Sensemaking Is Critical for Navigating Complexity

Many leadership models are missing a key ingredient: sensemaking, the capability for navigating change and planning through uncertainty. As our world grows more complex — and in the face of difficult, uncertain circumstances — executives need to recognize sensemaking as a crucial leadership tool and embed sensemaking processes and practices into their organizations.

Banning Apps to Increase Security May Instead Heighten Risk

TikTok is suing the U.S. government after the Trump administration’s announcement that it was considering banning Chinese social media apps, followed by executive orders blocking transactions with TikTok’s parent company. Two MIT Sloan cybersecurity experts believe that such a ban could have sweeping impacts on the business community beyond the tech sector.
 

Elevating Cybersecurity, Strategically

Most companies treat cybersecurity as an operational issue — and are often unprepared for debilitating attacks. Elevating it to a matter for strategic planning can not only improve organizational resilience but also reveal strengths, weaknesses, and new opportunities.

Cities Are Crucial for Innovation

As the pandemic has demonstrated, tech workers are capable of working productively almost anywhere. Still, productivity is distinct from innovation, and for successful disruptive innovation, people need exposure to a diversity of creative ideas, which research shows is more likely in large cities.

Anticipate Your Own Disruption

Developing a truly innovative strategy requires you to anticipate how your organization might be disrupted. The Phoenix Encounter Method uses a series of exercises and workshops to imagine your company’s annihilation and then develop a new strategy for disrupting yourself before a competitor can.

What Else We’re Reading This Week

• Three considerations for developing truly inclusive hiring practices
• Tech companies are shifting perks to support remote employees’ mental health and child care needs
• Working remotely can be stressful … even for teeth

Quote of the Week:

“A few decades ago, companies could build a strong business model and apply it more or less unchanged for years. In that era, resilience was based on stability and competitive barriers to entry. … Resilience now depends on rapid and effective adaptation to change.”

— David J. Teece, Paul G. Raspin, and David R. Cox in “Plotting Strategy in a Dynamic World”

Plotting Strategy in a Dynamic World

David J. Teece, Paul G. Raspin, and David R. Cox

Organizations can never be fully prepared for an unanticipated shock. But the most resilient ones learn to expect the unexpected. They can rebound quickly and take advantage of opportunities that emerge.

A framework developed by the authors offers four sets of activities for companies that want to go beyond traditional forecasting and risk-assessment exercises. First, companies need to develop a set of processes to actively sense new insights that could affect the business. Second, they need to organize in response to those threats or opportunities by reallocating resources where necessary and revamping processes. Third, they must capture value by restructuring their business models and relationships with other players in their ecosystems. And fourth, they need to renew the organizational capabilities that will allow them to continue to monitor and make adjustments over time.

These four sets of activities and capabilities — sensing, organizing, capturing, and renewing — allow organizations to nurture their dynamic capabilities. The activities are not meant to be implemented sequentially. Instead, they are interlinked and allow behaviors and processes to continually adjust.

Read the article

The Overlooked Key to Leading Through Chaos

Deborah Ancona, Michele Williams, and Gisela Gerlach

Vision, honesty, and the ability to execute changes are commonly cited traits of great leaders. Less acknowledged but equally critical is sensemaking: the ability to create and update maps of a complex environment in order to act more effectively in it. Sensemaking involves pulling together disparate views to create a plausible understanding of the complexity around us — and then testing, refining, and abandoning that understanding, if necessary, to start again.

Research by the authors shows that while sensemaking is a predictor of leadership success, few leaders model or implement it in their organizations. Less than 4% even recognize it as a key attribute. Undervaluing this practice is a particular problem in turbulent times, when it’s critically needed to plan in the face of uncertainty.

To be more effective at gathering information that points to better solutions, organizations need to plant sensemaking in the minds of leaders and employees, and formalize the practice in the organization. The authors provide examples of teaching, role-modeling, and shaping culture that include sensemaking and recommend including sensemaking activities in organizational processes, and in hiring and performance-management criteria.

Read the article

Make Cybersecurity a Strategic Asset

Manuel Hepfer and Thomas C. Powell

Despite costly cyberattacks on major organizations, many of the world’s largest companies remain unprepared. Although executives acknowledge cybersecurity as an important part of IT planning, they misunderstand the strategic character of cyberattacks, both as a severe threat to earnings and operations, and as an opportunity.

The authors studied three companies affected by a major cyberattack. Afterward, executives developed a new appreciation for the strategic value of investments in cybersecurity, not only for mitigating risk or minimizing damage but for strengthening the core strategic capabilities of the company. On the basis of their research, the authors provide a framework for understanding the four key dimensions of cybersecurity strategy along with guidance on how to incorporate each into strategic-planning discussions.

Read the article

Disrupt Your Own Business First

Ian C. Woodward, V. “Paddy” Padmanabhan, Sameer Hasija, and Ram Charan

The coronavirus pandemic has reminded business leaders that all assumptions and practices must be continually reexamined and that existential threats can come at any time.

Companies need to strategize in new ways, recognizing the limitations of long-term planning in an unpredictable world. They can do so by mercilessly examining their own weaknesses and vulnerabilities, and by gaming out their own destruction before someone — or something — does it for them.

The authors offer a multipart exercise in creative destruction that they have field-tested with over 1,500 leaders from around the world. While the process ordinarily includes participants from multiple companies and plays out over several days, it is streamlined in this article as an exercise for a single institution and a flexible time frame. The authors call it the Phoenix Encounter Method, focusing not on the ashes of destruction but on the revitalized company that will rise out of them.

Read the article

Innovation’s Uncertainty Factor

Rahul Kapoor and Thomas Klueter

A disruptive value proposition moves into the marketplace with its own trajectory and impact. Although innovators wish they could fully anticipate that path, there is significant uncertainty. Some innovations can reach mainstream status in a matter of years, whereas others may take decades. Others, despite their potential, may never reach fruition.

The authors have analyzed the progress, successes, and failures of disruptive innovation efforts in sectors such as health care and energy. They have also surveyed the academic literature and publicly available reports on disruptive innovation in other industries. They write that the importance of factoring in uncertainty to understand the trajectory and impact of a disruptive value proposition on either a startup or an incumbent can’t be overemphasized.

Three key sources of uncertainty — around technology, ecosystems, and business models — turn out to be pivotal to understanding the process of disruption. The authors have found that when companies carefully consider these sources of uncertainty and how to address them, they can better position themselves to manage disruption and achieve superior outcomes.

Read the article

Driving Growth in Digital Ecosystems

Ina M. Sebastian, Peter Weill, and Stephanie L. Woerner

When China’s largest insurer, Ping An, realized that its customers wanted not only insurance but also a means of addressing their medical and well-being needs, it created Good Doctor. The Good Doctor platform offers 24-7 one-stop health care services that are provided by pharmacies, hospitals, and about 10,000 doctors. In September 2019, Good Doctor reported serving more than 62 million customers monthly.

This is an example of a digitally connected ecosystem: a coordinated network of enterprises, devices, and customers that creates value for all of its participants. These networks can bring spectacular success: Research by the authors found that companies with digital ecosystems experienced revenue growth approximately 27 percentage points higher than the average for their industries. Their profit margins were 20 points higher, too. This was true in both B2B and B2C domains.

To build such environments, companies need a capability for digital partnering — which often differs from the traditional handshakes, exclusive relationships, and long-term contracts of partnering in the physical world. The authors found that successful companies in this type of collaboration have both digital readiness and thoughtful curation of which products and services to offer.

Read the article

How to Reconcile Your Shareholders With Other Stakeholders

Paul Strebel, Didier Cossin, and Mahwesh Khan

How are leaders supposed to manage the trade-offs among conflicting stakeholder interests? Pursuing long-term growth strategies that benefit a broad set of constituents requires them to focus rigorously on a company’s long-term value and assess which stakeholders create — and which deplete — that value.

To help executives do this work, the authors have put together a framework in which long-term shareholders are separated out from other stakeholders to avoid short-term, value-destroying traps. Leaders must determine which stakeholders are victims, subject to value extraction that benefits shareholders, with uncertain risk of a stakeholder backlash; which are free riders, inclined to extract more value than they contribute; which are predators, who destroy company value for their benefit and to everyone else’s detriment; and which are creators of value, driven to promote win-win initiatives for themselves and the company.

The authors identify five common traps: misjudging stakeholders’ potential value, underestimating backlash from weak stakeholders, subsidizing free riders at the expense of long-term shareholders, compromising with predators, and underestimating the role of intermediaries. They advise leaders to shift as many stakeholders as possible into win-win positions — targeting not just those who are already critical value creators, but also targeting victims and free riders that have the potential to contribute and realize greater value.

Read the article

Overcoming the Innovator’s Paradox

Jeff Dyer, Nathan Furr, and Mike Hendron

When trying to win support for significant new ventures, effective innovators go beyond conventional tactics such as data analysis, financial forecasting, and strategic planning. They rely on generating attention and credibility for themselves and their ideas (generating what the authors call impression amplifiers) by using the right comparisons and analogies about why the idea will succeed. They also focus on materializing the idea by showing and not just telling, triggering emotional reactions through strong storytelling, building legitimacy through others, and creating a fear of missing out.

Read the article

Competing on Customer Outcomes

Marco Bertini and Oded Koenigsberg

Customers who buy products and services want them to deliver meaningful outcomes, whether it’s a particular sensation, a tangible benefit, or some combination of the two.

Technological advances enable companies to track the outcomes their solutions actually deliver to customers, and thus offer new revenue models that can help win customers and drive growth.

The authors detail three revenue models: access models, such as subscriptions and memberships that anchor payments to periods of time rather than physical goods or services; consumption models, which include unbundling and metering and let customers pay only when they use a product or service; and performance models, where customers pay on the basis of the outcomes they achieve, even in complex arenas such as health care, education, and live entertainment.

Read the article

Why Social Responsibility Produces More Resilient Organizations

Sarah Kaplan

Corporate social responsibility involves more than “doing good” and charitable activities. At its most robust, being socially responsible means accounting for the varied interests of the diverse stakeholders that surround the corporation — including workers, suppliers, local communities, environmental advocates, governments, and the many others who are essential to the well-being of the business.

But every business model and every strategic choice has stakeholder trade-offs embedded within it. Some groups win (maybe consumers, bondholders, or shareholders), and other interests lose (maybe the environment, vulnerable workers, or communities). Resilient companies manage those trade-offs carefully.

The author details four common mistakes made in managing these conflicts and suggests ways leaders can avoid them and build more resilient organizations.

Read the article

The coronavirus pandemic has reminded business leaders of some unsettling truths: that all assumptions and practices must be continually reexamined and that existential threats can come at any time, from any direction. This crisis will eventually pass. But its ramifications will ripple through the economy for years, and inevitably it will be followed by another global crisis — or an unforeseen revolution in the marketplace. How can companies strategize once they have recognized the limitations of long-term planning in an unpredictable world? By mercilessly examining their own weaknesses and vulnerabilities, and by gaming out their own destruction before someone — or something — does it for them.

In this article, we will walk you through an intensive, multipart exercise in that kind of creative destruction that we have field-tested with more than 1,500 leaders from around the world as part of executive education at INSEAD. Ordinarily, the process includes participants from multiple companies and plays out over several days as CEOs search for the surest way to demolish their respective companies from a competitor’s perspective. Here, we streamline the exercise for a single institution and a flexible time frame. Ideally, there should be four teams, each with as many as six members, working independently and sharing their insights later in a debriefing session. We call this undertaking the Phoenix Encounter Method because our true subject here is not the ashes of destruction but the revitalized company that will rise out of them.

A Journey in Three Stages

This process unfolds in three stages.

Stage 1: Groundwork. Prevailing mindsets and values are questioned. Major global trends are examined. Group members work toward a Phoenix Attitude, which embraces upheaval as a catalyst for change.

Stage 2: Battlefield. The facilitator delivers a short list of scenarios that could disrupt the company. The threats might be new technology, demographic shifts, social trends, or all of the above. Group members craft the most devastating attack and use it to shine a light on their business’s weaknesses.

Stage 3: Breakthrough. New strategic priorities are put in place. New business models are adopted. The Phoenix rises.

In each of these stages, the team will grapple with difficult and potentially divisive issues. (See “Guiding an Effective Phoenix Encounter Group.”) To provoke a real change in perspective, it’s essential that a facilitator oversee this process and that each team — in our parlance, the Phoenix Encounter Group, or PEG — bring a diversity of experiences and opinions to the table. Team members should be drawn from vastly different areas or business units within the company, and perhaps even different management levels. The presence of outsiders, like stakeholders or customers, can also energize the process and enhance key relationships.

Stage 1: Groundwork

1. Define your company’s status quo. Before the first meeting, PEG members should each prepare a frank assessment of the organization as it currently stands — the good, the bad, and the ugly. What is the company’s vision? What are its strategic priorities? How does it create value for stakeholders, be they customers, employees, partners, or investors? How does it capture value for itself? What, to borrow the prompts of a standard SWOT analysis, are the company’s strengths, weaknesses, opportunities, and threats — and how are they reflected in the way things are done? This material will be useful not just in the initial stages of the process but later as well, when it will help you assess whether the PEG has been as rigorous as necessary.

Why must each participant produce a report if they all work for the same company? An organization can look vastly different from disparate vantage points, and what’s needed here is a frank, multidimensional portrait. In a Phoenix Encounter session we ran with a large financial services provider, the multiplicity of perspectives yielded some hard truths: “too inward-looking,” “very confusing priorities,” “our past strengths are being overplayed.” Senior leaders tend to believe they’re too busy to prepare the report themselves and often try to outsource it, but it is crucial that they do their own legwork and take ownership of their analysis. These reports will be shared with the group when everyone gathers at the end of stage 1.

2. Interrogate your own mindset. Participants should also complete a more introspective assessment that will remain private. What are their own attitudes toward disruption? How willing are they to call out outmoded practices and identify problems on the horizon? What are the characteristics of the leaders they admire most, and how do those shape their own management styles, for good or ill?

3. Identify threats and tools. There’s just one remaining piece of prep work: Team members must scan the landscape for new trends that could either disrupt the company or, ideally, be used to defend it. They could include sweeping societal changes, like regulation, generational shifts, and activism, as well as specific technologies that are evolving quickly, like cloud, AI, internet of things, 3D printing, blockchain, and social media.

