’t about not having the right playbook. The problem is that well-intentioned leaders often delude themselves by downplaying disruptive threats or overestimating the difficulty of response. In simple terms, leaders lie to themselves. This means that dealing with disruption is not just an innovation challenge; it is a leadership challenge. This article explains these delusions about disruption and offers ways to help leaders avoid self-sabotage.

Cautionary Tales Persist

“Christensen and Raynor have done a superb job of creating a framework for helping to understand industry dynamics and for planning your own growth alternatives.” This quote appeared on the back jacket ofThe Innovator’s Solution, attributed to Pekka Ala-Pietilä, then president of Nokia. The Finnish company had much to be proud of back then. It was on the brink of taking over the booming cellphone market. Over the next few years, the company would grow into a seemingly unstoppable force. Its stock price surged. Then, in November 2007,Forbes ran a prophetic cover with the headline, “Nokia: One Billion Customers — Can Anyone Catch the Cell Phone King?”

Well, yes.

Despite having dominant market share, despite having the resources and capabilities to transition to the smartphone era, and despite having a leader who endorsed and presumably understood Christensen’s groundbreaking theories on disruption (though Ala-Pietilä, admittedly, left the company in 2005), Nokia stumbled. Apple famously entered the market mid-2007. Google formed the Open Handset Alliance, powered by the Android operating system, later that year. Nokia shares began to slide. In 2013, CEO Stephen Elop sold Nokia’s ailing cellphone business to Microsoft for roughly $7 billion. A year later, Microsoft took a roughly $7 billion write-down on the transaction, suggesting the business was worthless.

Nokia’s fall is just one of many cautionary tales: Eastman Kodak, Blockbuster, and Toys R Us were all destroyed by disruption. Some of today’s great companies look to be similarly snared in their own innovator’s dilemma. FedEx started in classic disruptive fashion but today is under threat from Amazon, which could hollow out a significant portion of FedEx’s core business by picking off high-value lines between hubs, leaving FedEx (and UPS) with small, unprofitable routes. Or consider Netflix. The disruption poster child could be disrupted itself by Amazon, Apple, AT&T, or Disney. Netflix lacks the diverse portfolio these businesses have, and it may be overly focused on mainstream customers while ignoring the needs of less profitable ones, like all of those young people who prefer creating and sharing short-form videos on platforms such as YouTube and TikTok instead of watching shows likeThe Crown. New habit formation is often an early warning sign of disruptive change. For all its innovation prowess, why hasn’t Netflix visibly pursued growth opportunities beyond video streaming and long-form content creation?

And why, after so many years since Christensen presented his original theory and so many cautionary tales, do leaders continue to miss the warning signs? Our view is that the disruptive playbook’s leadership section is incomplete. Leaders must learn how to build the individual and organizational capability to confront powerful self-deceptions that inhibit successfully dealing with disruption.

Four Lies Leaders Tell Themselves

Powerful deceptions hinder a leader’s ability to respond to disruptive threats and seize disruptive opportunities. Christensen’s original research highlighted one such deception, noting how, ironically, listening to your best customers drives the innovator’s dilemma. Companies typically focus on satisfying their best customers (usually their most profitable ones) by providing better versions of current solutions while ignoring their worst customers, the ones most likely to flock to cheaper or more convenient disruptive solutions. Of course, that deception is now well known. But other, less obvious lies that leaders tell themselves play a critical role in determining a company’s long-term fate. Let’s explore four of them.

Lie No. 1: “We’re safe.” It is easy to be in the middle of a disruptive storm and take comfort in data suggesting everything is fine. This is because data lags disruptive change. CEOs look at their dashboards and think they are OK, but they forget that they are looking in a rearview mirror. BlackBerry is a good example. On April 1, 2008, its co-CEO, Jim Balsillie, gave an astonishing interview on a Canadian chat show. He dismissed the iPhone, didn’t mention Android, and smugly said, “I don’t look up too much or down too much. The great fun is doing what you do every day. I’m sort of a poster child for not sort of doing anything but what we do every day. … We’re a very poorly diversified portfolio. It either goes to the moon or crashes to the earth.”

