Dave Ulrich: Reinventing the Organization

 

I continue to be impressed by Dave Ulrich's ability to articulate the future of HR, leadership and organisation. Since my current focus is on organisational management, that applies in particular to Dave's recent focus on organisations, with the suggestion that organisation has four times the value of talent (in Victory through Organization). So I really appreciate Dave writing the Foreword to The Social Organization (TSO) too.

And now, writing with Arthur Yeung, Dave has once again moved his thinking on a significant notch. Reinventing the Organization deals with the formation of the Market Oriented Ecosystem (MOE) which I referred to when posting on Dave's and other sessions at the Drucker Forum in Vienna last year.

In many ways I see the book as a follow-on from mine. TSO dealt with the opportunity for melding networks, including the use of platforms, internally. MOE is a build on that, extending the ideas internally and developing them externally too. But I still believe that in the majority of cases, the first useful step to create a MOE might be to develop something more like the melded network from TSO. That then provides a great basis to develop this approach outside of the firm too (see more on this later).

Regardless of where you start, Dave’s book is by far the best book you can read to understand the development of platform based ecosystems, particularly over the last five or so years. It's a deep book, and quite hard going (for me, that's not a negative) so although I've been through the book twice, I need to spend quite a bit longer on it too. Therefore, my notes here summarise my early, rather than fully formed, thoughts.

However, I think I have now got my head around why Dave suggests the book provides an evolution in organisational thinking - a reinvention of the organisation rather than just incremental experimentation. Dave explains this as “reinvention means more than just changing people’s reporting relationships, building teams or announcing a new strategy. You must build a fundamentally new organisation, redefining how your organisation works. Besides understanding and shaping your work setting, you need to change how you coordinate the work, the principles that govern it, and your own and others’ leadership actions.”

If I'm correct, then Dave’s organisational reinvention isn’t about the MOE itself, but the way we see organisations which Dave suggests has progressed from a focus on structure (leading to a focus on hierarchy / bureaucracy) to one on more holistic organisations (the systems view of McKinsey’s 7S or Jay Galbraith’s Star model), and mainly through Dave’s own insights, onto the outcomes or capabilities which an organisation provides. I think TSO develops these ideas further too, describing how organisational forms and other options can be selected to provide the capabilities and organisation principles which are required. That logic applies to the selection of a MOE just as it does a functional, team based or other organisational form. So despite the following diagramme, I don’t think the MOE itself is the radically new idea.

The new idea - and I suppose it’s not that new, but as a result of this book, it’s now more strongly articulated, is that we should always think about an organisation’s ecosystem and not just an individual organisation. Eg I liked the suggestion that MOEs focus on stakeholders more than processes.

So actually, the new logic, I think, is to be clear about the external environment and the required capabilities, and then to develop the ecosystem, systems and structures to support them. I think that this is at least a partial reinvention of organisation design. So I’d adapt the diagramme like this:

By the way, the mini-slide I’ve chosen to illustrate capability on the top left in the above diagramme is the one from TSO showing how the different elements of an organisation from the systems perspective can link with the different aspects of capability, ie human, organisation and social capital. I still think that works for an ecosystem too, although the social capital needs to be extended to what I normally call relationships capital, which is the value of the connections and relationships outside of the single organisation.

You could argue, and maybe this is what Dave is doing, that the traditional ways of seeing systems and structures needs to be replaced by the key features of the MOE, which I explain in a later post. However, I don’t think that’s so. MOEs still have the 7S’s structures, systems, shared values, style, staff and skills, or the Star model’s people, rewards, processes and structure (see the ecosystem model from IRC4HR below), or whatever other set of elements you pick (eg in TSO I present the Organisation Prioritisation Model which focuses on work, infrastructure, people and connections as well as a largish number of organisation and HR enablers, which might not be a reinvention but is, I think, a bit more suited to today’s organisations, and ecosystems too).

Assuming that a reinvented organisation has got to have a particular feature takes us back to the first step in Dave’s evolution diagramme when we assumed all organisations had to have a hierarchical, functional structure, just with a more modern equivalent replacing this. I don’t see that as helpful and certainly don’t believe it would contribute to more evolved thinking. Much better to start with a set of core elements and then build up from there.

It’s still helpful to have an archetype. Dave’s three legged stool for HR is a good example of this, but that’s different to saying all HR organisations need to have three legs. Or that all organisations need to have a platform.

Dave actually suggests there are three archetypal MOEs but I’m just going to review their basic features - see my next MOE related post over the next few days for more on this.

https://tinyurl.com/cudc3zv2

The 20 Companies That Produce the Most CEOs

 Consulting firms have the highest share of employees who go on to become chief executive officers of American companies.

That's according to a recent report from OnDeck. The researchers used LinkedIn data to determine what proportion of employees at major companies end up as CEOs.

An infographic (below) covers key findings from the report.

The researchers found that McKinsey & Company produces the highest share of CEOs (7.1% of former employees now hold the title). It is followed by Bain & Company, Boston Consulting Group, and Kearny.

Check out the infographic to see the 20 companies that topped the list:

https://www.marketingprofs.com/

Understanding, Engaging and Developing Your Workforce

 

Understanding and developing your people

The most valuable resource of any organization is its people. Staff well-being and their level of satisfaction directly impacts on an organisation’s performance and success.