The leaders most open to utter disruption will survey not just their own industry but beyond it as well. Android and iOS smartphones didn’t just disrupt Nokia and Motorola — they affected different sectors altogether, like the manufacturers of GPS devices and pocket cameras. They made Uber possible, which in turn disrupted taxi companies and automobile manufacturers. They enabled Alibaba to create Alipay and Tencent to create WeChat Pay, which are now hugely popular payment systems in China and many parts of Asia. That, in turn, produced a sea change for financial services companies that traditionally would be unaffected by developments in the social media and e-commerce sectors.

Proactive scanning is critical if executives are to develop an intuition for what’s on the horizon, whether it is a boon to business or potentially menacing. Change, when it comes, doesn’t trouble itself with the boundaries of industries or nations.

Stage 2: Battlefield

1. Launch the scenario. At the first meeting of the PEG, the facilitator presents each team with a scenario to ignite discussion: Newco — an aggressive behemoth with unlimited resources in terms of capital, tech, and regulatory influence — has the team’s company in its sights. Newco intends to destroy the organization and then, if it’s still hungry, the whole surrounding industry.

2. Think like your enemy. It’s here that PEG members must imagine themselves in their competitors’ shoes. How will Newco take them down? What would be the most devastating combination of, say, leading-edge tech and established business strategy? The PEG’s work in stage 1 has prepared everyone for this debate. What would truly leave their company for dead? The suggestions should be wild and unexpected — and deviate radically from the organizational status quo. Whatever the team believes to be the wiliest plan, or combination of plans, is adopted.

It can take anywhere from three to seven hours to define the takedown plan and write it down for future reference. What the teams come up with is often inspired. In one of our workshops, a senior vice president for a global hardware manufacturer helped dream up a speculative technology that would decimate his company: a Google Chromebook-like smartphone with an entirely cloud-based operating system, for which the physical device would be a mere carrier. The product was entirely imaginary but believable. With the advent of such a device, the hardware company’s competitive edge — its hard-won technical expertise and supplier and customer relationships — would be wiped away, leaving only cumbersome and costly physical processes. Its business model would be placed in existential danger, almost overnight.

Another workshop included a man we’ll call Trevor, who was the CEO of a Canadian agricultural commodities company focused on grains. Despite the success of his company, Trevor was fixated on a confluence of potential dangers, such as growing public unease about the meat industry, animal rights activism, and the global spread of African swine fever. Along with his PEG, he marshaled an attack straight out of his worst nightmares: Newco would capitalize on socially conscious consumers by delivering food products customized to fulfill their sustainability and personal wellness goals. It would adhere to the principles of a circular economy, with end-to-end sourcing — and its advocacy arm would use social media to hammer Trevor and his fellow multinational incumbents for their dependency on sourcing from far-flung suppliers. To give customers locally sourced alternatives, Newco would even acquire Trevor’s suppliers. The attack was no less startling for the fact that Trevor had helped conceive of it himself. By collaborating with teammates from different backgrounds, he saw how quickly a bold competitor could push his company to extinction.

Emotions can run high in this phase, even if everyone has examined their mindsets ahead of time. (See “Guiding an Effective Phoenix Encounter Group.”) But the work done here can save a company.

3. Develop a defense. After the PEG’s company has been leveled, each team must come up with a commensurate plan to rebuild. This requires a transition in thinking that we call turning the wheel — a mindset shift from destruction to rebirth. In our experience, this phase can last anywhere from four to eight hours. Radical ideation — and the debate between those with utterly opposing viewpoints — comes back into play now, as team members search for new strategies that will not just help them preempt Newco’s attack but also stand the test of time.

Trevor’s team devised a plan that would unfold in three parts. In the short term, his company would beat Newco to the punch by inviting local farmers to be partial owners of the enterprise. Over the medium term, the company would work closely with those farmers to develop new proprietary business models for the optimal use of land in terms of sustainability and profitability. In the long term, Trevor and his team would transform their organization from a mainstream agricultural company into a food company in touch with current trends. Rather than striving to merely improve their previous business model, which was based entirely around delivering in bulk, they would pivot to a more niche market space with the help of trusted partners.

Stage 3: Breakthrough

1. Make a blueprint for the future. The battlefield stage can be cathartic and inspire real camaraderie among executives who, by virtue of their differing roles, have never truly partnered before. But as the PEG disbands and team members return to their normal routines, they will find that the gravitational pull of the old ways of doing business is strong. Without concentrated follow-up, the lessons of the first two stages may be forgotten and momentum lost.

We advise teams to prepare what we call a future-facing blueprint immediately after finalizing their defensive strategies. The document should describe the reimagined business model and include an updated SWOT analysis. (The latter is likely to be starkly, almost comically, different from the one that the team completed in stage 1.) But the blueprint should also address key details: What is the new value proposition for various stakeholders? What are the most important action items in the short, medium, and long terms? How can internal stakeholders at large be brought on board and energized the way the PEG has been?

2. Embed the Phoenix DNA. If there’s a danger of executives sinking back into the status quo, there’s also a danger that — fired up from the sessions — they will attempt to change too much too quickly. That’s a recipe for burnout. We suggest that they focus on the plan for the first 100 days and select three significant action items from their new blueprint. These might include engaging stakeholders, earmarking resources, initiating pilot projects, or analyzing aspects of the company at a more granular level than was possible during the sessions. After that, they can take more decisive actions, such as acquiring new partners or competencies, monitoring progress, and revamping organizational culture.

We worked with an Eastern European supplier of household appliances and farming equipment — let’s call it Dvorak — that had created a financial services arm. In the first two phases of Dvorak’s Phoenix Encounter, the PEG envisioned an Alibaba-like Newco that partnered with local insurance companies and banks to offer a suite of new-to-market financial products (think digital microloans with innovative, customer-friendly incentives, such as cash prizes for early payments). Newco would exploit the split in Dvorak’s business between engineering and financial services to foment dissent among the shareholders and would poach younger, tech-savvy employees who felt stifled by Dvorak’s senior management.

How did Dvorak respond to the sudden threat? It reinvented itself as a physical/digital one-stop shop for all the financial demands, both professional and personal, of rural households. To make this enormous task tangible, Dvorak prepared a blueprint with specific goals, which included constructing an engine for analyzing consumer insights, developing more fine-grained approaches to consumer data collection and segmentation, and totally automating core tasks (such as data input, processing, and recommendations). The organization also resolved to wage a zero-tolerance assault on internal silos to boost customer-centricity.

Dvorak’s response was sweeping and inspired. The company did the two most crucial things that any legacy organization can do when it’s looking to remake itself for the new world order: It fortified its core business, and it identified the actors, actions, and activities that would enable it to face the future from a position of strength.

Of course, like other entities, companies are not always free to execute change on their own timetables. A Phoenix Encounter we led not long ago brought that fact home vividly. Amy had been tapped to become CEO of a large British private hospital and retirement care business that we’ll call Horcomp PLC. Only a few weeks after Amy returned from her Phoenix Encounter, however, Horcomp’s chairman informed her that an activist investor was advocating for radical changes that eerily echoed the scenario she had just been workshopping. Her worst-case scenario had sprung to life.

Knowing she had to accelerate her long-term plan, Amy convened an in-house PEG within the senior leadership team and wisely persuaded the retiring CEO not to take part. The team brainstormed ways to ramp up Horcomp’s technological capacities through rapid, iterative steps. Within one year, Horcomp had built a pilot ecosystem for providing whole-of-life care, with the help of a digital partner. The pilot projects included patient-monitoring systems, health care apps created in tandem with Apple, and technology that allowed users to easily access support services and connect with other patients and families. Taken together, the new programs not only produced service improvements but also reduced costs by 10% and helped increase talent retention across the company.

Accelerating the Destruction

As they seek to recover from the growth and opportunities lost to the COVID-19 pandemic, a great many organizations are focused on trying to claw their way back to “normal” business operations. We think that strategy is entirely misguided. Instead of attempting to preserve what worked in the past, leaders should lean in to the inevitability of large-scale disruption and brainstorm radical solutions. The future may be highly uncertain, but it is coming no matter what.

On June 27, 2017, employees in more than 80 global companies booted up their computers only to find a black screen with the message, “Oops, your important files are encrypted,” along with a demand for a bitcoin payment to decrypt the files. Within a few hours, managers began to realize the extent of the attack: Malware had infected the companies’ central servers, paralyzing every aspect of global operations, including interoffice communications, access to documents, access to customer data, and all operational and manufacturing systems. The NotPetya virus, which had begun its spread via the software-update function of a widely used Ukrainian tax preparation program, eventually caused global economic damage exceeding $10 billion in industries such as transportation, energy, pharmaceuticals, food production, consumer goods, and professional services.1

Despite such examples of devastating cyberattacks on major organizations, many of the world’s largest companies remain unprepared.2 Although executives acknowledge cybersecurity as an important part of IT planning, they misunderstand the strategic character of cyberattacks, both as a severe threat to earnings and operations, and as an opportunity. Yes, an opportunity.

We studied three global companies, competing in logistics, consumer goods, and professional services, that suffered from the 2017 NotPetya attack.3 (See “The Research.”) We found that executives who have successfully managed through cyberattacks now recognize cybersecurity as a top-level strategic priority; they told us that their biggest mistake in the period before the NotPetya attack was to treat cybersecurity as an operational issue. Having experienced an attack, executives at the consumer products company recognized that cyberattacks can’t be prevented but must be prepared for, while the board realized that an attack’s impact is not limited to IT but rather affects the viability of the whole business.

What these executives came to understand is that organizational resilience to cyberattacks requires a fundamental change of mindset: Executives must view cybersecurity as strategic rather than operational, and as an opportunity rather than an expense.

What do we mean by “opportunity”? A mature cybersecurity strategy provides a basis for securing critical assets and business processes, enhancing organizational learning, and noticing and capturing new strategic opportunities. It can reveal new strengths and fundamental weaknesses in leadership teams and organizational capabilities. Among the companies we researched, some found that it paved the way to a fully digital business model or helped them create a new value proposition around security for customers. Our research offers new ways of thinking about cybersecurity and provides a simple framework for assessing organizational resilience.

Why Executives Treat Cybersecurity as Operational, Not Strategic

It is easy to understand why executives fail to recognize cybersecurity as a strategic priority, even as many have embarked on digital transformation strategies.

Cybersecurity is delegated to IT. Maintaining secure systems has traditionally been the responsibility of IT — and, in many cases, IT itself is not seen as a provider of strategic advantage but rather as an internal service provider primarily accountable for keeping systems running. Even as the cyberthreat to business has magnified dramatically, and as technology has in many cases been recognized as more strategic to the business, cybersecurity has remained delegated to IT operations, where the technical expertise necessary to assess and respond to cyberthreats resides.

Companies misunderstand the strategic nature of cybersecurity risk. Many executives fail to elevate the risk of cyberattack to a strategic consideration because they mischaracterize the threat as a random, unpredictable event — when, in fact, no organization is immune, and cyberattacks are “predictable surprises” that exploit weaknesses in organizational strategies and capabilities. Some companies are more attractive targets than others, but in reality, cybercriminals directly attack organizations of all kinds, and many other businesses suffer collateral damage in the course of attacks on other companies.

Companies keep attacks under wraps. One CEO in our study reported having some processes and measures in place, but once his company was victimized, it quickly realized how ill-prepared it was and how little it actually knew about the real risks of being hit by an attack. Such naivete may be exacerbated by the tendency among organizations that have suffered an attack to release as little public information about the event as possible — which may serve to downplay the true extent of the risk. Keeping cyberattacks confidential also means that best practices for responding to them are not shared and executives cannot learn from cyberattacks on other companies.

Executives assign strategic priorities based on their own areas of expertise. We also found that executives have failed to include cybersecurity among their strategic priorities because their strategic plans and major investment decisions have focused on areas in which they had previous experience or technical expertise, such as engineering, finance, and marketing. Cyberattacks are nonroutine and hard to plan for, and many executives have not experienced a serious cyberattack. The cognitive tendency is to carry on with the same strategic priorities, interpreting the absence of a cyberattack as evidence that the company is on the right track. After the NotPetya cyberattack, executives understood the importance of defining strategic issues according to their potential impacts on company performance.

Flipping the Narrative on Cybersecurity

Senior executives who guided their companies through cyberattacks experienced a fundamental change of mindset, transforming their perceptions of cybersecurity from operational to strategic, from reactive to proactive, and from threat-driven to opportunity-driven. In practice, this meant taking cyberthreats seriously at the highest levels of decision-making. The CEO of a logistics company told us, “Prior to the attack, I had never envisioned that a cyberattack could go global in an instant, which was really a huge surprise. We were doing something about cyber, so it looks like we are doing something [right], but it was much more of a tick-the-box exercise instead of really understanding it.”

Before the NotPetya attack, executives made the mistake of viewing cybersecurity investments as a lose-lose situation. They felt that if their company was attacked, they would lose reputation and profit; if their company was not attacked, investments in cybersecurity would be wasted. As a result, the companies had underinvested in cybersecurity.

Following the cyberattack, executives appreciated the strategic value of investments in cybersecurity, not only for mitigating risk or minimizing damage but for strengthening the core strategic capabilities of the company. For example, a professional services executive told us that the cyberattack “was an existential threat to our business, and one of the things it shows is where you have strong leadership and weak leadership.” As crises tend to do, the attack explicitly highlighted those pockets of weakness; had the company taken a strategic approach to preparation, it would have known which leaders needed better training to handle the response.

In the logistics business, where competitiveness depends on speed in bringing new solutions to market, cybersecurity investments transformed the company’s competitive position by driving it to standardize digital solutions across its operations. Executives learned from the NotPetya attack that the company was not a purely physical business but a data-intensive digital business. The new technology infrastructure allowed the company to implement a fully digital business model; it rolled out a new transport management solution in just nine months from start to finish. According to a company executive, “Our biggest competitor did the same and it is taking them seven years, and the main reason for this is our standardization today.”

How Cybersecurity Strategy Reveals Opportunity

Our research shows that executives can leverage cybersecurity strategy to enhance organizational learning and create new opportunities. Companies that suffer cyberattacks find that an attack exposes weaknesses not only in cybersecurity but in many other aspects of the business, such as leadership development, external communications, and process innovation. Accordingly, the process of developing a comprehensive cybersecurity strategy, as outlined later in this article, can similarly uncover weaknesses and opportunities.

Before the attack, executives at the logistics company thought that its most critical process was moving cargo, but subsequently they realized that the most critical process was bookings — and thus they reconfigured their strategic priorities. In implementing a new, robust cybersecurity strategy in the wake of the attack, the company identified its seven most critical business processes. Diagramming the interconnectedness of these critical processes helped executives discover how the NotPetya virus had spread so quickly through the enterprise and why it took so long to recover servers and applications. In essence, the company changed from protecting its IT infrastructure to protecting its most critical business processes.