It’s easy in hindsight to laugh at the quote and especially at Balsillie’s hubris. But consider BlackBerry’s performance at the time and over the next few years that followed. When Balsillie gave the interview, BlackBerry (then called Research in Motion) had just reported revenues double those in the previous fiscal year, to roughly $6 billion. Over the next three years, revenues tripled, reaching a peak of close to $20 billion. Then, of course, came the crash, and now BlackBerry’s revenues are below $1 billion. Today’s data reflects yesterday’s reality.

Ironically, leaders can be adept at spotting disruption in other industries and yet be blind to what’s going on right in front of their eyes. Years ago, Innosight and Harvard Business School (HBS) held an event to discuss disruption with organizations that included Hallmark, Intel, Kodak, and the U.S. Department of Defense. Participants were given 20-page case studies highlighting potentially disruptive developments related to their industries. Kodak’s case focused on digital imaging, for example, while Hallmark’s focused on online greeting cards. But by and large, the cases depicted similar disruptive scenarios. “I thought this was going to be the most boring event ever,” admits Clark Gilbert, an HBS professor at the time and now president of BYU-Pathway Worldwide. “We basically had written five versions of the same case.” But something surprising transpired. While discussing the cases, it quickly became clear that while executives easily saw disruption in other industries, they missed the forces at work in their own. “It was remarkable,” says Gilbert. “None of the companies could see their own problem.”

When company leaders finally see the problem, it is usually too late. Leaders must have the “courage to choose” before they face the proverbial burning platform. Once the platform is on fire, choices substantially narrow. Mark Bertolini of Aetna provides a good example of a leader who didn’t wait that long to act. When he became CEO in late 2010, there was no burning platform. The health insurer had just reported record revenues and record earnings. It would have been easy for Bertolini to execute yesterday’s strategy for five years and ride off into the sunset. Instead, Bertolini made the courageous decision to dramatically reconfigure the business, which ultimately resulted in Aetna’s game-changing merger with CVS Health in early 2018, a first-of-its-kind combination of retail pharmacy and insurance capabilities. The combination creates the potential for more affordable access to urgent and primary care. The increasing collaborations could break down the traditional health care silos — payer, provider, pharmacy, medical devices — and may signal the beginning of broader health care disruption.

Lie No. 2: “It’s too risky.” There is a perception that making bold investments in innovation carries systemic risks and that it is safer to stay the course. Consider a large European industrial company Innosight advised. The company was seeking to set a bold new direction and achieve ambitious performance targets. Its leadership identified an opportunity to drive step-change growth by, for the first time in its history, bypassing traditional distributors to deliver highly customized products directly to end consumers. The strategy would require substantial commitment, but it also promised substantial returns, including the ability to spur growth, combat commoditization, and increase margins. Despite consensus and a serious commitment among the executive leadership team to the strategy, the outgoing and incoming board chairs decided — in the bathroom during a break — to significantly reduce the scope of the ambition, perceiving that leveraging digital technologies and bypassing traditional distributors was too risky and not in the company’s short- and medium-term interests. The ambitious plan was scrapped after that bathroom break. Both the CEO and CFO departed soon thereafter, leaving a demoralized management team with no clear view for the future except the status quo.

The fear of messing up what has been a proven strategy is powerful, but the reality is that making bold investments in innovation doesn’t carry systemic risks. New Coke, Apple’s Newton, Microsoft’s Zune music player, Amazon’s Fire Phone, and Google’s augmented reality glasses are all examples of big companies that made big bets that led to big write-offs. But while none of these failures was good, of course, none sank their companies, either.

“Big moves look like they are really risky. By and large, they are not,” declared a Fortune 500 CEO at a 2019 Innosight event. “Because what you lose when you invest a ton of money is the money you invested. It is capped. When you win, you usually create not only an annuity but a new ecosystem that gives you the opportunity to win in new areas.”