Satisfied people are not necessarily high performers. Happy, content employees are less inclined to seek improvements or do things differently. In today’s climate, this is not a good position for any organization. A company needs energised, motivated staff eager to try something new.

Motivation

Organizations need to understand behaviors and the key motivating factors for employees. Motivational theories can be helpful at understanding motivations, though satisfaction at work is achieved through a complex interplay of variables. High pay rarely compensates for poor working conditions, and modern offices and good working conditions rarely compensate for very low pay.

Engaging your employees

Engagement is a combination of commitment to the organization and its values, plus a willingness to help colleagues. It goes beyond job satisfaction. Engagement cannot be ‘required’ as part of the employment contract. There are many individual and organizational factors determining engagement. Engaged employees speak positively about their organization, have a strong desire to be a member of their organization, and make an effort to contribute to its success.

Measuring satisfaction

Common approaches to measuring satisfaction use a combination of qualitative and quantitative research designs. Off the shelf staff survey packages are available, but most companies choose a customized project design conducted by an external agency/partner or in-house HR team.

Qualitative research methods take their roots in the social sciences. They are often used in early consultations with staff identifying issues of greatest importance. At this consultative stage, staff should have freedom to express their views. Research is carried out through internal focus groups and depth interviews.

Quantitative research methods involve samples of large numbers and measurement. It is usual for staff surveys to be census surveys, inviting all staff to participate. The questionnaire is developed from issues which have arisen from the consultative stage, and the questionnaire comprises mainly closed questions.

The employee survey

Employee surveys normally cover key areas impacting on the staff experience, such as leadership and staff development opportunities.

The rating scales are usually determined by the sensitivity of the measurement required. There is no definitive or “correct” way to measure satisfaction – all scales need to be translated to a numerical scale in order to analyse the results.

Ensuring the highest response rate

When carrying out surveys, getting employees on-board can be challenging. Poor response rates, insufficient or unclear information and a failure to use the survey to drive actions are just some of the disappointments that are reported. Attention to several issues surrounding the survey can facilitate a positive response, including CEO involvement and a publicity campaign prior to the survey.

Comparing employee satisfaction

Benchmarking of employee satisfaction can be carried out internally where scores from within the company are compared using the same questions over a period of time, or externally, where scores from other external organisations are taken and compared.

External benchmarking has problems of comparability when taken out of the context of the original survey. It can be tempting to “cherry pick” questions from several sources where the data from other companies is publicly available, however, questionnaires tend to work in their entirety, and the total composition of the questionnaire therefore has an impact on the results obtained.

https://www.b2binternationalusa.com/

Evolving and Elevating Leadership Consciousness

 

How conscious is your own leadership and your leadership team? What do you and your leaders need to become to create the future you want?  What type of leaders are needed?  How can leaders enable breakthroughs at all levels of society - individuals, teams, communities, organizations (for profit and not for profit) and even nations?

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Context

• The Consciousness which perceives the world is one with the Reality of the world. Consciousness and reality are one. [1]
• We construct our own reality - everything in our world is self created.[3]
• Timeless leaders free the confines of their consciousness and rediscover its identity with reality to liberate the human potential that lies with themselves and others (and others). [3]
• This translates in time in the organisational world to higher employee engagement, productivity, individual and organisational capacity and profitability.

 

Call to Action – Leadership profiling and Discovery workshops

The diagram below summarises the action steps that a company can take to access this newer (postmodern) science of liberating the immense potential, performance and effectiveness through higher stages of leadership consciousness development. This is an opportunity to get a head start for the challenges and opportunities that we all will have to face in the future of work and in our lives.

How some of our customers have seen demonstrated business benefits

"I love that the tool does get at deeper discussions, this is terrific." (HR Director P&G Europe)

"We as Omega truly are inspired by your intent and we are experiencing a true partnership. We are really proud to have partnered with you." Senior Director Human Resources, Omega Healthcare Management Services 

"It's heartening to see so many of us working towards a common vision in our own ways across the world. Look forward to working with you in trying to understand what we can do for our organisation...hopefully make it into a larger case study". Head of Personal Excellence & Organization Transformation at Tata Consultancy Services (TCS)

“Together with HR, I have reviewed and endorsed the “Being At Full Potential” methodology and believe it could be a great enabler in our journey as a Team. …  I entirely trust the solidity of the self-assessment survey he (Mark) is offering us to take. VP Global Sustainability P&G.

Leadership today - We are taught what to do as leaders, but we must learn how to be good leaders[4]

 Organisation have done a great job at teaching leaders in what to DO as managers and leaders - in setting direction, translating goals into concrete actions, establishing the right systems, structures and reward mechanisms to influence behavior, all contribute to the DNA of an effective “DOING” leader.

Leaders in the modern era are trained for the need to manage (and DO) things that works well in simple and complicated situations. We have learned how to be very good at this. We are taught well in what to do as a leader and we are good at it. But this world is clearly disappearing in the new technological age of unrelentless changes, complexity and often chaos that leaders must deal with constantly today. In other words, effective “DOING” leaders alone are insufficient for meeting today’s and especially the future needs of organisations.

But in terms of our innate Human Potential “How much of a person's true leadership potential is being expressed when we solely focus on the “DOING” or stay at DOING level? 50% 65%? 

Our Human Potential data shows that the average is 65% (see figure below)

What new learning will it take to move the ‘Human Potential needle’ to 80% or 90%?