By disabling core business processes, the NotPetya attack exposed organizational weaknesses that were previously unnoticed or ignored. In some cases, the crisis prompted improvisational solutions that might have taken years to discover. For example, a logistics executive told us, “During the attack, the hierarchy of the organization completely broke down. There was no hierarchy at all. We assembled hierarchy and structure dynamically as we needed to. What might normally take two years to change, we were changing within 18 hours. We selected people based on skill, knowledge, and their ability to lead certain aspects. Suddenly we had four directors reporting to someone from the very bottom of the organizational chart. In one example, we promoted someone four times after the cyberattack.”

Gaining a more strategic understanding of cybersecurity creates the opportunity for closer integration and understanding between business and IT. “The cyberattack made us understand that IT is cutting across the whole business,” one executive in consumer goods told us. It revealed to people in areas as varied as supply chain and HR how IT underpins even the most basic business activities, such as printing a label for a box or tracking hours worked and paying wages, he said.

Capturing Strategic Opportunities From Cybersecurity

From our research, we have developed a model for evaluating and improving organizational resilience to cyberattacks and for leveraging cybersecurity strategy to achieve new forms of advantage. The model shows that organizational resilience requires four strategic capabilities: protecting the business, broadening awareness, managing consequences, and responding and recovering. (See “Four Elements of Organizational Resilience to Cyberattack.”) Each of the four elements raises questions that executives can use to lead discussions on the company’s approach to cybersecurity strategy. Although some of these discussions are concerned with events after a cyberattack, all of the discussions should happen now, as part of strategic planning — before a cyberattack.

Protecting the business, especially the IT infrastructure, has traditionally accounted for the lion’s share of cybersecurity spending. While it remains important to maintain and harden defenses, companies in our study acknowledged that attacks are nonetheless inevitable. The war between cybercriminals and cybersecurity experts is an arms race of sorts, with both attack vectors and defenses continually evolving, rendering perfect defense impossible. The companies we studied advised that first-level protection should not entirely consume cybersecurity budgets or efforts. One CEO told us, “What we realized is that the protection we had was a hard shell. But once you penetrate that hard shell, we were completely soft inside.” A more strategic approach to protection is layered and encompasses a deeper understanding of key business processes and how they might be designed to minimize an organization’s vulnerability to attacks.

Your strategic planning for protecting against an attack should consider these questions:

• What are our key business processes?
• How vulnerable are they to cyberattacks?
• What are we doing to protect ourselves?
• How can we design our business processes to minimize our vulnerability to attack?
• What internal capabilities do we have for protecting against cyberattacks?
• Where are the strategic opportunities for improving cyber-protection?

Broadening awareness requires senior management to take responsibility for looking outside the company to understand current threats and to develop a more comprehensive strategy for acquiring intelligence. These actions include establishing better connections into the network of threat intelligence, such as communicating with cybersecurity researchers at anti-malware vendors and building relationships with peers at organizations with the strongest capabilities in this area. In our interviews, a board chair recommended retaining and consulting with an expert cyber-response adviser before there’s a crisis, and a CEO advised having an outside organization regularly perform security audits.

To develop a fuller awareness of the threat landscape, ask these questions:

• How significant is the threat of cyberattack?
• Where is it most likely to come from?
• What form might it take?
• How are cyberattacks evolving?
• What capabilities do we have for detecting external threats?
• Where are the strategic opportunities for improving cyber-awareness?

Managing the consequences of an attack, like broadening awareness, demands that leaders look outward to plan for the potential effects of a cyberattack on customers, suppliers, financial markets, and the company’s reputation. The companies in our study suggest being open with information, as well as open to help — essentially, doing what many companies hesitate to do. The decision to communicate openly with customers, shareholders, and the general public proved especially valuable, according to a CEO in our study. It generated not only positive customer feedback but also numerous offers of help from customers, suppliers, and even competitors. For example, a professional services business built new relationships with competitors that offered their computing facilities and office space in the wake of an attack. And communicating proactively with your biggest customers reassures them about your cybersecurity practices while providing a potential source of competitive advantage: A logistics executive told us that after the company had been accredited to a security standard, it had won two significant pieces of business.

Develop a strategy to manage the external consequences of a cyberattack by considering the following:

• How would our key stakeholders respond if we were attacked?
• How would our customers be affected?
• How would financial markets respond?
• What can we do now to anticipate or shape these responses?
• What capabilities do we have for anticipating how stakeholders might respond?
• What are the strategic opportunities for managing the consequences of a cyberattack?

Responding and recovering requires understanding the organization’s capabilities to take appropriate action in case of a cyberattack and identifying potential weaknesses in processes, leadership skills, and backup plans. Executives in our study advised that response should focus first on recovery and spoke to the importance of having top leadership support for technology teams throughout the recovery effort. It is also essential to consider the composition and leadership of response teams: The head of operations for one company said that in the aftermath of a cyberattack, it continuously broke down and reassembled teams and changed team leaders based on who emerged as the strongest people for those roles. Plans for a cyberattack response should always include spotting opportunities — as the saying goes, “When the barn burns down, you can build a better barn.” In the aftermath of a cyberattack, managers must proactively seek new ways to position IT as a value generator rather than a cost center and leverage events to strengthen the company’s strategic position.

These questions should guide your plan for a robust response and recovery in case of attack:

• What capabilities do we have for responding to a cyberattack? What weaknesses would hinder our responsiveness?
• What can we do now to improve our responsiveness to an attack?
• What is our plan for business continuity in case of a cyberattack?
• How do we build an organizational structure that is dynamic enough to respond to different types of attacks?
• Who should be part of our crisis management team?
• What new strategic opportunities might be created if we improved our capabilities for cyber-responsiveness?

Proactively addressing each of these four elements of organizational resilience to cyberattacks, and considering each set of questions above in the planning process, allows executives to identify strategic opportunities that arise in all phases of the cybersecurity context and develop critical capabilities before a cyberattack happens. A crucial finding in our study is that resilience to cyberattacks requires advanced capabilities in all four elements of the model.

The companies in our study that suffered the greatest long-term damage from the NotPetya cyberattack — competitively, economically, and reputationally — were those that neglected one or more elements of the model. By far, the most common error was to focus on protection while neglecting the other elements. Every company had made prior investments to protect against cyberattacks and (to a lesser extent) to plan cyber-responses. These investments were largely wasted, however, because leaders considered the threats as having consequences only within their IT departments rather than potentially paralyzing the entire business. After a cyberattack, all of the companies expanded their cybersecurity strategies by significantly increasing investments in broadening awareness and managing the consequences of a cyberattack.

Our research shows that companies can improve resilience to cyberattacks by interrogating each of the four elements of organizational resilience as part of the company’s strategic planning process. The evidence shows that asking these questions now, before a cyberattack, allows companies to work proactively toward capturing new opportunities afforded by the context of cybersecurity strategy. By adopting a strategic mindset toward cybersecurity, executives can leverage cybersecurity strategy to enhance organizational resilience and to build new capabilities for strategic advantage.

To remain competitive over time, a company must be able to move quickly in response to major changes in society, technology, competition, regulation, labor markets, and myriad other areas. Yet the possibility of such changes creates deep uncertainty, making it challenging to identify the most profitable path forward. Although organizations can never be fully prepared for an unanticipated shock, the most resilient ones learn to expect the unexpected, rebound quickly when it occurs, and take advantage of unforeseen opportunities that emerge.

To help with those efforts, we have developed a framework that goes beyond traditional forecasting and risk-assessment exercises. It consists of four sets of activities: First, develop a comprehensive set of processes to actively sense new insights (whether internal or external) that could affect the business, and hence identify threats or opportunities as early as possible. Second, organize in response to those threats or opportunities; this is likely to involve reallocating resources, revamping processes, filling capability gaps, and aligning the company’s structure and governance. Third, capture value by revising business models and restructuring relationships with other players in various ecosystems. And fourth, renew the organizational capabilities needed to create and capture value by continuing to monitor and assess results and making small adjustments over time — while also preparing for the major disruptions that require a more comprehensive overhaul.

This approach is based on the principle of dynamic capabilities, which holds that companies need to continually adapt their resources to respond to rapidly changing and unpredictable environments. Dynamic-capabilities-based models are the subject of a large and growing body of strategic management literature.1 Our framework synthesizes key lessons from this literature and provides a way forward for managers to revitalize their company’s processes, structures, and business models — and to compete effectively — in a highly dynamic business environment.

The Shifting Innovation Economy

A few decades ago, companies could build a strong business model and apply it more or less unchanged for years. In that era, resilience was based on stability and competitive barriers to entry. Consider that, in the early 1970s, nearly 80% of the most profitable publicly traded companies remained in the top quartile of performance for at least six years out of the previous 10. Today, that is no longer true, as relentless innovation and disruption threaten established business models, leading to far greater churn among top performers in virtually all industries.2 Resilience now depends on rapid and effective adaptation to change.

Nokia is a good example of how change and unexpected competition can upend even highly successful businesses. Founded in Finland in 1865 as a paper mill, the company later diversified and eventually became one of Europe’s leading electronics companies in the 1970s. It introduced its first mobile phone in 1987, and by the end of the 1990s it had become the largest cellphone manufacturer in the world. But the company was overtaken by new competition from Apple’s iPhone and Google’s Android mobile operating system. By 2016, Nokia was out of the phone business altogether — an extremely rapid reversal for a market leader. Today, it is a much smaller company selling telecom infrastructure equipment.

Contrast that with Netflix, which anticipated a large shift in technology and was thus able to adjust its strategy to capitalize on it. In the early 2000s, Netflix founder and CEO Reed Hastings committed resources at the exclusively DVD-by-mail company to build a streaming service — well before home internet services had sufficient bandwidth to support it. Netflix first offered streaming in 2007 as a free bonus to DVD renters and then, in 2011, separated the DVD and streaming offerings. Mail-order subscribers left in droves, yet it was the right realignment in response to changes in how people consumed media. And it led to tremendous success for Netflix — its streaming business grew from 10 million subscribers in 2010 to over 160 million in 2020.

A Framework for Strategic Resilience

Making such prescient moves requires a structured way of looking out over the horizon and anticipating what’s coming. Drawing on the rich vein of dynamic-capabilities thinking, we propose the following model.

1. Sense. Management teams can’t respond to a problem if they haven’t figured out that it exists — nor can they capitalize on new opportunities they have yet to recognize. Although most organizations have some sensing activities in place, they often lack a systematic approach to gathering and sharing critical information. To successfully anticipate change, organizations must be designed for, and become accustomed to, gathering and sharing information from a wide range of sources, such as current and former customers, strategic partners, internal R&D staff, customer-facing employees, suppliers, local and regional stakeholders, university labs, boards of directors and advisers, trade media, and current and anticipated competitors. Big data and machine learning techniques can be used to tease out insights from combinations of the internal and external data streams.

One of the biggest challenges is getting information to the right places in the organization. Therefore, organizational design must foster the free flow of information from gathering points to wherever it may be relevant — for example, by ensuring that visible processes and incentive systems encourage collaboration and interaction.3 And when the future is particularly hard to read, leaders must distill insights by creating a range of scenarios and then developing, testing, and retesting hypotheses.4

These principles of sensing can be seen in action at Progressive, one of the largest auto insurers in the U.S. Progressive offers customers a mobile app called Snapshot that allows the company to capture billions of miles of driving data so it can provide finely segmented, usage-based rates. It combines that information with data from the marketing, claims, and policy service departments in a repository that can be accessed by analysts and managers throughout the organization via a dashboard.5 Progressive also created the Business Innovation Garage, a secure space where any employee can rapidly prototype and test new offerings.

2. Organize. Leaders also need to build flexible structures and processes that enable the organization to innovate and embrace change. A key aspect of organizing is filling capability gaps that arise when a company enters a new market or revamps its business model.

In the mid-1990s, Samsung committed to building a capability in industrial design — an effort that took several years and included opening a multidisciplinary in-house design institute along with design bureaus in Europe, the U.S., and Japan.6 To maintain flexibility as products are developed, Samsung often has multiple design and engineering teams working on similar products and eventually launches the ones that are best suited to current market conditions. Samsung’s intentionally developed design capability and its skill at reallocating resources where needed were critical to the company’s expansion into smartphones from its traditional base in home appliances and consumer electronics. Despite a slow start in the smartphone sector (Samsung’s first Android-based devices debuted in mid-2010, three years after Apple launched the iPhone), the company quickly grew to dominate the worldwide smartphone market.

The best approach to organizing will vary depending on a company’s circumstances, but several principles are widely applicable. For example, companies can often become more responsive and innovative by flattening management hierarchies and decentralizing decision-making authority. However, when they decentralize, they need to find ways to keep people moving toward shared goals to prevent chaos.7 A company’s culture — including its mission, values, and management style — can provide that sense of direction. But that culture should be entrepreneurial rather than bureaucratic — for example, ensuring that small, early failures lead to learning rather than blaming.8 As we’ve seen time and again, the most innovative organizations also are open to thoughtful criticism that forces the holders of the consensus view to sharpen (or, in some cases, abandon) their thinking.9

3. Capture. Capturing value requires leaders to execute strategic priorities by orchestrating their company’s tangible and intangible assets — such as capital, strategic partnerships, and intellectual property — as well as making changes to business models as required. Amazon, for example, developed proprietary technology infrastructure to enable its unprecedented scale advantage over competing online retailers. It subsequently leveraged that very IT architecture in order to create a highly profitable cloud computing business, an operation that now funds many of its other strategic initiatives.

Maximizing value capture also entails determining which activities can safely be outsourced and which ones must be retained in-house because they are critical to a company’s product road map or value delivery system (or both).10 Finally, operating discipline is an important contributor to capturing and retaining value in the enterprise. Management must define clear priorities and objectives, along with metrics to gauge progress.

4. Renew. Sensing activities will inevitably call the wider status quo into question and will sometimes even require that companies overhaul their entire identity.11 Yet for each of the successful renewals mentioned above, many other companies have failed to see themselves and their situations with fresh eyes, including Kodak, Blockbuster, and Yahoo, to name just a few. Top management must not be afraid to revise or ditch an assumption in light of new evidence, as difficult as that can be. As Ron Heifetz of Harvard’s Kennedy School of Government pointed out, “Mustering the courage to interrogate reality is a central function of a leader.”12

Renewal is best seen as a continuous endeavor. Between major transitions, there is often value in “tuning up” the company’s culture, organization, and routines. That includes considering changes to incentive systems, reporting structures, decision-making, and business processes.