What carries systemic risk is not making bold investments in innovation. In the face of disruptive change, company leaders consistently invest too little, too slowly, in doing something different. Companies increase risk by not taking risk. Walmart executives knew for years they had to embrace online retail, and yet from 1998 to 2015, the company kept redirecting or scuttling significant investments to compete with Amazon and other e-retailers. It spun off Walmart.com in 2000 and brought it back in July 2001. It didn’t allow third-party sellers until 2009 and then for years had just six sellers on its website. It invested in an e-commerce site in China in 2011, took a 100% share in 2015, and sold it off in 2016. Its acquisition of Jet.com in 2016 has promise, but Walmart should have bet boldly years earlier when the capital investment required would have been much lower and the tolerance for losses (necessary to catch Amazon) higher.

Ironically, such late-breaking attempts to catch up on innovation after being too slow are often, wrongly, seen as proof that they offer systemic risk — Walmart is “betting the store” on its web strategy. But that wrongly characterizes what is actually happening. Walmart was very, very late to the party and is now innovating to control the damage. Late-breaking catch-up innovation with a burning (or smoking) platform is not the same as making bold bets early on.

Lie No. 3: “My shareholders won’t let me.” This deception shows up in various guises. It might be “The activists will pounce on me,” or “My shareholders won’t like it,” or “The market just cares about short-term results.” This type of lie — more like an excuse — leads to self-harm. A compelling stream of research by McKinsey shows that companies that take a long-term perspective outperform those that don’t. So, paradoxically, those that focus on short-term returns generate lower short-term returns. Indeed, many leaders hide behind the “maximize shareholder value” maxim without understanding exactly what it means. As Michael Mauboussin and Alfred Rappaport, prominent financial experts and coauthors ofExpectations Investing, once noted:

Maximizing shareholder value means focusing on cash flow, not earnings. It means managing for the long term, not for the short term. And it means that managers must take risk into account as they evaluate choices. Executives who manage for value allocate corporate resources with the aim of maximizing the present value of risk-adjusted, long-term cash flows. They recognize that to create value, a company must generate a return on its invested capital that covers all of its costs over time, including the cost of capital. These executives are not fixated on the short-term stock price but rather on building enduring long-term value that ultimately shows up in a higher stock price.

Further, there are clear examples demonstrating that you can actively sell your shareholders on a new story, as long as it is indeed a convincing story and you demonstrate early success. But that doesn’t make it easy. Aetna’s Bertolini recalled a tense meeting early on in the company’s strategic transformation where he fielded questions from investment banking analysts: “I walked into a room of analysts and I said, ‘You either think of me as stupid or that I’m lying to you, neither of which makes me want to spend more time with you.’ I have had shareholders who have said to me, ‘Why don’t you double your dividends?’ Well, I want to invest in the company. So I said that one of my largest shareholders should get the hell out of my stock.” In 2018,Harvard Business Review identified Bertolini as one of the 50 best-performing CEOs in the world and the highest-performing CEO in the health insurance industry. Bertolini’s decision to stand firm in the face of criticism helped drive Aetna’s successful transformation.

Lie No. 4: “My people aren’t up to the task.” Leaders often use their own people as an excuse not to take action. It’s a convenient lie that puts the burden of inaction on others — or worse, requires leaders to take dramatic action that may not be required. For example, in 2018, Biogen CEO Michel Vounatsos told a group of CEOs that transforming his company had required turning over a staggering 80% of his top leadership team. “People resist change,” he said. “You need to find the leaders in the room who will be the ambassadors to the future.” Vounatsos’s strategy underlines a popular perception that changing a company requires changing the staff. It is too early to tell whether Vounatsos’s method will pay off, but there is an obvious risk of destroying a significant amount of institutional knowledge. The difficulty and pain of the “rip and replace” strategy is perhaps one reason why only 3% of companies researched by Innosight were embarking on significant strategic transformations.