Our Human Potential data shows that the average is 65% (see figure below).

New studies by many prominent constructive-developmental researchers[5] have shown us a new body of knowledge of higher stages of leadership development by new learning that can shift the “leadership potential meter”. This body of knowledge called “Action Logic”, first developed by William Torbert (building on the work of other scientists and researchers) and it is catching the attention of global leaders - both in high ranked organisations and large not for profit global organisations.

There are 8 action logics prevalent in the adult population as summarised by the generalised diagram (by Edward Kelly[6]) shown below.

The table below is a description of the 8 leadership action logics (adapted from Barrett Brown paper “The Future of Leadership for Conscious Capitalism”)

Vertical Learning is the key to shift the leadership potential to the next level of action logic or consciousness

According to the constructive-developmental scientists and researchers, there are two kinds of growth that we associate with adult development - vertical and horizontal and both are important, but they are very different. “If horizontal development is concerned with content and what we know, vertical development is concerned with how we know it (Harris & Kuhnert). As Cook-Greuter describes it, horizontal development is the gradual accumulation of new knowledge, new skills and experience, which can occur without any fundamental change in the individual’s overall meaning making, epistemology or worldview. Vertical development on the other hand, which is a much rarer form of development, entails a complete transformation in the individual’s meaning-making and in their overall view of reality that in turn transforms what they think, how they feel and what they do.[7] This is illustrated in the diagram below.

The new science of vertical learning is becoming central to leadership and high-performance development in organisations. 

There is an economic value business case for leaders to develop their leadership action logic or consciousness. In a study by Zenger & Folkman (of over 20,000 leaders), they state that “Good leaders create 3x more economic value than poor leaders, and extraordinary leaders create significantly more economic value than all the rest.” (emphasis mine). From their study, they show that good or great leaders have leadership characteristics that enable them to increase productivity, employee engagement, innovation and customer orientation.

Newer studies show that by developing the action logic or consciousness of leaders, they can potentiate a shift (an increase) in their leadership potential leading to higher performance and expanded effectiveness.[8]

Today, this new leadership action logic development and learning has been accessed by primarily by high-ranked global corporations or more progressive companies. They have paved the way for this adopting new developmental research science into the organisational world. But they also gain a head start in developing the next generation of Conscious leaders. 

We [1] believe is that leadership consciousness development goes beyond creating economic value. Together with creating economic value, conscious leaders also learn how to enable breakthroughs at all levels of society - individuals, teams, communities, organizations and even nations. In other words, conscious leadership goes beyond just creating economic value.  

By deploying our Human Potential realisation tool and methodology, we now have access to a new language and developmental practices (rituals, ceremonies and symbols) for shifting individual leader’s consciousness maturity or action logic across to their next higher state or level, and therefore to higher states of leadership performance and experience.

Another actionable pathway in learning and applying leadership action logic or consciousness

We [9] offer another viable and practical pathway to access higher stages of leadership consciousness or action logic. Our work lies at the intersection of cutting-edge science and ancient wisdom traditions.

Modern management science and ancient wisdom traditions recognize a certain state consistent among those who operate at high potential. These people tend to lead meaningful and fulfilling lives, create significant impact and have the ability to do all of this while remaining centered, irrespective of the circumstances they encounter.

When the Human Spirit is ignited, peak performance inevitably follows

In the realm of sports, music and arts we have known this for a long time. Acquiring more skills can only take us so far. Getting to Peak Performance however also requires doing the inner work of shifting mindsets, addressing our limiting beliefs and learning to manage the EGO through higher stages (or levels) of consciousness. Now is the time to bring this same thinking into the world of organizations.

Since the late 2000s, we have taken on the challenge to create a holistic model that will inform and help drive greater levels of Human Potential realization among individuals and organizations. The “Consciousness Maturity Index” is the product of that effort.

The ultimate test that decides whether leaders are reaching their ultimate leadership potential or not is by finding out how masterful they are in the manner they consciously experience reality.[10] 

Awakening our consciousness through vertical learning AND elevating levels of consciousness help us to redefine our view of reality (and help others to do so as well), to start showing up in our full potentialities as leaders and in “dancing” with the how the reality of the emerging situations is occurring  to us in the complex and uncertain world we live in.

Our Human Potential diagnostics gives leaders in organisations another affordable, practical and actionable way in advancing leadership action logic and consciousness, leading to the development and liberation of leadership potential that lies within themselves and their performance and effectiveness.

Our Human Potential diagnostics also give us a new kind of language and crucible for supporting, shifting and uncovering consciousness to help us to see the world with “new eyes” that reflects new possibilities and insights. The diagram below summarise how this new pathway helps us in learning and advancing leadership action logic and its correlation with consciousness maturity states or levels.

Developing a spectrum of next generation conscious leaders

It is a well know statement (attributed to Albert Einstein) that “No problem can be solved from the same level of consciousness

that created it.” Through this new pathway of developing conscious leaders with the Human Potential Diagnostics, we are also developing a conveyor, pipeline or spectrum of the next generation of conscious leaders – in solving today’s and tomorrow’s problems, challenges and opportunities with new levels or states of consciousness. 