Moreover, as these changes are made, they generate new data. Leaders must use that information to gauge the accuracy of any assumptions that went into their strategic planning and adjust accordingly.13 In that sense, this fourth component of the framework includes continually assessing results and revising the first three components.

Fluid Timing

The four sets of activities and capabilities defined above — sensing, organizing, capturing, and renewing — are not meant to be implemented sequentially. Rather, they are tightly interlinked; as information continuously flows back and forth, the underlying behaviors and processes should change accordingly. More than any individual activity, managing the connections across all four areas enables an organization to become more resilient. For example, feedback from activities that capture value, such as an unexpectedly poor monthly sales report, could trigger a greater focus on sensing activities — thereby leading the sales or engineering staffs to restructure their interactions with external partners and customers in order to seek feedback, test the validity of existing assumptions, and revise operating plans.

Another key point is that these processes don’t run on a specified timetable. At many organizations, strategic planning processes take place on a strict schedule, most commonly in conjunction with annual budgeting. This is a recipe for rigidity rather than resilience. In any company with mature dynamic capabilities, sensing activities, for example, continually generate new insights, which must be processed quickly by leaders at the divisional or corporate level. As new conjectures are tested and accepted or rejected, subsequent sets of activities to sense, organize, capture value, and/or renew should begin as soon as the evidence suggests they’re needed — not when the budget cycle creates an opening.

Applying the Model in a Turbulent Industry

One industry facing significant uncertainty is automobile manufacturing. Carmakers are dealing with technology changes such as electrification and autonomy, new forms of competition from ride sharing, and regulatory changes. Given those variables, the dynamic-capabilities model could be used by an incumbent auto manufacturer faced with the emergence of autonomous vehicle (AV) technologies. Large-scale investments are already being made by numerous competitors as well as new market entrants (including device makers and software developers), despite the lack of a clear path to profit. Several developing technologies hold large potential yet also present great uncertainty, often due to questions about whether regulators can keep pace with new developments and how long it may take for consumers to feel comfortable with driverless vehicles.

The dynamic and highly uncertain nature of AV ecosystems demands structured sensing activities to monitor changes in the landscape. Market strategists from most organizations review relevant news sources, attend conferences, and engage outside experts. But a central question, of course, is how well those companies will systematically manage and leverage that collective knowledge pool. If self-driving technology becomes standardized and universal, for example, car manufacturers may no longer compete on handling characteristics but rather on interior amenities such as infotainment packages or other custom features. Disparate sources of information about new technologies, emerging business models, and tactics pursued by new and existing rivals must be assessed, calibrated, and integrated — and then distributed to the appropriate places where leaders can use that information to inform business model decisions and resource allocations.

Based on those myriad inputs, incumbent original equipment manufacturers (OEMs) must assess their capabilities and organize themselves to ensure that new ventures have adequate resources and sponsorship to get a fair trial. In addition, new activities must be protected from attempts by established divisions to fatally undermine them, and management must structure incentive systems to retain key talent. It is essential to align both new and existing businesses within the company’s strategy, structure, governance models, and critical processes.

Perhaps the biggest issue facing automobile manufacturers is the need to formulate new potential business models to capture value — for example, considering whether to continue operating primarily as an OEM or expand into mobility as a service, short-term leasing, fleet management, or other services. Another critical decision centers on the timing of market entry. A company’s strategy, assets, and capabilities may position it to be a market pioneer, or they might suggest a less risky “fast follower” approach. While AV technologies and ecosystems are still too embryonic for anything more than limited trials, working hypotheses about their rollout and about key bottleneck assets enable a company to decide which capabilities are needed in order to test its forecasts about the future. Part of this involves determining which capabilities should be owned, contracted for, or leveraged through alliances — a distribution that may change as the business ecosystem evolves.

Finally, renewing existing structures and processes is particularly important in the context of early-stage technologies like self-driving vehicles. Leaders must continually update future scenarios, consider the implications for corporate identity and mission, determine how best to fill missing-but-needed skill sets, and take proactive steps to shape new ecosystems as they emerge. If an OEM concludes that AVs are critically important to the future of its industry, top management must frequently question their company’s state of readiness — as well as continuously monitor the alignment of their underlying assumptions with signals generated from activities such as market trials and prototypes.

In short, since the future is a moving target, leadership teams in this industry must anticipate multiple scenarios and develop the means to test them on a limited scale — with a keen eye toward organizational capabilities and skills gaps. Participants must regularly update their estimated timelines for key technologies to be refined and introduced on a broad scale in order to provide reliable inputs into strategy formulation activities — since being too early to market is often just as costly as being too late. If, for example, too many urban markets balk at implementing the infrastructure required for AVs to function safely, the current driver-based car culture could persist for decades to come.

The requisite elements for an organization to establish strategic resilience are not mysterious, magical, or limited to Silicon Valley startups. Resilience requires a long-term, dogged commitment by the executive team to cultivate an innovative organizational culture and a mature set of dynamic organizational capabilities. By remaining relentlessly curious, anticipating disruption, and preparing the organization to adapt quickly, management teams can develop strategies more effectively despite significant uncertainty — positioning their companies to better compete regardless of what the future holds.

In his 1969 book The Marketing Mode, Harvard Business School professor Theodore Levitt immortalized a gentleman named Leo McGivena, who reportedly said: “Last year 1 million quarter-inch drill bits were sold — not because people wanted quarter-inch drill bits but because they wanted quarter-inch holes.”1 A half-century later, this insight is as compelling as it ever was — customers still want to buy meaningful outcomes (a particular sensation, a tangible benefit, or some combination of the two), not products and services. What’s changing is companies’ ability to become more accountable for those outcomes by helping customers navigate three critical checkpoints: accessing the solution, consuming (that is, experiencing or using) it, and getting it to perform as expected or above expectation.

Even so, most companies do not stake their success on these checkpoints. Instead, they sell quarter-inch drills and promise customers that the quarter-inch holes they desire will follow. Indeed, a revenue model focused on transferring the ownership of a product or service to the buyer may appear prudent because revenue accrues up front, and any risk associated with access, consumption, and performance is passed on to customers. But in reality it places an unnecessary burden on customers and ultimately shrinks the opportunity in the market. This contraction occurs when, for instance, customers are priced out or forgo a purchase because it is inconvenient, when they perceive ownership as too risky and decide not to buy, and when they resolve to pay less to account for the possibility that they will not make sufficient use of their purchase or that it will not perform as advertised.

Technological advances are enabling companies to rewrite the rules of commerce. Mobile communication, cloud computing, the internet of things, advanced analytics, and microtransactions offer sharper, more timely information that can illuminate when and how customers access and consume their products and services, and whether and how well those products and services perform. We call this information impact data — it enables companies to track and understand what happens to their solutions beyond the moment of purchase.

The way we see it, impact data — and the technologies that deliver and analyze it — is transforming corporate accountability for customer outcomes from a fashionable marketing slogan into a strategic imperative. Some organizations dismiss this imperative, hoping that it is another passing trend. Others (often intentionally) make their prices more ambiguous and thus less comparable across competitors, which impedes sound purchasing decisions on the customer side. These will not be winning plays in the long run. Instead, companies should start to embrace accountability for outcomes and change their revenue models accordingly before they are forced to do so by more enlightened competitors and disruptive startups.

In this article, we’ll describe three types of revenue models that can help companies win customers and drive growth in today’s increasingly transparent markets. The framework draws on insights from our respective academic areas of behavioral economics and operations, our research, and our ongoing interactions with companies. We’ll also provide guidance on developing and implementing the right revenue model for your company, unlocking the untapped market potential of your solutions, and capturing the lion’s share of the resulting value.

From Promises to Proof

With three revenue models, companies can progressively deliver access, consumption, and performance. One step removed from standard ownership (or transactional) models are what we call access models. These include subscriptions and memberships; they anchor payments to periods of time rather than physical goods or services. Next up are consumption models, which include unbundling, metering, and sharing; they not only facilitate access but also enable customers to pay only when they use a product or experience a service. Finally, performance models address all three needs — access, consumption, and performance — together by enabling customers to pay on the basis of the outcomes they achieve. In the past, pay-by-outcome agreements have been used in settings where performance is easy to quantify and monitor. In recent years, however, we have seen them taking hold in more complex arenas, such as health care, education, insurance, and even live entertainment.

Facilitating access. Access inefficiencies can be traced to physical and financial hurdles. Physical hurdles include conditions like stockouts and inconveniences, such as when a purchase requires too much time or effort to consummate. Subscription services, such as HP Instant Ink and the Dollar Shave Club, are designed to lower or remove these hurdles by eliminating much of the pain associated with buying printer ink and razors, respectively, such as running out of them and running out for them.

Less obvious physical hurdles are the unwanted accumulation of expensive or idle assets and the disposal of assets, as well. Disposal is not always easy, especially when products contain toxic materials or are relatively large. Signify, formerly Philips Lighting, addresses this challenge by offering “light as a service” to corporate clients such as Schiphol Airport in Amsterdam and steel and mining giant ArcelorMittal. Under these contracts, Signify retains ownership of all fixtures and installations while the client pays for the light it uses. Similarly, Ikea is testing ways to shift the standard ownership model for flat-pack furniture toward a rental model to meet customers’ needs for affordability and sustainability.

Financial hurdles to access arise when customers lack the capital to purchase a product outright, such as a fleet vehicle or household furniture. Mobility subscriptions — such as Care by Volvo, which includes a car payment, insurance coverage, comprehensive maintenance, and additional digital services in one monthly fee — are increasingly popular because they ease this constraint. Another financial hurdle can arise when customers want an assortment of items that are collectively expensive, such as a music or film library or a stylish wardrobe. Spotify and Netflix are household brands in this space. In fashion, successful upstart Rent the Runway offers three monthly plans for designer clothing and accessories that let members decide how many items they rent at one time.

The common denominator across these and other access models is that revenue accrues as a function of time. At first glance, these are familiar, long-established renting and leasing models, but a host of recent technological advances pertaining to monitoring, prediction, logistics, and payment have extended their applicability across most sectors of the economy. Today, companies can lower the barriers to entry in a market by transforming almost any product into a service with enhanced convenience. Indeed, XaaS (everything as a service) has become the mainstream revenue model in the software and tech industries, rendering the licensed software CD obsolete.

Consume and pay. Consumption inefficiencies take many frustrating forms. They occur when an asset — say, a car, apartment, or medical device — either sits idle for a large portion of its useful life or is not acquired in the first place because customers cannot justify owning it. Automobiles, for example, sit idle about 95% of the time — a disturbingly low level of utilization for such an expensive product. Consumption inefficiencies also result when customers must purchase a predetermined package size that is too small or large given their needs. Finally, they occur when some barrier, such as a related risk or the price of a complementary good, prevents customers from using a product or service they already own. Companies have three options for tackling these problems: unbundling, metering, and sharing.

In the past, physical constraints made it economical to bundle offerings together (songs on a compact disc, articles in a newspaper, and so on). But digital technologies changed the economics: Now, companies can digitalize certain offerings and deliver them to match customers’ actual consumption patterns. The recent experiences and struggles of traditional media companies with digital transformation can be traced in large part to this push toward unbundling.

In metering models, a company supplies the product but charges customers only for using it. The German company Winterhalter, which specializes in commercial dishwashing machines, racks, detergents, water treatment supplies, and services, adopted such a model with a program it calls Pay Per Wash. Instead of selling or leasing its products, the company charges customers for completed wash cycles. Similarly, Thermo Fisher Scientific’s next-generation genetic analysis systems feature “pay per lane” DNA sequencing. The platform is the first to enable laboratories to run just one, a few, or all sequences and pay only for the reagents used in the sequences they choose.

In sharing revenue models, sellers either manage or join a platform to distribute a product or service across many interested users. These collaborative-consumption ventures are growing at an impressive rate because they not only reduce waste for customers but also improve the utilization of assets — and, therefore, the return on investment — of asset owners. Uber and Airbnb are obvious examples of this. So is logistics startup Flexe, which matches retailers with warehouses that have excess space, and SpotHero, which helps drivers find open parking spots in crowded cities by pooling the spare capacity of its participating partners.

Perhaps the biggest impact of sharing models, however, is felt in less-developed and rural economies, where information technology enables the sharing of critical assets, such as farming equipment, on a much larger scale than was previously possible. One example is Hello Tractor, whose platform enables farmers in Nigeria to access farm machinery on a pay-per-use basis while providing the security that the owners of the machinery demand through remote tracking. Similarly, Trringo, a tractor and farm equipment rental service in India, strives to make these scarce resources easily accessible and affordable to farmers across the country. These examples underscore the inherent relationship between initiatives that tackle consumption waste and those that tackle access waste. While access to farm equipment does not guarantee consumption, there is no consumption without access.

Each of these models aids customers by removing barriers to the use of solutions and activating dormant or underutilized capacity. But consumption models do not guarantee outcomes: They may or may not produce the performance customers seek from a product or service.

Performance, guaranteed. Value delivered is the ultimate outcome. In B2B markets, delivery of value implies that a particular solution improves the profitability of the customer, but agreeing to a contract based on profit impact can be a challenging task. For example, it is often hard to isolate the influence of a single contributing factor when a complex mix of factors are in play. In B2C markets, value combines impressions or sensations with tangible benefits, and research technology has not yet progressed to the point where a company can identify and measure the changes in brain activity that signal the overall satisfaction individuals derive from everyday products and services at scale. Even if this could be achieved, social norms might render collecting and using such intimate impressions impossible. In both contexts, the practical alternative is to settle on a proxy that represents value accurately, can be quantified by the company, and, in turn, can be verified by the customer. Let’s consider three examples.

Instead of selling explosives, Australian multinational Orica adopted a revenue model based on the quality of the blasts it delivers to customers. Its rock-on-ground contracts are possible because the size of the broken rock that results from a blast has a significant impact on the operating cost of a mine (greater fragmentation makes it cheaper to handle and dispose of unwanted debris) and therefore a mine’s profitability. These contracts have become a defining characteristic of Orica, both internally, in terms of innovation and product development, and externally, in terms of its ongoing relationships with customers and positioning in the market.

In health care, Roche, a Swiss pharmaceutical multinational, is developing personal reimbursement models, a clear break from the tradition of charging for a pill or treatment — the legacy ownership model in the industry. Under this new model, Roche acknowledges that the effects of medications can vary by indication (that is, the patient’s specific condition), combination with other medications, and response, and customers are charged in light of that reality.