As a counterexample, DBS, the largest bank in Southeast Asia, went from a stodgy regulated bank to an innovative digital powerhouse without dramatically changing its workforce. Soon after becoming CEO in 2009, Piyush Gupta set a challenge: Given increasing technological change, DBS had to function like a 27,000-person startup. That meant embracing new behaviors, such as agile development, customer obsession, and experimentation. DBS’s culture change effort rested on the fundamental belief that its staff had the inherent capabilities to become innovators but lacked the tools and support to realize them. Under the leadership of Paul Cobban, chief data and transformation officer, the bank redesigned its offices, changed its meeting styles to encourage equal participation and greater collaboration, and introduced a new innovation team with an unusual mandate: Under absolutely no circumstances should the innovation team innovate. Instead, the team’s mission is to enable the broader community to incorporate the behaviors that enable successful innovation.

Transform Thyself

To see these lies for what they are and successfully transform their organizations, leaders first need to transform themselves. Successfully responding to disruption requires executives to simultaneously reinvent today’s business while creating tomorrow’s business. More specifically, they have to find new ways to solve customer problems while at the same time scoping out new growth opportunities. The challenge isn’t just that these missions are in conflict and involve periods of chaos and uncertainty; it also is that they require fundamentally different mindsets and approaches.

Research by longtime Harvard professor Robert Kegan found that most leaders lack the cognitive flexibility required to “toggle” between being disciplined and entrepreneurial. Kegan terms this flexibility self-transforming, where leaders have the ability to “step back from and reflect on the limits of our own ideology or personal authority; see that any one system or self-organization is in some way partial or incomplete; be friendlier toward contradiction and opposites; [and] seek to hold on to multiple systems rather than project all except one onto the other.” Unfortunately, other research suggests that no more than 5% of high-performing managers have achieved this level of leadership.

It’s not surprising that so many leaders lack this capability. Most grew up in a world that was either disciplined or entrepreneurial but rarely both and almost never both at the same time. And leadership development (with rare exceptions) hasn’t caught up with this emerging need. To transform themselves, leaders must focus more on mindsets, awareness, and inner capacities to combat basic biases that make it hard to make decisions in uncertainty and toggle between different frames. There are no quick fixes here. But research increasingly suggests the best starting point is to embrace what broadly goes under the term mindfulness.

To some, the word might sound squishy and New Agey, but meditation and related practices that use breathing to tune into thoughts and sensations have widely documented health benefits, such as boosting energy and lowering stress. More critical, and for our purposes here, mindfulness boosts awareness, increasing a person’s ability to step back, pause, and become aware of not just habitual thought patterns, but also emotional reactions. As Potential Project managing director Rasmus Hougaard has noted, mindfulness is not about just doing more but also seeing more clearly what is the right thing to do and what is just a distraction.

Mindful leaders can, for example, “see” their reactivity, giving them the tools to identify and overcome the deceptions of disruption. A mindful leader is better at toggling between different mindsets: a disciplined focus on transforming today’s business and more entrepreneurial thinking to create tomorrow’s business. Mindfulness is a powerful, scientifically validated tool for improving self-awareness, which is a critical and underappreciated tool for senior leaders confronting the challenges of disruptive change.

Some leaders who have successfully managed transformative change have touted the value of mindfulness. Aetna’s Bertolini was an early advocate of advancing meditation programs at his company, and in 2014, the company hired a chief mindfulness officer. Bertolini credits mindfulness for easing chronic pain he suffered after a skiing accident and when recovering from a rare form of cancer. He says it also improves his ability to process information and make sharp strategic decisions: “With so many things going on, whether in a small or large organization, you can get frozen by attempting to process it all instead of being present, listening, and focusing on what really matters.”