Companies developing a spectrum of leaders with different stages of action logics is better prepared to take advantage of the opportunities and face challenges in the fast change, volatile and complex future world that we are working in. These companies have a greater capacity and confidence to act in and on the world in a way it believes it can be effective and have significant impact.[11]

The diagram below shows how for example we can map or profile the spectrum of leadership consciousness levels or action logics of 10 leaders in an organisation. 

Creating the Future That We Aspire For

The Human Potential Assessment Tool and methodology makes it very easy for organizational leaders to discover how and where to place themselves (the types of leadership action logics and consciousness) based on today's reality, and more importantly, get a glimpse of what the emerging future reality and human capacity could look like at its full potentiality.

It is this future state, and the additional value that it can create for an organization, that triggers an openness to look at the deeper human levers sitting beneath the surface. Not only do we measure where you and/or your organisation are today on these leadership priorities, but we also provide you with a detailed map of your ideal end state.

With this ideal state in mind we work backwards to identify the areas of intervention at the deeper human dimension to bridge the leadership gap and the readiness to deliver short- and long-term expectation and outcomes demanded by customers and stakeholders.

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[1] Rupert Spira – The Transparency of Things

[2] Debashis Chatterjee – The other 99%

[3] Ibid - adapted

[4] Inspired by an article I read, but could not find the reference to it 

[5] Piaget, Loevinger, Kegan, Cook-Greuter, Torbert, Ken Wilber, Barrett Brown and many (many) others

[6] Edward Kelly - Transformation in Leadership, Part 1: A Developmental Study of Warren Buffett 

[7] Ibid

[8] Reference – Barrett Brown – Leadership at the edge – leading complex change with postconventional consciousness; with adaptations

[9] Being at Full Potential - http://beingatfullpotential.com/

[10] Debashis Chatterjee – The other 99% - adapted 

[11] Reference - on action logic and action inquiry by William Torbert - http://www.williamrtorbert.com/

https://bit.ly/3svWz5o

Management Skills 101: How setting expectations is critical to leadership

Setting clear expectations leads to successful teamwork

How is setting expectations a critical leadership skill?

Research states one of the top reasons for unhappiness in the workplace is communication issues with one’s manager/supervisor. One of the key shortcomings for this case lies with the managers. Very often managers make incorrect assumptions that employees have all of the information needed about what needs to be done, without having been told how things work. Yet, if asked, the employees will give you a completely different picture about what is expected of them. Due to this evident disconnect, the employee fails to deliver the expected results, and the manager ends up blaming the employee. Resentment follows thereafter, leading to poor performance.

This is why it’s critical for you as a manager to get everyone on the same page, and to set the expectations clearly at the beginning of your professional journey together. In an article1, Kevin Eikenberry describes 4 main areas in which you need to clarify the expectations for your team.

The 4 key areas to setting expectations

Work – It’s imperative for your team to know exactly what is expected of them. There is a basic job description that a person is informed of when they join the team, however the unwritten rules about the level of quality expected in the work, and the depth of knowledge that needs to be exhibited, are what defines a successful work project. What are the boundaries of an employee’s responsibilities? What are and what aren’t the roles of the job? These things include, and even go beyond, the job description. For optimum performance and strong working relationships, these expectations must all be clearly communicated, understood and mutually agreed upon.

Communication – Communication is one of the most critical components of organizational life, and it is far too important to leave to chance. Everyone operates based on their preferences and their habits, which might be in conflict or different from the work habits and preferences of others in the organization. Setting the rules of conduct helps employees navigate the workspace more efficiently and confidently.

What’s the preferred way of communicating, both formally and informally? What needs to be communicated to all, and what can be handled at the employee level? What should be the frequency of communication? What particular information should be shared in each of the different mediums of communication? What are the protocols for communication at different levels – while reporting to the manager or even upper management?

Time – When working in tandem with multiple people on multiple tasks, it’s important to keep track of your time and that of the others working with you. Clarity is required in terms of expected response times to requests from different levels in the firm. Make sure also to clarify what the work-times of other team members are, in case you’re working in a virtual or international team.

Culture –  Defining the corporate culture is an important component to clarify for the team when managing expectations. Be it first time employees or experienced hires, they bring their past experience and habits with them.  If those experiences and habits differ from the organizational culture, non-clarification can lead to poor performance (perceived or reality) and to interpersonal conflicts.  It’s the responsibility of the manager to make sure that the organizational principles, behaviors, values, and overall expectations are clarified.

Evaluating Performance Expectations

After clarifying all expectations, it’s best to have a checklist to affirm whether you and your team are in accord with the expectations. According to John Baldoni2, there’s a 3-question checklist managers should ask themselves:

1. Does your team know what’s expected of them? It’s important to have your team paraphrase what has been told to them. Have a conversation to test their understanding of the expectations shared with them. People may know the specifics, but often lack knowledge about how what they do helps the entire organization.
2. Have you told your team what they can expect from you? It’s important to let employees know that you as their manager are available to them. It’s important they know how and when to reach out to you, and that you are accessible to them as a knowledgeable resource. For new hires, the role would be more as a teacher than as a boss. For experienced hires, you will have to be a coach and help them unlearn and relearn the behavioral and cultural aspects of their job. For the team, you will be the supplier of resources as well as their champion.
3. Do employees know what is expected of each other? In a team everyone has defined roles and responsibilities, so it’s also important that everyone knows how their work affects their colleagues and how to work in tandem to achieve team/organizational goals.