Lastly, Teatreneu, a popular comedy theater in Barcelona, Spain, brought a performance-based revenue model to live entertainment by charging patrons according to how much they enjoyed it. Customers entered the theater free of charge in its pay-per-laugh system, and a facial recognition system mounted on the seat back in front of them registered each time they laughed during a performance. Each laugh was priced at 30 euro cents, with a maximum charge of 24 euros per show, or 80 laughs, so that “no one would need to cry because they laughed more than they could afford.”2

Performance models represent the cutting edge of outcome accountability. Such models charge directly and as precisely as possible for the value or utility that customers derive from a purchase. There is no need for intermediate measures — outcomes are monetized, and access, consumption, and performance inefficiencies can be minimized.

Walking the Outcomes Walk

The existential question for company leaders who are uneasy about the new technologies and disruptive competition that may be threatening their livelihood is, What are we asking customers to pay for? The hard truth about how a company can successfully earn revenue lies in how leaders answer this question, not in the promises being made in advertising, online, or on sales calls. Evolving your revenue model requires a different mindset and new competencies. In particular, there are five critical questions to answer:

1. What do we mean by outcome? The starting point is clearly defining outcome in the organization. To be suitable as the basis for a revenue model, an outcome must be:

• Meaningful to customers. This may seem obvious, but many companies still lapse into navel gazing — focusing on product or service features in which they have an inherent interest or technological advantage, even when these characteristics are irrelevant or matter little to customers. (See “The Quality Paradox.”)
• Measurable. The organization and its customers must agree on the parameter(s) that best reflect outcomes, and when and how these will be captured.
• Independent. Neither the company nor its customers, nor third parties, can tamper with the measurement of the outcome to their benefit.

Beyond this, leaders have to consider the number of outcomes they want the organization to deliver and the degree of control they have over each outcome, as these factors can force trade-offs between complexity and financial returns. The right number of outcomes relates to the heterogeneity of customer needs and wants in your market. This determines whether you can serve the market with a single outcome or should champion multiple outcomes. Clearly, the company that delivers multiple outcomes is likely to require greater coordination and face greater challenges along many dimensions, from product development and operations to marketing and communications, but in return it often serves — and monetizes — more customers.

At the same time, outcomes tend to be less complex when their delivery depends only on the selling organization or when they can be broken down into a small set of clear, manageable steps. Conversely, outcomes tend to be more complex when they involve intermediaries and customers themselves or when the underlying process is unclear or difficult to control. Ultimately, complexity here is an issue of how many moving parts a company must track and coordinate to implement and maintain an outcomes-based model. For instance, the number of contributors is important because if a market evolves to the point where customers pay according to some measure of performance, then the team responsible for delivering that performance needs to share the resulting revenue.

2. What happens after our products and services reach customers? “How many miles does it have on it?” is one of the first questions a mechanic will ask when someone brings in a vehicle for service. It is also one of the most important questions a potential used-car buyer will ask. This single number sets expectations on wear and tear, repair needs, warranty costs, residual value, and more.

What mileage cannot do is tell us anything about the car’s usage or performance with certainty. Once the vehicle leaves the dealer’s lot, the rest is a black box of sorts. Odometers cannot tell us who sat in and used the car, the conditions under which any mile was driven, and how well the vehicle performed for each individual mile. Odometers also offer no insights into miles not driven because of a breakdown or other mechanical or technical issues with the car.

The missing link in understanding the value customers ultimately derive from their purchases is impact data. Over the past decades, customer-focused organizations have made important progress in understanding customers’ needs and wants, as well as mapping their purchase processes and experiences. (See “Beyond Needs and Journeys.”) However, prior to the widespread availability of information technologies, a company could not efficiently observe customers’ post-purchase behavior directly, completely, and in real time.

This is no longer the case. Impact data enables companies to take customer focus full circle and define effective revenue models. Without impact data (in combination with traditional information on needs, wants, and journeys), companies would have no reliable means of identifying the access, consumption, and performance inefficiencies that can plague traditional revenue models based on ownership. Accordingly, they would have no reliable means to hold themselves truly accountable for the value they can offer customers.

One big consideration is the extent to which customers want to share their impact data. While collecting information on customers’ needs, wants, and decision journeys is typically not invasive, collecting impact data is. It can reveal facts, patterns, tendencies, and behaviors that customers purposely keep to themselves. Any data-driven quest for a better revenue model may feel like theft to customers unless companies protect their privacy and foster trust. Protecting privacy involves putting the appropriate safeguards in place to keep data confidential. Building trust involves reassuring customers that the company collects and uses impact data for purposes that are ultimately in their interests.

3. Are our products and services optimized for impact? A surprising but critical byproduct of answering the two questions above is that leaders suddenly have a sharp, unequivocal metric for assessing innovation. Innovation does not always serve the customer. Sometimes, even the most customer-obsessed companies take their eyes off the prize and look inward for inspiration — seeking the most cost-efficient solution, pushing features that internal factions desire, or making compromises that deliver an initially higher return on investment.

Answering this question allows leaders to review and adjust the current product and service portfolio. It enables them to better align their innovation efforts with the way customers derive value, and it motivates or pushes them to strip away internal distractions and focus on (re)designing for impact.

4. How do we engage customers who participate in the creation of value? Companies that adopt a performance-based revenue model are assuming the risk associated with the delivery of value to customers. Bearing this risk is not an issue if the company is confident that it can consistently create quality outcomes on its own. But what happens when customers are active participants in the creation of value? For example, a new drug may provide superior relief, but this depends on whether a patient complies with instructions on when and how to take the medication. Likewise, a well-designed course or educational platform may provide superior learning, but this outcome depends on whether a student puts in effort and follows the syllabus.

When customers participate in value creation, the ensuing risk may be excessive to the company, unless it can offer the right incentives to ensure they make the proper contribution. Perhaps the simplest way to motivate customers to behave is to reward them proportionally for acting in a manner that improves the underlying quality of the outcome. In other words, as the value pie expands in the exchange between the company and the customer, the customer should benefit from an increasingly larger slice.

Aside from financial rewards, companies have three options to mitigate the risk they have assumed from customers. First, they can enter into formal contracts so that both the company and its customers recognize their rights and obligations in a pay-for-performance exchange. Second, they can use elements of gamification — competition, a point system, or some other motivational mechanism — to nudge customers toward the behaviors that make the greatest contribution to outcome quality. This is particularly relevant for consumer markets and, for example, is a feature of many modern pay-as-you-drive auto insurance products. Finally, the company can extend its operations and take over the activities that are typically undertaken by customers. This option makes sense whenever customers lack sufficient know-how, skills, or resources to ensure a result on par with what the company could provide — something that we see frequently in industrial markets, where many leading suppliers have reinvented themselves as solution providers.

5. What is the transition plan? Changing the way your company makes money is not easy. The nature of your product (physical versus digital), the pace of technological change in your market, and beliefs about how long it will take your customers to change habits are likely to be important factors in deciding when to make a move. When the time comes, you will need to choose between the radical approach of launching the new model while switching off the old and easing into a new reality by operating multiple revenue models for some period of time. Neither approach is a walk in the park, and both depend on your ability to manage expectations inside and outside the company.

The first approach is risky, as you put all your eggs in one basket. And it is almost guaranteed to trigger short-term losses as transition costs quickly accrue and revenue is postponed from the point of purchase to some point in the future — periodically upon access, upon consumption, or upon performance, depending on the model selected. For a public company, these effects can alienate investors unless they understand (and agree with) the strategy and recognize the temporary nature of the downturn.

The second approach appears safer but is by no means risk-free. When given a choice, existing customers are likely to switch to whichever revenue model makes them better off. Because this results in cannibalization, the short-term impact on sales to existing customers will be negative, which can create friction inside an organization that is caught off guard. Accordingly, it is important to set expectations and establish clear ground rules if the active revenue models are led by different teams, to avoid internal competition for the same customers. Prices must also be carefully calibrated to minimize cannibalization.

Irrespective of which of these approaches you take, the organization will soon need to ask itself what the business would look like if it dealt with customers on the basis of a changed revenue model. Imagining this scenario requires creativity and the proper perspective. What is the right benchmark when a company judges a future course of action? Although it is often the case in practice, the point of comparison (the control group, so to speak) should not be the status quo — as expressed by current performance in terms of the key financial and commercial indicators. This confers a false sense of security. Instead, the organization should draw a comparison between multiple futures, contrasting the likely consequence of the planned change in revenue model with the likely projected consequence of inaction (that is, the decision to maintain the existing revenue model). Moreover, the proper time horizon for this comparison should not be a short-term one, and any anticipated dip in sensitive metrics, such as number of customers, revenue, or profitability, should be viewed as an investment in a more sustainable future.

Companies that earn their living by selling products and services tend to presume that there is a direct and strong link between the amount of money customers spend on a specific offering and the achievement of the outcomes they desire. But this is often not the case, and the consequence of any disconnection is borne by the customer. Ownership in and of itself does not enable access, nor does it imply consumption. And it certainly does not guarantee performance.

When a company truly possesses a superior product or service, especially when it has the resources to innovate and maintain a technical advantage, it can do itself and its customers a disservice by stubbornly holding on to a revenue model based on ownership. This company is not properly pricing its competitive advantage. Indeed, claims of superior customer value are cheap talk unless companies back them up by not only delivering the solutions customers need and want but also adopting a revenue model that aligns its success with that of customers. This should be intuitive to companies — especially those that claim to put customers at the heart of their operations and have spent the past several decades sharpening their ability to gather meaningful insights about their motivations and decision journeys.

We urge you to act on this intuition. Not every company can or should rush to implement a performance-based revenue model, however. Performance models may be the final destination, but they are not necessarily the next destination.

Even so, companies should recognize that revenue models anchored in the mere ownership of a product or service are patently inferior. Making the transition to better alternatives anchored in time or use is within reach for most businesses — so they can start pursuing access and consumption models now.

Starting business meetings with a handshake, laughing with friends in a bustling restaurant, or squeezing onto a crowded commuter train: Before the coronavirus pandemic, these were the completely unremarkable events of everyday life. But in the absence of an effective vaccine or test-and-trace system, these activities now carry deadly risks. Naturally, individuals, businesses, and governments have taken dramatic actions to reduce the number of social interactions to prevent the spread of COVID-19 and a deepening of the pandemic.

Reducing social contact to slow the spread of the virus has had a major impact on the U.S. economy, but not all businesses have been equally affected. Some companies provide better trade-offs. Those offering more social and economic importance per social interaction that poses potential risks face less government regulation and a smaller reduction in visits from fearful customers. Governments, businesses, and individuals should seek to maximize the bang for their buck from social interactions. And organizations that can boost their value-risk trade-offs are even in a position to benefit from the crisis.

In our recent research paper, “Rationing Social Contact During the COVID-19 Pandemic,” published in the Proceedings of the National Academy of Sciences, we measured the value-risk proposition offered by 26 different location types throughout the U.S.1 Locations we considered are generally for-profit (such as different types of retailers, entertainment venues, and service providers), but we also looked into the trade-offs offered by some nonprofit organizations.

Regarding benefits, we measured the economic importance of a location in terms of its receipts, employee counts, and payroll. We also included consumer importance as measured through a nationally representative survey. Such surveys have been used in the past to measure the value of free digital goods.2 In this survey, respondents could choose between a pair of locations and decide which one they would prefer to remain open.

To measure the cumulative risk of a location type, we looked at a combination of nine factors drawn from smart-device GPS mobility patterns. A location is considered more dangerous if it is visited frequently and by large numbers of people, and if those visits result in crowding at certain times of day. We considered these factors for the general population but also focused on individuals age 65 and over, a population at higher risk of developing a serious case of COVID-19. Another factor we incorporated was the distance people traveled to given locations from their homes. This last component captures the amount of social mixing at a specific location by people originating from different locations, while the other measures capture the intensity and amount of social interaction. Each of these social mixing measurements was evaluated for each location type.

The figure “Cumulative Danger and Importance of 26 U.S. Location Types” summarizes our findings. The locations that offer the best aggregate risk-reward ratio include banks, grocery stores, department stores, and general goods stores. These locations all offer very high social importance, with banks and grocery stores rating higher because they offer critical services to customers and serve as employers.

The locations that we find offer the worst trade-offs include gyms, liquor stores, sporting goods stores, and cafes. These are generally small, highly trafficked, and highly crowded locations. They are also of lower social importance. While we visit these locations often, they contribute relatively little to GDP, employment, and welfare in terms of the daily necessities they offer consumers and the number of employees served.

These risk-reward trade-offs have profound implications for businesses. From February to March 2020 (the latter being the first month of wide-scale actions to enforce social distancing in the U.S.), visits to all locations in the 26 categories we evaluated declined 24.9%. According to our analysis, this decline was concentrated in locations offering worse risk-reward trade-offs. While banks experienced only a 2% decline in visits during this period, gyms experienced a 33% decline.

Even outliers are usually driven by consumers’ desire for safety. Hardware stores, despite offering a mediocre risk-reward ratio, actually saw a 19% increase in visits from February to March. We speculate that this was due to consumers stocking up on personal protective equipment, such as masks, and high-demand supplies. Visits to grocery stores also increased by 15%, likely due to consumers seeking to substitute one grocery store visit for multiple risky restaurant visits.

How to Boost Your Value Proposition

Given the data findings and the continued risks to public health, it’s clear that boosting organizations’ risk-to-value proposition is both a financial and moral imperative. Companies that establish reputations for having safer locations will be rewarded by risk-averse clients. Leaders should keep in mind that the effectiveness of potential interventions will vary depending on the business’s type of location.

Implementing Sanitation and Distancing Best Practices

One critical first step every company must take, regardless of industry or location, is implementing basic health and safety best practices by disinfecting surfaces, putting protective barriers in place for staff members and clients, and requiring mask use. Mask wearing is especially important for industries that involve close-proximity personal services, such as hair salons. By looking at the share of workers by occupation in an industry and combining this data with O*Net occupational characteristic scores, we can estimate how much an industry relies on physical proximity. Industries with low scores can more easily allow employees to practice social distancing or work from home, whereas masks will be essential for industries with high scores. In our analysis, we found that dental offices and salons and barbershops are the only two location types with a high share of workers requiring extended close proximity. Amusement parks, gyms, and restaurants of all types also have high shares of workers requiring some degree of proximity to do their jobs.