Another example of the power of mindfulness comes from Pierre Wack, who advanced and popularized the idea of scenario planning while working at Royal Dutch Shell in the 1970s and 1980s. Wack was influenced by Russian guru Georges Gurdjieff and practiced meditation in India. Successful scenario planning, Wack noted, requires “being in the right state of focus to put your finger unerringly on the key facts or insights that unlock or open understanding.” He noted that the value of scenario planning is not about developing specific plans that will actually be implemented or getting to the “right” scenario but about helping leadership understand that the future can be dramatically different from the present, while fostering a deeper understanding of the forces driving potential changes and uncertainties. The approach, he said, gives managers something “very precious: the ability to reperceive reality.”

By sharpening his ability to toggle between present reality and future possibility, Wack and his team transformed scenario planning from a passive manipulation of data into an active tool to stretch thinking and advance discussions. This helped Shell to see what others missed and weather oil shocks in the 1970s and 1980s significantly better than its competitors.

Transform Thy Organization

Of course, it is not enough to transform just the person at the top. Too often you see a single-shot transformational leader. That is, a leader seems to transform an organization, but then the organization backslides when the leader departs. For example, A.G. Lafley drove substantial change at Procter & Gamble as CEO from 2000 to 2009, but the company stumbled so badly when he stepped down that he was asked to return. Lou Gerstner was an icon for transformation during his time at IBM, but by the time Sam Palmisano turned the CEO reins over to Ginni Rometty, IBM had missed the cloud computing revolution and its touted Watson platform was struggling to deliver results commensurate with its hype. Tim Cook has been a strong steward at Apple, boosting growth and strengthening its services business, but he simply hasn’t matched the disruptive magic of Steve Jobs. Single-shot leaders might have the personal ability to toggle between different mindsets, but they seem to struggle to codify core elements of their unique approach and institutionalize them.

Kegan and coauthor Lisa Laskow Lahey noted inAn Everyone Culture that you can create a deliberately developmental organization (DDO) that consciously upgrades an entire organization’s capacity to grapple with disruption. Bridgewater, the world’s largest hedge fund, is a good example. It seeks to base the organization not on founder Ray Dalio’s charisma or his intuition but rather on decision rules, which Dalio calls principles, hardwired into its systems. Some of the fundamental principles include radical transparency, where the goal is to review people “accurately, not kindly”; recognizing that internal exploration and struggle is important (“pain + reflection = progress”); and sharing and supporting project work with complete transparency. Bridgewater gives employee feedback not just to boost short-term performance but to enhance long-term capacity. It consciously helps its employees develop reflective muscles to understand defensive routines and blind spots and to improve their ability to acquire, process, and make sense of multiple forms of data. This commitment to developing everyone’s “sense-making” capacity as a mission-critical component of long-term performance sets DDOs like Bridgewater apart.

Two final examples worth mentioning for their transformative efforts are SAP and Johnson & Johnson, which are helping staff develop creatively, emotionally, and mentally to tackle larger challenges such as disruption. SAP has trained more than 10,000 of its employees to use meditation to improve self-perception, regulate emotions, and increase resilience and empathy. Participants report double-digit increases in their personal sense of meaning, their ability to focus, their level of mental clarity, and their creative abilities. For its part, Johnson & Johnson has long focused on employee well-being. Recent efforts center on energy and performance, with a stated goal to help employees achieve “full engagement in work and life.” Participants answer diagnostic questions such as, “Are you present in the moment, focused, and fully aware?” and peer reviewers assess whether “their self-image is keeping them from being the person they wish to be.” Leaders serve as active role models for building these capabilities. CEO Alex Gorsky, for example, has long worn a fitness tracker and speaks publicly about the link between mental well-being and productivity.

In the first two decades of the 21st century, scholars and practitioners fine-tuned the technical solution to the dilemma of disruption. It is high time for that community to more fully define a human solution — one that starts with senior leadership and carries through an entire organization. If you want to defeat the dilemma of disruption, you must start by defeating delusions about disruption. That challenge starts at the top.