Communicating expectations in a clear way enhances relationships because your team is confident in their manager and can react and communicate directly in all aspects of their position. This clarity prevents employees from having to do rework or getting blamed for not meeting unclear or changing expectations. When expectations are communicated with the right amount of direction or delegation, depending on the person and the situation, employee ownership is further developed.

FOOTNOTES
1Four areas of expectations for great results
2Three questions to clarify – HBR

Keep Calm and Manage Disruption

Joshua S. Gans

Just whisper the word “disruption” if you want to scare the life out of many business leaders. But contrary to some claims, disruption can be averted, and many businesses find ways of managing through it.

If you want to capture the attention of a business leader, say the word “disruption.” At least, that was the reaction of Andy Grove, then the CEO of Intel Corp., when he first heard the disruption theory espoused by Harvard Business School professor Clayton M. Christensen.1Christensen argued that even when a company does everything right — for example, focuses on its customers — it remains vulnerable to competition from unexpected sources. Christensen had seen a pattern of market leaders being upended by entrants in the hard disk drive and steel industries, among others. Grove called Christensen’s message “scary,”2 and indeed, over the past 20 years, Christensen’s observations have led to widespread fear and paranoia. In the minds of many executives, disruption is just around the corner, and the fear is palpable.

Seeing that fear has led some researchers3 to question whether such emotion is justified. Using the examples of disruption that Christensen cited or anticipated, academics such as historian Jill Lepore, writing in The New Yorker, and Andrew A. King and Baljir Baatartogtokh, writing in MIT Sloan Management Review, have attempted to test the facts against the theory by looking at questions such as whether the claimed disruptions actually ended up causing businesses in their path to fail.4 Although both analyses were more nuanced than determining that simple relationship, the researchers found that the claimed link between a disruptive innovation and significant trouble for established companies often did not hold up. This led them to conclude that the theory did not have a solid basis and that managers could place less weight on such concerns.

However, just because the hypothesized link between disruptive technologies and the failure of a company is weak does not necessarily mean disruption cannot happen. Instead, my contention here is that two decades of managerial scholarship has revealed a set of reasons why that link might not be present strongly in the data. Specifically, contrary to some claims, disruption can be averted. Indeed, although disruption can happen, many businesses find ways of managing through it, and this can weaken any relationship between a disruptive event and the actual disruption. To be sure, facing disruption is no picnic. But it also isn’t the existential threat that so many see it as.

Disruption in Perspective

One of the issues that immediately arises in discussing disruption is that the word “disruption” itself is overused. These days, everyone wants to be the disrupter, and somebody is constantly getting disrupted. Thus, before exploring how companies can manage their way around disruption, we should specify what the term really means.

The phenomenon of disruption is something that management theorists and scholars have pondered for decades. Ever since the economist Joseph Schumpeter tantalized us with the notion of “creative destruction” — that progress in innovation necessarily requires shedding the shackles of the past — we have wondered about the mechanics of the process. For although it is not a surprise when incompetent or complacent businesses go under (in fact, it can even be comforting), what draws our attention is the notion that companies doing everything right might also be caught in destruction’s path.

Christensen’s theory is the most recent instantiation of this idea. Although the overuse of the term “disruption” can be traced to how he used it in his popular 1997 book The Innovator’s Dilemma, his interest was in understanding the failure of successful companies; indeed, the book’s subtitle isWhen New Technologies Cause Great Firms to Fail.5 For that is what disruption is: It arises when successful businesses fail precisely because, in the face of technological change, they continue to make the choices that made them successful in the first place.

Christensen identified a specific pathway by which such failure could arise. He argued that there was a problematic type of innovation — specifically, innovations that initially perform worse on some dimensions but rapidly improve along many dimensions. When such disruptive innovations emerge, successful companies that have paid careful attention to their customers’ needs and continue to do so are vulnerable to competition from those that adopt the innovations. Moreover, this is not just an unconscious blind spot. Successful companies make conscious decisions to deemphasize or seemingly ignore those innovations until it is too late. They are stuck in an unenviable dilemma that prevents them from moving toward the new for fear of losing too much of the old.

The question here, however, is whether companies, when facing such disruption, can step back and counter those effects. Here I will show that businesses have countered potential disruption through effective reactive management, often by investing aggressively in that new innovation after entrants had brought it to market or by acquiring the entrants.

The Risk of Disruption

Before considering ways of combating disruption, it is important to examine in more detail why, absent such management, disruption can lead to failure, or specifically why what otherwise might be considered competent or even excellent management can lead companies astray. It all starts with a particular type of technology or innovation that emerges in the marketplace. This disruptive technology, as Christensen referred to it, has two characteristics. First, it tends to underperform the established company’s products in its ability to serve mainstream customer needs, although it may be attractive to a segment of customers that is underserved by established companies, thus providing a market opening. Second, the disruptive technology’s products can grow into a threat by improving rapidly along dimensions that mainstream customers do care about. The threat to the established company becomes real as entrants attract its marginal customers. As entrants’ offerings improve, the competition becomes more intense and, Christensen predicts, may leave incumbents unable to respond effectively until it is too late.