Scheduling Visits

Companies and business owners can also take steps to lower risk in their physical locations by modifying their business hours and admitting customers on a staggered schedule that creates lower density. Keep in mind that strategies aimed at lowering risk can have their own drawbacks. For instance, having customers wait outside a store while it is at its (reduced) maximum capacity means a higher chance of frustrated customers and still allows the opportunity for customers to infect one another. Much better alternatives include special hours for vulnerable populations, time-restricted coupons, surge pricing, and increased enforcement of scheduled rather than walk-in visits.3 Time-restricted coupons and discounts also have the benefit of doing less to dissuade spontaneous and impulsive visits compared with strict scheduling.

Offering Premium Lower-Density Services

During the pandemic, companies that have provided tiered services may need to pause or disband options previously available to customers that are now less safe. A tutor or personal trainer who has offered both individual and group training might decide to focus on premium one-on-one services, for example. A larger-scale example comes from Uber and Lyft canceling their discount ride-sharing options that pool multiple riders in one vehicle. Businesses continuing to offer services that push large numbers of clients together are likely to face both lower demand and more resistance from their employees and governments.

The figure “Potential for Reducing Crowding by Scheduling Attendance” looks at how different business types can benefit by better using spare capacity. On the x-axis is the importance-risk trade-off favorability of a location. On the far left are gyms, which offer the worst trade-off; on the far right are banks, which offer the best trade-off. The y-axis plots location types by the average variance of their crowdedness. A location with high variance in crowding is very crowded at some points but nearly empty at others, such as the typical cafe or liquor store. Locations in this category have more to gain from new strategies for customer visits.

The good news is that locations that offer the worst trade-offs due to COVID-19 have the best opportunities to improve their safety through customer timing and scheduling changes — such as clothing stores, dentists, liquor and tobacco stores, and restaurants of all types. This is demonstrated by the strong negative trend line. For dentists and restaurants in particular, where visits are commonly scheduled in advance, reductions in transmission risk might be easily achieved with little disruption to processes or increases in costs.

Know Your Brand

Within a location type, there can be large variation in the potential gains from rescheduling visitors. In the figure below, the top and bottom panels show the cumulative danger due to proximity and the potential for danger reduction through scheduling visits for the 30 top restaurants brands in the U.S. As before, the marker sizes indicate the total monthly visitors in February 2020. Unsurprisingly, for each of these location types, the number of visits to a chain (marker size) is positively related to the cumulative danger of the chain (position on the x-axis).

What else does this figure show us? Consider, for example, a pair of restaurant chains: The Cheesecake Factory and Ruby Tuesday. Both chains have approximately the same number of normal visits monthly: about 1.7 million. However, they vary dramatically in terms of their current safety and the safety they might gain through rescheduling. The Cheesecake Factory’s guests are concentrated in short periods, with the highest visit-weighted average crowding variance at open locations compared with any restaurant brand. This leads it to have a much higher danger index than Ruby Tuesday, despite having the same number of visits. In order to better deliver value to customers during the COVID-19 crisis, The Cheesecake Factory should take steps to reduce the crowding of its restaurants during peak hours.

Generally, restaurant chains strongly associated with a single meal or event type tend to have higher variance in crowdedness over time. For example, IHOP (breakfast), Texas Roadhouse (dinner), and Buffalo Wild Wings (sporting events) all have above-average variance in crowdedness. These chains have the most to gain by redistributing their visitors throughout the day. However, due to the strong association of their brands with these events, they may face additional challenges in doing so. The takeaway from this is that businesses face an important trade-off in creating an identity that is tightly associated with a particular event or time of day. This association may prevent them from fully utilizing capacity in off-peak hours.

Within grocery and department stores, there is also significant variation in the amount that stores can gain through redistributing visits across time. Within grocery stores, ShopRite and Kroger have much higher variance in crowding than Winn-Dixie, Whole Foods Market, Aldi, and Publix. Within department stores, Target and Sears have higher crowding variance than J.C. Penney and Safeway. Kohl’s is doing a particularly good job at keeping its stores evenly attended and therefore has a very small cumulative danger score for its number of visitors.

How can businesses best protect their customers from the coronavirus while still delivering or even increasing the value they offer? How businesses answer that question is a critical success factor moving forward. Companies need to meet government regulations but also attract and win back customers and clients based on their proactive risk-prevention measures. Not every business will find this easy, but boosting quality never is. The only alternative is a dismal one — businesses undertaking coronavirus safety “theater,” and cynical clients and governments looking the other way, while hundreds of thousands more die.

But there is a silver lining to this challenge. It is exactly the type of problem that market forces are good at solving. In the past, competitive pressures have forced companies to economize on resources. Today, they must economize on social proximity as well. As long as clients, workers, and governments demand this of their economies, the invisible hand of competition will deliver it.

As companies continue to grapple with the impact of COVID-19, a valuable insight they can bring to strategizing new paths forward relates to coping with the state of limbo — a sense of “in-betweenness” — experienced in a major crisis. One valuable source of insight into this state is the concept of liminality from social anthropology. Arnold van Gennep, a French anthropologist, coined the term in the early 20th century to describe the threshold period between two phases of life — for instance, what adolescents might experience during certain rites of passage.

During a crisis, liminality can be a pervasive, shared experience for people across communities. Learning to harness the benefits of liminality is helpful for coping with the challenges of COVID-19 and is also important beyond the pandemic, given the likelihood of aftershocks from or recurrences of the coronavirus crisis and the emergence of other uncertain events in the future.

Taking advantage of this transitional period requires managing both opportunities and challenges. Liminality is characterized by ambiguity and can be a time of great creativity for people as their cognition recognizes new possibilities. However, this ambiguity may also be disorienting, triggering panic. This threshold period also heightens our sense of community, offering scope for spontaneous cooperation, even among nontraditional allies, in what Richard Hytner at London Business School describes as a “climate of collaboration and a spirit of insurgency.” However, this fleeting spirit of solidarity may also induce passivity if people begin to take added support for granted. Liminality can also be a period of capability-building for people and teams, given that prior expertise will often have to be modified, augmented, or replaced to meet challenges in the next phase. However, these transformations may go awry if people improvise too much or act impulsively.

The trick for leaders is to harness the upsides of the in-between phase of crisis while avoiding accompanying pitfalls. Three strategies have helped companies meet the demands of the current crisis and will be worth holding on to as we look toward the future. (See “Harnessing the In-Between Stages of a Crisis.”)

1. Pivot calmly using resources at hand. An antidote for panic is working with what is at hand — a principle that anthropologists call bricolage. This might mean augmenting an offering with readily available — and relevant — components. For instance, Shanghai-based health care startup HiNounou first added face masks and hand sanitizer to its health-monitoring kit for elders to use during COVID-19 and eventually released this kit to the wider market as it became broadly relevant.

Another approach is refashioning an existing offering in one realm to make it applicable to another. SenseGiz, a startup that originated in the southern Indian city of Belgaum, applied its expertise in monitoring home and office safety to a social distancing and COVID-19 patient-tracing application that won first prize at an innovation challenge organized by the Indian government. Another celebrated example is ventilators being fashioned out of diving masks.

In contrast to these examples, a young entrepreneur I spoke to within the past few months panicked because the lockdown in his city and associated travel restrictions meant that he simply could not pursue his plan A. He tried to pivot using an expensive new feature that required users to install equipment that was not easy to procure. Thus his knee-jerk reaction was neither sensible nor, in the end, feasible. Working with resources at hand, as opposed to worrying about hard-to-obtain resources, helps managers and entrepreneurs enhance their belief that they, rather than external circumstances, control outcomes. This, in turn, can mitigate initial anxiety or panic brought on by the ambiguity of a crisis. This approach makes practical sense for many companies during a crisis, given that their resource base typically doesn’t expand. If anything, it shrinks.

2. Connect actively, recognizing that support may be temporary. Recognizing the temporary nature of the current situation and, therefore, of available support and resources could be a wake-up call for organizations that prompts proactive change. The U.S. Geological Survey has captured the spirit of solidarity many groups are experiencing in its compilation of open innovation projects focused on COVID-19: One of its lists, titled “The Unusual Players — Spontaneous Efforts,” includes a contribution from a 17-year-old high-school student. In other words, liminality can bring on a Dunkirk-like spirit of spontaneity when actors who normally don’t work with one another are willing to pitch in and help.

On the other end of the spectrum, a colleague recently described an email he had received from a company for which he had volunteered to mentor as conveying a sense of lethargy; its leaders didn’t feel ready to brainstorm and wanted to wait for the dust of the current crisis to settle. What they didn’t seem to grasp is that my colleague’s offer wouldn’t be available indefinitely. Recognizing that external support may be fleeting can instill a sense of urgency that offers an antidote to the danger of slipping into passivity.

In times of uncertainty, early investors and mentors often provide advice and serve as a useful sounding board. Cisco LaunchPad, a corporate accelerator, has provided support for alumni startups — like the previously mentioned SenseGiz — on technology enablement and market access to meet needs arising from the pandemic. Also valuable is generous scaffolding like the Australian Information Industry Association’s business continuity initiative, which provides access to free business services and tools that facilitate remote working arrangements.

When partnering with organizations and providers that are dissimilar from one’s own, tapping the expertise inherent in programs that can help match various solutions with corporate needs can help greatly. For companies, it’s important to recognize that the journey between stages does not have to be a lonely one — but ensuring that will require active effort and engagement.

3. Learn without overreaching by being consistent with one’s DNA. If companies follow the preceding strategies of calmly (No. 1) yet proactively (No. 2) working with internal (or adjacent) resources and external networks, they are more likely to avoid the risk of reckless overreach, by staying true to their DNA as they improvise. Crowdz, a Silicon Valley startup focusing on supply chain finance, recognized a new opportunity to target the small and medium-sized business (SMB) market, as opposed to its traditional customers, who were large trading companies. It pivoted by shifting its messaging and business, based on the technical and business expertise that were already at hand, to show SMBs how they could prequalify for invoice financing. Crowdz found that it could tap into a newfound spirit of generosity among large companies that wanted their SMB suppliers to survive the current economic crisis. Building on these moves, Crowdz then recognized the need to quickly develop new expertise, consistent with its DNA, to build a new feature — in this case, the ability to basket invoices for external funders. Crowdz improvised in a way that was effective yet not impulsive, which helped it avoid overreaching. This type of approach proves successful because even after a liminal transformation, the core values and DNA of a company are likely to remain the same.

For managers, a nuanced understanding of the transitional stage we’re in is critical. While the need to guard against the pitfalls of panic, passivity, and impulsivity can be easy to overlook, taking care to do so will make it more likely that well-intentioned efforts — in terms of creativity, cooperation, and capability-building — are truly not wasted.

Businesses are increasingly operating in a low-trust world. The levels at which people mistrust government, traditional media, and social media are high — and rising.1 Companies increasingly struggle to maintain consumer confidence on issues such as data collection and privacy, the use of artificial intelligence, and environmental practices.

Add to the trust deficit a global pandemic, in which consumers have been asked to limit their visits to stores and restaurants and to shop online when possible. Those who do venture out face an uncertain and (literally) distanced service experience: They’re questioned about their health, asked to line up and wear masks, shown where to walk, and reminded to avoid other customers and employees. Although this gamut of control measures is well intentioned, it may undermine customers’ sense that companies provide safe and welcoming service.

This trust deficit persists outside the retail space. Individuals contacting customer service — whether at airlines, banks, or retailers — during the pandemic are waiting longer than ever and are dealing with uncertainty and frustration about refunds and product availability.

So customers are arriving at interactions in highly charged emotional states. Many front-line workers with similar safety anxieties and changing directives from their supervisors are also stressed. Further, due to staffing cuts, shuttered branches, and closed call centers, many customer service employees are working from home with less support from team members and supervisors.

In short, the potential for fraught customer service experiences — in person or otherwise — is higher than ever. But a growing body of research on language use in service interactions can help. Companies can proactively make the most of conversations with customers, whether in physically distanced and masked face-to-face interactions, through voice-based communication on the phone, or in text-based emails and chat messages. By speaking to customers with specific, dedicated attention; establishing individual connections through the use of the word “I”; and conveying care through warm words and the generous use of “thank you,” businesses can ease customer anxiety and foster customer confidence.

The Challenge: Build Customer Trust and Satisfaction

Trust is key to customer satisfaction, and the current situation has stolen from consumers and companies most of the face-to-face, nonverbal ways people build trust — things like smiles, head nods, and handshakes.

In this environment, every word matters. Below, we highlight how using the right “speaking terms” can send signals that lead to the trust that businesses and consumers sorely need during this challenging time.

Provide customers with dedicated attention and concrete language. Without the benefit of in-person cues, it can be challenging for employees to convey to customers that they are giving them their full attention. New research that one of us conducted (Packard, with Jonah Berger of the Wharton School) shows that careful strategies around language can increase customer satisfaction and how much money the customer spends in the days following a customer service interaction.

Front-line employees who use words that describe the customer’s interest in concrete, specific terms signal that they are genuinely listening. For example, when a customer reaches a call center to inquire about her order’s delivery, she’s more satisfied when she hears, “Your package will be at your doorstep next Wednesday,” rather than, “Your order will be there next week.” A package is more concrete than an order, a doorstep is more concrete than “there,” and Wednesday is more concrete than next week.

Similarly, “How can I help you?” can sound canned and rote. Instead, an employee should mention the distinct thing the customer is likely interested in. For example, at a coffee shop, an employee might say, “Can I get a coffee started for you?” At a hardware store, if a customer is looking at lawn mowers, the employee might say, “Can I help you find a mower?”

The same advice applies when responding to complaints. Rather than just saying, “Sure, I can look into that,” it’s more powerful to repeat the concrete thing the customer wants — such as, “Sure, I can look into why we sent you the wrong shoes.”

Bridge the trust deficit through individual connections. For customers, it’s easier to have faith in a single caring individual than in a vast corporation. An analysis of real customer service encounters found that when employees used “I” (the agent) rather than “we” (the agent and company) as the pronoun, it signaled that the agent could be depended on. This simple shift in language to using “I” — for instance, “I can make that return happen for you” (not “We can make...”) — helped customers feel that the employee was acting on their behalf.

Similarly, “I’m sorry to have to cancel your flight” conveys a more genuine, personal sense of remorse than “We’re sorry to cancel the flight.” The word “we” not only decreases perceived empathy but may also make it appear that the employee is avoiding responsibility and blaming the company — something that is unlikely to increase a customer’s trust in the brand.

Another example: Rather than saying, “We probably have that in stock,” try, “I can probably find that in stock.” The former guesses about something the employee seems to have no control over, while the second conveys a desire to make a personal effort.