The computer industry’s transition from minicomputers to personal computers in the 1980s offers a good illustration of how this occurs. During that period, large and medium-size enterprises favored minicomputers, but personal computers were starting to become a potentially lucrative market segment among households and smaller enterprises. At the time, Control Data was the largest independent supplier of 14-inch and 8-inch disk drives for minicomputers. When 5.25-inch drives first emerged as a viable option, minicomputer makers didn’t want to make trade-offs for the sake of smaller drives.

Although size was a factor, the minicomputer manufacturers were more concerned with storage capacity and other performance metrics. As a result, new entrants pitched the 5.25-inch drives to the emerging personal computer segment. Seagate Technology aggressively developed a supply chain to produce 5.25-inch drives en masse; when established suppliers finally saw the potential of this segment, they were too late. Seagate acquired Control Data’s disk drive business in 1989 to become a market leader in all hard disk drives, a position it has been able to maintain.

For most companies, uncertainty about which products on the fringe of their markets might turn into serious competition makes it difficult to respond; initially, at least, many of the products are unimpressive. Responding to disruption involves deviating from strategies that currently serve your best customers and taking on the established competition. Thus, companies may hesitate to jump the gun on technologies that are unproven and that then prove not to be important. That said, by waiting to see whether new technologies start to serve their best customers, established companies can formulate and implement responses. Failure is by no means inevitable. Below I will outline three responses to disruption that can be implemented once disruption is actually occurring: beating them, joining them, or outlasting them.

Strategy 1: Beat them.

The disruption we have discussed here essentially comes from the demand, or customer, side. It is not so much that a company is unable to respond to the competition that arises from what turns out to be a disruptive innovation; rather, it does not have the incentive to respond.6 Although it may be difficult not knowing whether an entrant’s innovation will become a threat, when the situation eventually becomes clear, the incentive also becomes clear: The established company must act to protect its market position.

Instead of doubling down on the old technology, one response is to do the opposite and attack by investing in the new technology. This strategy was advocated in the 1980s by Richard N. Foster, a longtime director at McKinsey & Co.7 It involves marshaling resources (something incumbents often have more of than entrants) and aggressively investing in the new technology in an effort to control the technology as it improves in ways customers care about.

An example of this can be found with Microsoft Corp. and the “browser wars” of the 1990s.8 In the mid-1990s, Microsoft introduced Internet Explorer to compete against Netscape Navigator, which at the time was the dominant product in the browser market. Microsoft did this by setting up a new division that was separate from its established Windows division. The new division had its own approach to the Internet, through the Microsoft Network, which controlled the Internet user experience and also the services it pitched to consumers. (AOL used a similar approach.) Microsoft wanted to guide consumers to applications that complemented its existing ecosystem.

It is not entirely clear how Netscape was able to gain traction before Microsoft got around to responding. Microsoft had consistently monitored developments in the Internet space, so it had to have been aware of what was happening. However, in 1994, Microsoft CEO and founder Bill Gates was still promoting proprietary services as the only profitable way to bring the Internet to consumers. By 1995, with Netscape taking off commercially and also providing interfaces with online applications that mimicked Microsoft’s own approach with Windows, the danger was clear: Netscape was on the verge of owning a key complement to Windows that was beyond Microsoft’s control.

Guided by an eight-page memo by Gates describing the threat, Microsoft took action. Over the next few months, it invested heavily in a succession of versions of Internet Explorer aimed at luring users away from Netscape. There were challenges: To begin with, Netscape had an open systems approach (making its browser available across different computing platforms), whereas Microsoft took a different approach; it favored Windows. What’s more, Microsoft’s organizational capabilities were mismatched with the challenge, and a structural realignment would take time. Thus, Microsoft opted to create a new division dedicated to defusing the Netscape threat. By 1998, the division had 4,500 employees. Although Microsoft has had subsequent up and downs, it continues to be the dominant market force in its traditional areas of personal computer operating systems and applications.

Strategy 2: Join them.

While aggressive investment can forestall disruption, another way to achieve this result is by acquisition. The idea here is for an established business to “wait and see” whether a market entrant’s innovation improves and becomes a potential competitive threat. Then, instead of waging war, the existing player acquires the entrant’s business and its set of products. In the process, the established company averts disruption.

This wait-and-see approach was one of the major strategies employed by market leaders in the hard disk drive space that Christensen featured in his early work. Christensen’s study ended around 1995, just as Seagate Technology, the new market leader in 5.25-inch disk drives, faced competition from Conner Peripherals, which was selling 3.5-inch drives. However, soon thereafter Seagate acquired Conner and went on to become the biggest seller of 3.5-inch drives, which became the most successful type of drive. With this, Seagate has managed to remain a market leader in the industry to the present day. Seagate and two competitors — Western Digital Corp. and Toshiba Corp. — have for the past two decades acquired the other hard disk drive manufacturers.9 Moreover, in 2015 Western Digital moved beyond hard disks and acquired SanDisk Corp., the leading maker of flash memory storage products (which many view to be a technology disruptive to hard disk drives).