Don’t just be competent — be caring. Warmth and competence are the two most fundamental qualities people care about when it comes to trusting others. It’s nearly impossible to be both at the same time: Research has shown that people who try to be warm often seem less competent, and those who try to be competent often seem less warm. Later research suggested that given this challenge, employees should just try to be competent.

However, new research on conversational dynamics that one of us conducted (Packard, with Yang Li of the Cheung Kong Graduate School of Business and Berger of Wharton) shows that it’s critical for employees to speak both warmly (that is, emotionally) and competently (that is, rationally). It’s just that when they do so matters. Agents should convey different tones during different parts of the interaction. Customers appreciated employees most when they bookended the conversation with warm, considerate words at the start and end but spoke with more cognitive, solution-oriented words in the middle.

Caring can also be communicated with a simple thank-you during an interaction. While past research has suggested that it’s important to apologize in customer service contexts, new work reveals that signaling appreciation (“thank you”) is prized by customers and often more effective than saying “sorry.” Although apologizing does acknowledge the company’s failure, it doesn’t alleviate consumers’ negative thoughts toward the business. In contrast, saying “thank you” (for instance, “Thank you for your patience about this”) shifts attention away from the company’s failure and toward customers, making them feel more personally important to the company. Research shows that this boosts customer self-esteem and increases customer confidence in the organization.

Finally, keep in mind that it’s not just what you say but how you say it. Even without the valuable visual cues of trust, employees can affect trust perceptions by varying the pitch of their voices and increasing the volume of their speech slightly. These signals allow communicators to seem more confident without weakening their perceived warmth.

In this new world, where face time is minimized and physically distanced, and where conversations increasingly occur via even more socially distant phones or keystrokes, it is critically important to consider how we are speaking to customers. By paying attention to language and tone, organizations can reduce customer anxiety and build trust in these challenging times.

Several months into a global pandemic, leading organizations are redefining expectations of what is possible. Consider how offices around the world shifted virtually overnight to digitally enabled remote work. Grocery retailers and restaurants rolled out new pickup and delivery services. Hospitals rapidly expanded telehealth options. Automakers, apparel makers, and mobile phone assemblers retooled on the fly and are now rushing out personal protective equipment and ventilators.

All of these scenes offer a glimpse at a new age of acceleration taking shape, in which leading companies are racing ahead to redesign strategies and operations in weeks instead of years. Many of these breakthroughs have been on chief executives’ to-do lists; now, they are being fast-tracked. A defining feature of the much-discussed new normal in business is speed: Decisions are being made at a pace previously thought impossible.

The tremendous public health and economic impact of the coronavirus pandemic has raised the global standard for efficiency and innovation. The world can’t magically go back to the way things were before. The resilient corporations that find success in the future will be those that can continue to turn on a dime as nimbly as they have during the early months of the pandemic.

This shift is spawning a new breed of company — more capable of thriving in uncertainty with a clearer and broader sense of purpose. Corporate superstars will be able to continue to motivate people around a common goal even after the health crisis and through economic hardship. They will recalibrate quickly in response to megatrends, expand beyond traditional business lines through partnerships, and improve their performance along broader environmental, social, and governance metrics.

In recent months, we’ve had discussions with dozens of the world’s top chief executives on how to build a better future. We found that companies showing the most agile and resilient responses to the crisis are pursuing four main strategies.

1. Prioritize people. One of the biggest lessons from the pandemic is that people are the key to rapid innovation and resilience. Many labor forces now work from home — yet they come together as teams across silos and geographies, united by a common purpose. “Solidarity has proven to be more contagious than the virus itself,” one chief executive told us. As a chief operating officer put it, “A gap will widen between those companies able to motivate and mobilize their employees post-COVID, and those who fail miserably at it.”

Top leadership teams communicate openly with empathy, making it clear their people always come first. During the coronavirus crisis, many have demonstrated commitment by avoiding or minimizing layoffs, securing aid for employees in need of help, and accepting executive pay cuts.

Now some leaders are going further and instituting new measures to create cultures capable of retaining and attracting the best people, even after health issues abate and economic issues remain. These include new compensation schemes that reward employees not just for hitting sales targets but also for extra efforts like supporting the company’s culture of resilience, more opportunities for company leaders to hear feedback from employees, wellness programs with mental health counseling, and more flexible work arrangements.

Simultaneously, companies are exploring new ways to tap into employees’ collective intelligence more efficiently. Some executives, for example, plan to spend more time explaining their strategies so that employees will feel empowered to make more, better, and faster decisions, even with incomplete information. For example, employees may switch suppliers or pay a higher price for supplies if they are aware of the company’s goal to secure its value chain. Other executives are expanding training and investing in open-source online portals, data dashboards, and algorithms that make it easier for people to share insights across functions and geographical boundaries to monitor, communicate with, and make prescriptive recommendations to suppliers and customers.

2. Make megatrends matter. Leading companies are also prioritizing the need to identify threats and opportunities created by megatrends that can rapidly reshape businesses. The coronavirus pandemic has shown that negative megatrends like epidemics and climate change can no longer be treated as tail risks so extreme that no preparation would make a difference.

Companies have to build up resilience to safeguard profits by being prepared to play ferocious defense against other negative megatrends gathering momentum, like public debt crises, at one end of the spectrum. At the other, they must aggressively pursue new prospects created by positive megatrends like digitalization and health and wellness.

Macro shifts set off by the pandemic illustrate how quickly megatrends can force companies to reset strategies. Retailers are rerouting investments earmarked for building physical locations into upgrading online commerce features and delivery services. Financial services companies are accelerating many more digital-only offerings, such as contactless payments and risk management products such as health insurance.

Measuring and analyzing the impact of such megatrends can no longer be left to a business unit or risk department. Instead, leadership teams are adopting dashboards that monitor how their company will fare across different scenarios — and asking managers to explain how their strategies take megatrends into account. “The economics of profit are not always compatible with the economics of resilience,” one chief executive said, “but we are discovering that our economics are no longer based on sustainable fundamentals.”

3. Build resilience to accelerated change. Companies must also consider what happens when megatrends combine to trigger exponential change. The pandemic has magnified the links between countries, between the public and private sector, and between companies’ own inner workings and their customers and supply chains.

These often-overlooked interconnections help explain why the new recession is expected to be broader, deeper, and more difficult to turn around than previous downturns. The International Monetary Fund expects the “Great Lockdown” to be the worst recession since the Great Depression of the 1930s. In 2020, global GDP will decline by 2% to 4%, according to the World Bank. More than 40 million people in the United States have lost their jobs since the start of coronavirus-triggered shutdowns in March, reversing more than a decade of job growth.

Deeper ties also explain why many companies accelerating and adapting in the coronavirus-driven economy have focused on forming new alliances. Companies ranging from retailers to manufacturers are racing to replace capital-intensive, integrated, end-to-end businesses with coalitions and partnerships with the goal of protecting their returns on capital and responding more nimbly to sudden spikes and slumps in demand and supply. Automakers are coinvesting in machinery kept in the facilities of suppliers motivated to grow their business along with them. Manufacturers are broadening relationships with suppliers producing key materials like copper at every stage of its life cycle — from mining of the ore to its recycling.

In what increasingly looks like a new phase of being “agile,” companies are doubling down on core capabilities while cutting costs by broadening and deepening partnerships. Just-in-time operations are evolving into “just-in-case” coalitions of suppliers similarly focused on what they do best, whether producing materials and parts or research and development. “We need to free ourselves from activities that others do better than us,” one chief executive said.

This strategy also includes collaborating more with competitors. Over the past decade, companies have shared everything from engine platforms to transportation fleets with rivals. Now, intense pressure to lower prices while raising returns on capital is driving companies to partner on even more and to join forces against bigger challengers.

In every way possible, companies are trying to reduce complexity, instead of making big bets that ultimately may not pay off. For some companies, this means developing new sources of revenue and picking up businesses that complement their core offerings so that they can respond to big swings in consumer attitudes as seamlessly as a hybrid vehicle switches from gas to electricity. For others, it means focusing only on the most promising distribution channels, products, customer segments, and geographies in the future.

Companies are adding new digital capabilities to move quicker, in part by allowing them greater visibility into and control of their operations. The crisis has also sharpened focus on key technology investments in AI, as many organizations are scurrying to shift operations to the cloud and adopt smarter substitution algorithms, robots, and automating systems.

4. Champion multistakeholder capitalism. Leading companies are also now starting to sprint toward becoming more sustainable over the long term. As European governments play a bigger role in deciding how wealth is distributed through financial stimulus packages, many are pushing companies to meet broader environmental, societal, and governance standards, such as carbon neutrality. More investors are beginning to cheer for companies with strong environmental, social, and governance (ESG) practices. During the first four months of this year, ESG funds have attracted more than twice as much money during a market meltdown as they did during the same period of the previous year, in large part because they are delivering better-than-average returns.

In order to maintain momentum, more companies will be under pressure to break from the economic philosophy that has guided most public companies since the 1970s: that they exist solely to maximize shareholder value. More governments will ask companies what they can do for society. Past rules of thumb for share buybacks, dividend payments, board structures, and executive compensation will require a rethink. Shareholder activism will be regarded with skepticism.

Companies had to respond to similar demands after the 2007-2008 financial crisis, when governments required banks to shore up capital and to clamp down on executive compensation. But this downturn feels different. Governments are extending financial support to a much wider range of virus-hit strategic industries — from steelmakers to airlines — and calling the shots on many more aspects of companies’ operations. On May 11, 2020, the European Commission banned dividends, share buybacks, and bonuses for bailed-out companies as long as governments hold a stake in them. If governments pick up the pieces when lean companies get hit with systemic issues, they will likely require them to bolster their balance sheets.

Already, national governments have started to attach conditions to aid packages to protect climate goals. At least one airline, Air France, has pledged to reduce its carbon emissions earlier than originally planned in order to receive government loans.

Moving fast will require adapting to new standards more quickly than competitors, and companies at the forefront are adjusting their expectations for returns. Companies that have already forensically reviewed their operations to obtain strong sustainability scores now have a competitive advantage. More are focusing on their environmental, social, and corporate governance performance as they prepare for a new era when growth will depend on excellence measured by social metrics like employee absenteeism and environmental yardsticks like waste-recycling rates.

The coronavirus pandemic has triggered the kind of economic reckoning that occurs perhaps once a century. Enormous innovation and breakthroughs will be required to revive the global economy. Along with it, previous assumptions of how business should be conducted will have to be reexamined.

“Ironically, the longer the crisis lasts, the more seriously we will be forced to transform into more sustainable businesses,” one chief executive said. The companies that can make fast and forward-thinking decisions so that they can continue to adapt rapidly to change while embracing the human capacity for invention, will be among them.

For the past two decades, companies have assumed that they know the disruption playbook. It’s an S curve of progress: a series of cumulative advances as a new value proposition progresses to outperform a given industry’s prevalent offers. A company introduces gradual improvements in a new, innovative value proposition. Initially, the offering is not attractive to mainstream users and established incumbents, but eventually it becomes good enough and then achieves market dominance. Disruption of the incumbent is complete.

This perspective on disruption provides a valuable guide with respect to how investment returns on innovative efforts may unfold over time. Progress during early efforts tends to be slow, followed by takeoff and a period of sustained growth.

The launch of Netflix’s DVD-by-mail service at the turn of the century represents a classic example. The service was initially targeted at movie enthusiasts who were early DVD adopters. These were consumers who agreed that the trade-off of selecting films through online search was worth the wait (often several days) for the movies to arrive in red envelopes in the mail. At the time, this value proposition was not attractive compared with the mainstream video rental market. However, as Netflix improved its offer — via an unlimited subscription service, an online recommendation engine, a more efficient distribution network, and newer and original content — the company was able to disrupt video rental incumbents such as Blockbuster.

But this view of disruption is oversimplified or, at a minimum, incomplete. What the prevailing imagery for S-curve progress misses is the fact that there is significant uncertainty regarding the rate of progress within the new disruptive value proposition. Some innovations can reach mainstream status in a matter of years, whereas others may take decades. And others, despite their disruptive potential, may never reach fruition. Video streaming services took off rapidly around the globe in a matter of years. In contrast, it has taken online degree programs more than a decade to establish a strong foothold in the education sector. And gene therapy, touted as a major advance in personalized medicine for several decades, has yet to take off.

The importance of factoring in uncertainty to understand the trajectory and impact of a disruptive value proposition on either a startup or an incumbent can’t be overemphasized. When it’s not anticipated, an otherwise promising upstart might leap forward with a product or service based on the assumption of a strong product-market fit without ever finding its audience. Or an incumbent can find itself taking its eye off its bread-and-butter existing products and services based on the assumption that a new innovation will skyrocket to success and provide the growth engine for the future. Neither path is a good one.

Uncertainty and disruption are two sides of the same coin; they can’t be separated. And yet much of the established thinking around managing disruption focuses on incumbents grappling with the threat of market incursions and identifying opportunities to develop their own, and on new entrants managing the opportunities around disruption.1

Although it’s true that the progression of each disruptive innovation may be shaped by the specific strategies of incumbents and entrants, decision makers should bear in mind that there is substantial uncertainty around whether a disruptive value proposition will materialize in the first place. Why is this important? Because an explicit consideration of uncertainty can help decision makers recognize the risks that surround the execution of the disruptive strategy. It can help them set more realistic market-growth expectations and evaluate strategic contingencies that can be experimented with and validated.

In our ongoing research, we have found three key sources of uncertainty — around technology, ecosystems, and business models — that are pivotal to understanding the process of disruption. When companies carefully consider these sources of uncertainty and how to address them, they can better position themselves to manage disruption and achieve superior performance outcomes. When entrepreneurs and executive teams overlook these factors, it opens up their companies to foreseeable challenges, such as the following:

• Failing to recognize the time and the extent of resources that might be required for the disruptive value proposition to take hold. This can lead to misjudgments about investments in a disruptive innovation initiative, such as giving up too early or sustaining significant spending too long, or starving other, more viable initiatives of resources and attention.
• Focusing on the new technology or the new business model while overlooking the challenges within the company’s ecosystem of suppliers, business partners, and customers that may be critical to the realization of the new value proposition. This can lead to prematurely optimistic projections about the potential of a disruptive innovation and risks wasting resources.
• Missing opportunities they could otherwise identify and seize around business model innovation across different markets. The risk here is that a company limits the potential appeal of a disruptive innovation or narrows the innovation’s paths to market without examining all the possible variations around the business model.