Acquisition depends on the permission of the entrant. But there are good reasons why cooperative deals such as acquisitions or licensing agreements may be possible. When disruption is upon them, incumbents realize they will face stiffer competition in the future, so they have an incentive to neutralize the threat. However, there are advantages to disrupters as well. Even if they know they are on a better technological path than the incumbents, avoiding a prolonged intense period of competition is valuable and may be a common interest.10 That said, there is a potential constraint on a cooperative deal: Disruptive technologies normally occur on technological trajectories that aren’t consistent with the ones incumbent players are used to. Thus, the costs of integrating the old and new technologies are apt to be high. If the costs are too high, then cooperation may not be advantageous. However, if the costs, while significant, are not too high — and if they can be reduced as the disruptive technology improves and is better understood — an entrant may choose to compete initially with the incumbent, but as the technology becomes more proven, the opportunity for a cooperative deal may brighten. In principle, then, the disruptive technologies that are the least understood initially — but turn out to be the most promising — are the ones that begin with competition (with the entrant as a competitor) before switching to cooperation.11

ABOUT THE RESEARCH

This article draws on two types of research. The first involved studying the commercialization decisions of entrants with disruptive technologies. This research, conducted with David Hsu and Matt Marx,i examined whether startup entrepreneurs used competitive commercialization strategies (by entering product markets to compete with incumbents) or cooperative ones (by doing licensing or acquisition deals with incumbents). We hand-coded information on commercialization strategies from 60 years of startup activity in the speech recognition industry. We then constructed a dynamic model of how commercialization choices and deals would evolve dynamically with technologies that themselves evolved over time. We also conducted econometric analysis of the resulting strategies of more than 200 businesses to demonstrate that the patterns of dynamic commercialization choices largely confirmed the theory that “joining them” was a strategy incumbent businesses employed when faced with disruptive technologies.

The second part of the research focused more broadly on the phenomenon of disruption. The article discusses managerial reactions to what I term demand-side disruption of the Christensen type. My forthcoming book The Disruption Dilemma considers other sources of disruption that are mainly supply-side or organizational, as well as strategies that organizations can employ proactively to ensure themselves against disruptive threats over the long term.

My own recent research into the automatic speech recognition industry, with Matthew Marx of the MIT Sloan School and David H. Hsu of Wharton, set out to test this theory of “compete, then cooperate” as it pertains to disruptive technologies.12 (See “About the Research.”) We examined more than 50 years of startup strategies among automatic speech recognition companies. Although speech recognition technology (such as Apple’s Siri, Microsoft’s Cortana, and Google Voice Search) is embedded in today’s mobile devices, previously the technology was deployed in more pedestrian settings such as call centers. As with disk drives, the speech recognition industry was made up of a mix of established companies and new entrants. Whatever claims new products made about accuracy could only be evaluated over time.

In our examination, we found that for new technologies that fit Christensen’s definition of ones that could lead to potential disruption, new entrants were indeed the first players to bring those technologies to market. An example is the move from speech recognition embedded in specialized chips or hardware units to technology that was strictly software. Software initially did worse on traditional metrics (such as vocabulary size and accuracy) but better on cost and convenience. We found that the best of these technologies improved over time on traditional metrics and thus were ones that might lead to disruption.

We used this classification to determine whether entrants that initially competed with incumbents using disruptive technologies continued to do so or whether they pivoted to cooperate with them later. A well-known case involves Siri, the speech-recognition-based “personal assistant” that was an independent app before Apple acquired it in 2010. Less well known is the namesake product of a startup called Vlingo Corp., which introduced speech recognition five years earlier in a mobile app that featured grammar-free speech recognition. Unlike existing technologies, Vlingo didn’t confine users to a set of recognizable phrases but allowed them to speak freely. Although it was less accurate than previous technologies, it improved over time. Initially, Vlingo sought to embed the technology in mobile handsets, but the performance wasn’t considered good enough. The mobile app was developed to demonstrate that consumers would embrace the technology and accept some trade-offs. The strategy worked, and licensing deals based on the original idea to embed the technology followed. (In 2011, Vlingo agreed to be acquired by Nuance Communications.13)

Vlingo switched from competing to cooperating, but it wasn’t the only company that shifted its strategy. We found that new-technology entrants that started out competing with incumbents were four times more likely to make the switch to cooperation than those with what turned out to be sustaining technologies.

On the incumbent side, we confirmed that companies could indeed use a wait-and-see approach with respect to potentially disruptive entrants and then join them later when their technology proved itself. So long as there aren’t any other barriers to cooperation, this is a valuable option for established businesses. Moreover, although they may pay a higher price for such cooperation when a disruptive technology becomes proven, incumbents can save on the costs of reacting to, or acquiring, nascent startups that do not turn out to be real threats.

Strategy 3: Wait them out.

Incumbents can try to manage disruption by beating or joining the new market entrants, but as the Control Data example shows, they cannot wait too long. As technologies improve, entrants may become too strong to beat or too expensive to acquire. However, in planning reactions, companies should also assess what they have that entrants lack. It is rare that a disruptive technology allows an entrant to build out all of the key elements in a value chain. Indeed, sometimes incumbents are in positions of leadership precisely because they have invested in value chain elements that are difficult to replicate. Under these circumstances, incumbents may be able to afford to wait disruption out and react on their own timeline.

Having key complementary assets can help established companies buy time. Although innovation may reduce the value of and necessity for such assets in some cases, in others, by design or sheer luck, this may not be the case. The typesetting industry provides a great example.14 Typesetting is based on Gutenberg’s introduction of hot metal type for printing from the 1400s. But in 1886, when Ottmar Mergenthaler invented the Linotype machine, keyboards became the main way of inputting text. Linotype used melted metal to create the type. Until 1949, this was the only method of typesetting; Mergenthaler Linotype and two other companies (Intertype and Monotype) dominated the industry. To say that this industry underwent dramatic technological changes in the twentieth century is an understatement, yet Mergenthaler’s business for many years remained among the dominant players. How was this possible?

Mary Tripsas, the author of a 1997 study on typesetting, found the answer: fonts.15 In 1949, hot metal gave way to a photographic process using a xenon flash, but just over a decade later the technology was overtaken again by the cathode ray tube, followed in the mid-1970s by laser typesetting. In almost every case, previous competencies were made redundant by a new technology, and the established businesses struggled to produce leading equipment for the next generation. Unlike disruptive technologies of the sort that Christensen has written about, the new entrants’ products in typesetting technically outperformed those of incumbents. However, it was only in the transition from hot metal to photography that new entrants made significant market inroads; even then, one of the other incumbents (Intertype) was actually the first to market.

The problem new entrants faced was that they didn’t have fonts, a key complementary asset. Without the fonts (which were proprietary and owned by Mergenthaler and the other hot-metal typesetters), they were unable to compete with established companies, particularly for sales to newspapers and publishers. Such customers’ products had a look and feel that depended on the font they chose. In the late 19th century, Mergenthaler had invested in developing new fonts. By 1900, it had more than 1,000 typefaces, which established a high barrier for new entrants. Customers that wanted Helvetica had no alternative to purchasing from Mergenthaler, which gave it a critical advantage. The printing technology may have changed over the years, but the fonts endured. Thus, Mergenthaler had a means of slowing down the disruptive process and formulating a plan to control the rest of the process. By having a key complementary asset, Mergenthaler could wait out the disruptive period (sometimes for several years) before reasserting its dominant position. Even today, Mergenthaler’s font library, now owned by another company, is in use.

Costly Options

The managerial reactions to disruption that I have presented here do not stop disruption but instead allow incumbents to manage the consequences of disruption for themselves. Thus, they can survive disruptive events and continue on into the future. However, the options presented here are arguably very costly. Beating a disruptive entrant requires investment of significant resources, usually in excess of what the entrant invests in bringing the technology to market. After all, incumbents need to catch up and have to learn along the way. For Microsoft, meeting the Netscape threat was eventually successful, but the consequences in terms of organizational focus on products other than Windows and online services were steep. Moreover, even when Microsoft succeeded in dislodging Netscape as the leading Web browser, it took several years for the company to reintegrate its browser with its other businesses.16

Costly as it is to beat market entrants early, the costs of waiting and acquiring the entrants later are also high. Recall that the rationale for waiting was to let the entrant prove itself in the market before doing a deal that neutralizes the potential competitor. The problem, of course, is that it will be much more expensive for the incumbent to do that deal once the technology and competitive threat are proven. In part, paying out extra dollars saves the incumbent from preemptively buying a myriad of unproven technologies. But more critically, it can be costly to integrate the entrant into the incumbent’s processes. To be sure, by waiting to understand the technology, the costs fall, but they likely still exist.

As the costs of managing disruption can be large, it is useful to consider when a company might choose between beating entrants and acquiring them. To beat an entrant requires incumbents to use any advantages they have to the maximum extent. Mergenthaler had unique assets that could buy it time. Microsoft had a large number of engineers at its disposal who could be easily redeployed. In each case, the company could combine resources or assets with the ability to manage time. For Mergenthaler, the challenge was to slow down customer attrition; for Microsoft, it was to accelerate the response. In each instance, the response undermined the entrant’s position.

Considered in this light, acquisition appears to be an easier route. However, it isn’t that simple. If an entrant is acquired but the disruptive technology is not integrated into the existing business, what is to stop another entrant from appearing on the scene and continuing the disruptive wave? Instead, for an acquisition to be effective, incumbents must have capabilities that allow them to integrate entrants properly. Specifically, they need to use the acquisition as an opportunity to develop the disruptive technology further and not suppress it. Just buying something and putting it on the shelf will not stop — and may even encourage — other disruptive entrants.

In this light, it is interesting to examine Facebook Inc.’s recent strategy regarding potential disrupters. Facebook acquired Instagram in 2012 for about $1 billion and WhatsApp in 2014 for around $19 billion. In both cases, Facebook chose not to integrate the acquisitions into its main Facebook products but left them as separate entities run by the founding entrepreneurs. To this day, each operates relatively independently. In essence, what Facebook did was to buy an option to control future competition: specifically, it ruled out future head-to-head competition with Facebook. But Facebook put off the costs of integration that might otherwise have been a barrier to a cooperative deal. It is too early to know whether this represents a new form of managing potential disruption, but it may well turn out to be an efficient way of managing the costs of forestalling it.

For executives who have determined that the threat of disruption is real, the starting point should be to ask questions. Is the company able to redeploy its own resources to confront the disruptive threat? If not, is the company ready and willing to acquire resources externally that will allow it to meet the threat? While the message of this article is one of hope, these questions are not easy to answer, and the answers can be even more difficult to implement. They require management insight and effort. As Christensen and others who have considered disruption have long noted, complacency is the enemy.

REFERENCES (17)

1. T. Mack, “Danger: Stealth Attack,” Forbes, January 25, 1999, www.forbes.com.

2. A.S. Grove, on the cover of C.M. Christensen, “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail” (Boston: Harvard Business Press, 1997).

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