These uncertainties do not influence every company to the same degree, of course. Startups tend to be adept at experimenting with new technologies and business models, even though they may be resource-constrained. In contrast, established companies tend to be endowed with significant resources but face significant adjustment costs when they pursue disruptive value propositions while managing their core business. (Although startups and established companies often compete, collaboration can help both manage the uncertainties of disruption. See “The Potential for Collaboration in the Face of Uncertainty.”) But without a deep understanding of how uncertainty can affect the speed and resource-intensiveness of the disruptive arc of development, startups and incumbents alike can find themselves failing at what otherwise might have been a successful disruptive innovation.

Three Sources of Uncertainty

How is it that otherwise savvy companies tend to overlook or ignore potential sources of uncertainty? They might not be looking in the right places, or they may be locked into a specific strategic perspective too early. Our research has identified three key sources of uncertainty surrounding the question of whether the disruptive value proposition will reach fruition in a given market.

1. The enabling technology. Questions can persist about whether the technology that is enabling the disruptive value proposition can achieve the performance-cost threshold required for adoption by mainstream users (that is, for achieving product-market fit). For example, for commercial space travel, there are technological questions related to performance and cost, and although a large number of companies are pursuing the new value proposition, it remains unclear which technological design may be most feasible.

2. The surrounding ecosystem. Uncertainty may also stem from not knowing whether actors in the ecosystem will contribute to the disruptive value proposition through supporting investments, complementary innovations, or standards and regulation. For example, there remain important gaps in understanding regarding the use of augmented reality for instruction and training; it’s unclear whether there will be sufficient complementary content and suitable hardware devices for users to benefit from the new value proposition and how such virtual offerings might be regulated.

3. The business model design. Finally, there can be unsettled issues around the viability of the business model. Will the revenue and profit streams reach sustainable levels for the companies pursuing the disruptive value proposition? For example, there is significant uncertainty around whether the business model for autonomous vehicles looks more like traditional private and fleet vehicle ownership or like a fee-based mobility-as-a-service offering.

These uncertainties are not isolated. As our research on gene therapy has revealed, they can sometimes combine to heighten the challenge of commercializing innovations with disruptive value propositions.2

Gene Therapy’s Suspenseful Story

Gene therapy has faced challenges since its emergence in the 1980s. It has the potential to be a game changer for patients with genetic disorders that have no known cure, because it promises to cure the diseases by fixing defective genes instead of treating symptoms. When seen through the lens of the three uncertainties, however, it’s clear that the path to disruption is a steep climb.

Early attempts in gene therapy development proved ineffective, and some clinical trials led to severe patient side effects and deaths, raising questions about the time and resources required to bring this innovation to market. The business model for gene therapy is also unsettled. Because the treatments can mean a permanent cure or less frequent treatments than prevailing methods, calculating pricing and insurance reimbursements has proved difficult. Companies have discussed several business models, including a pay-per-treatment approach, payments spread over a fixed time line, or a pay-for-performance model in which payments are halted if the treatments have stopped working.3 Gene therapy also confronts significant ecosystem uncertainty. Treatments need to be administered by trained physicians in specialized settings, and they need to be reimbursed by insurance plans. But the availability of trained physicians, gene therapy facilities, and insurance plans that provide coverage is difficult to establish.

Even when a gene therapy treatment wins approval, it can face a cloudy future. A recent case illustrates the challenge: Gene therapy company uniQure pursued a treatment for lipoprotein lipase deficiency, a rare disorder that prevents a person who lacks certain proteins from breaking down fat molecules. The company and health care insurers found it difficult to price the treatment for such a small patient population. UniQure, which had won European approval for the treatment, subsequently withdrew it because of the pricing challenges and the rarity of the disease.4 The fate of this treatment is emblematic of the obstacles other gene therapy companies face. The disruptive potential of their innovations is enormous, but even after a company overcomes the technological and R&D hurdles and creates a new offering, it must confront business model uncertainties.

The life-and-death implications of gene therapy as a potential disruption make it a dramatic example. But this analysis of uncertainties is applicable whenever products and services with a disruptive value proposition emerge. Using this lens to assess the circumstances in which their company enters a particular market enables leaders to make precise decisions about resource allocation and timing — and guides their expectations about returns.

Considerations for Established Companies and Startups

How might established enterprises and startups be affected by these sources of uncertainty? Their motivations for pursuing disruptive innovations differ, and their strategies are shaped by their available resources and how they measure performance. So each type of company must weigh different considerations.

While nearly all disruptive startups are motivated by the possibility of replacing the industry’s status quo, many of them confront resource constraints in their efforts to develop a disruptive value proposition. In the case of gene therapy, startups have attracted a lot of attention, but many could not continue in the face of technology setbacks as their resources and new sources of funding dried up. Highly promising gene therapy startups like Introgen Therapeutics and NeuroLogix ultimately filed for bankruptcy in the U.S.

Established market leaders face other challenges. Although they typically have significant resources available to explore disruptive innovations, they cannot focus solely on this quest. They have to simultaneously manage their core business and measure progress against prevailing key performance indicators (KPIs) and short-term investor expectations. And established companies also may be industry incumbents facing a direct threat from a disruptive innovation or from players active in adjacent industries who see their own opportunity to grow in a related industry at the incumbent’s expense. In our research, we saw evidence of several established pharmaceutical companies, such as GlaxoSmithKline and Merck, investing in gene therapy research but holding back its commercialization because of business model and ecosystem uncertainty.

Analyzing a company’s resource availability and the need to manage performance carries over to the three key uncertainties for disruption.

Resolving technological uncertainty requires significant resources over time to achieve the performance-cost threshold necessary for product-market fit. Given that startups tend to be resource-constrained, they may be more adversely affected by this type of uncertainty. For example, in the case of companies pursuing new solar power technologies, many promising startups had to exit the industry once they lost the technology race to alternative solutions, whereas many established firms were able to continue directing significant resources toward the emerging market opportunities.5 For example, Solyndra entered the renewable energy market with a promising solar power technology called copper indium gallium selenide, but it ended up losing the battle for market dominance to crystalline silicon, resulting in an abrupt bankruptcy.6

Resolving ecosystem uncertainty represents a coordination dilemma, given that business leaders need to manage significant investments across multiple actors, including business partners, suppliers, customers, and regulators. Failure to account for critical actors such as regulators and creators of complementary innovations can cause progress bottlenecks and constrain the value proposition of the disruptive innovation. In such situations, startups may have a steeper challenge: Not only are they resource-constrained, but they may also lack scale and credibility among members of the ecosystem to influence their supportive actions.

Consider the case of Better Place, with its disruptive value proposition around electric cars. Its model to offer battery-charging and -swapping services in addition to selling vehicles helped resolve the technological uncertainty for motorists for whom the low battery performance and high cost of electric cars did not offer a strong value proposition. But, as it pursued its growth trajectory across different geographies, Better Place was unable to orchestrate the ecosystem and align the different actors — including customers and the governments in its targeted markets of Denmark and Israel — and sold only about 1,300 cars before going bankrupt in 2013.7

Autonomous vehicles are another example of a potential auto industry disrupter, with a number of established automakers launching deliberate, collaborative efforts to develop an ecosystem. BMW, for one, is working with Mobileye (Intel’s vision-safety venture) and Fiat Chrysler, as well as parts suppliers like Aptiv, Continental AG, and Magna International, with the goal of commercialization by 2021.

Resolving business model uncertainty requires continuous experimentation and the ability to reconfigure one’s approach to unlock the potential of the disruptive innovation for the innovation’s users and the innovating companies. Established companies are more likely to struggle with such uncertainty because experimenting with new profit formulas runs counter to existing metrics. Executives face pressure to meet KPIs. Scrutiny by investors and analysts, meanwhile, typically rewards sustaining rather than disrupting profit models. Conversely, startups are not entrenched in prevailing business models and may be better equipped to manage business model uncertainty.

The recent struggles of electric utilities to adapt to more decentralized business models exemplify the challenges for established companies. In a decentralized model, users (such as homeowners) consume electricity that is generated at or near the point of use, often through a combination of rooftop solar photovoltaic systems, batteries, and digital management of the electricity grid. Incumbent companies that were entrenched in the old, centralized business model had lower performance outcomes when pursuing the disruptive value propositions.8

For example, NRG, a U.S.-based energy incumbent, reported large losses from its pursuit of a decentralized model, resulting in the CEO’s firing. His departure was followed by a number of articles in the trade press describing the internal conflicts between the centralized and decentralized businesses, unforeseen delays, cost overruns during the implementation of the decentralized model, and the extensive competition NRG faced from new entrants.9 Incumbent energy companies elsewhere, such as AGL in Australia and RWE in Germany, have faced similar challenges.

Managing the Uncertainty of Disruption

Pursuing a disruptive innovation means taking on risk that the effort may fail. Analyzing the uncertainties that any disruption faces, however, can help you mitigate those risks by making informed decisions about the supporting technology, the surrounding ecosystem, and the business model foundation required for success.

The following five questions can help innovators — incumbent companies and startups — manage uncertainty.

1. What are the opportunities for a disruptive value proposition? Opportunities can be related to creating new markets, such as space tourism, or penetrating existing markets, such as global tourism.

2. Where are the key sources of uncertainty — technology, ecosystem, and business model — in different markets? Uncertainty doesn’t have to be prevalent across all areas. It is typically a subset of the three sources that can create bottlenecks for market growth. Management practices such as scenario planning and discovery-driven planning can be more effective if they explicitly incorporate the different sources of uncertainty.

3. How can the different sources of uncertainty be addressed? Experimentation with respect to customers and others in the ecosystem, business models, and technology choices can be valuable in resolving uncertainty. However, if uncertainty is severe across the three sources, decision makers may need to say no to investments at the outset or stop specific disruptive innovation initiatives.

4. Can I pursue this disruption on my own, or do I need strategic partners in the ecosystem to help resolve uncertainty? Identification of ecosystem activities and actors where uncertainty resides — and coordination among them — can be a critical aspect of managing such uncertainty.

5. How can I align partners to cocreate value? Partners can have different business models and motivations around the disruptive value proposition. It is important to identify which partners may have mutually beneficial objectives and to ensure that those objectives are aligned for the long run.

This exercise widens leaders’ perspectives on the opportunities before them. By openly considering these questions, leaders improve their ability to identify the risks of any strategy to develop a disruptive innovation. Based on the answers to these questions, they can make more nuanced decisions about their plans — which innovations to pursue, how much to invest, which partners to collaborate with, and the timing for all of these choices — than they otherwise would. They can revisit their evaluations and adjust their investments and the timing of them. And they can calibrate their expectations for progress on a particular value proposition and whether it has the potential to disrupt an established market based on additional evidence and insights.

Well-established cases show what’s possible for both established companies and startups. For the iPhone, Apple managed ecosystem uncertainty (What parties will work with us on this disruption? How?) through the creation and maintenance of its App Store and its calibrated rollout of available telecommunications carriers. Apple also navigated business model uncertainty in part through its use of exclusive vendors when rolling out the iPhone. Tesla has managed technology uncertainty by investing in batteries and software in order to offer a high-performance electric car. Regarding questions about its business model, Tesla set up direct sales. And the company is working to manage ecosystem uncertainty (how to keep electric cars charged) by developing infrastructure through initiatives like its Supercharger network of charging stations.

Disruptive innovations have made us more productive, better informed, and more mobile. They improve our health. They entertain us. And there are many more disruptive innovations to come — indeed, the next one may be at your company. To prepare for the best possible outcome, it’s important to understand not only the reach of an innovative idea but also the risks that lie in its path to realization. With our eyes open to confront uncertainties around the technology, ecosystem, and business model of each potential disruption, we can better understand what to expect along the way and better devote the time and resources to strengthen our chances of success.

When Johnson & Johnson’s CEO codified the company’s principles into a credo in 1943, corporate value statements were a novelty. Today they are ubiquitous among large corporations. In our study of nearly 700 large companies, we found that more than 80% published an official set of corporate values on their website.1 Senior leaders, in particular, love to talk about their company culture. Over the past three decades, more than three-quarters of CEOs interviewed in a major business magazine discussed their company’s culture or core values — even when not specifically asked about it.2

Corporate values statements are nearly universal, but do they matter? Critics dismiss them as cheap talk with no impact on employees’ day-to-day behavior. Recent corporate scandals support the skeptics’ view. Volkswagen, Wells Fargo, and Barclays each included ethics or integrity among their core values in the years before their wrongdoings were discovered, while Boeing hit the trifecta by listing integrity, quality, and safety among its “enduring values.”

It is tempting to dismiss corporate value statements as irrelevant, but ignoring them is a mistake. Even when companies fall short of their aspirations, official statements still cast light on the values leaders consider critical for success. They also spell out the cultural elements that leaders believe distinguish their company in the eyes of employees, customers, and other stakeholders.

Official corporate values only matter to the extent they shape employees’ activities and decisions on a day-to-day basis. This raises a fundamental question: How well does behavior inside a company align with cultural aspirations? In other words, when it comes to their core values, do companies walk the talk?

To measure the gap between aspiration and action, we collected the official corporate values statements for more than 500 large organizations and compared these official values with how employees view their companies on common corporate values based on an analysis of more than 1.2 million Glassdoor reviews.

What Companies Aspire To

Corporate culture means different things to different people. There are more than 50 distinct definitions in the academic literature, including the stories employees tell to interpret events, organizational rituals, and corporate symbols.3 The official culture statements we studied, in contrast, display a striking consistency in how they define corporate culture.

Three-quarters of the culture statements include an introduction explaining the role of corporate culture. The primary function of corporate culture, according to these descriptions, is to guide the actions and decisions of employees throughout the organization.4 Aligning behavior with official culture allows companies to differentiate themselves from competitors, build trust with stakeholders, increase brand equity, and attract great talent.

Nearly all the organizations we studied rely on a set of core values as the guideposts for helping employees align their behavior with corporate culture. Of the companies in our sample, 72% referred to their company’s culture as values or core values, and even employees at companies that use other labels — principles, philosophy, or ideals, for example — cited values as the foundation of their culture. The realities of how companies talk about their culture is consistent with a prominent theory that defines organizational culture as “a set of norms and values that are widely shared and strongly held throughout the organization.”5 We’ll use this definition of corporate culture throughout this paper.

The typical company lists a handful of values — the most common number of reported values is five, and nearly three-quarters of companies in our sample listed between three and seven values. (See “How Many Corporate Values Do Companies Have?”) Companies are not, however, always disciplined in spelling out their core values. Ten percent of organizations listed two or more sets of values under different names (core values and corporate culture, for example) on different parts of their website. Others packed multiple values into a single item. JP Morgan Chase’s business principles, for example, included “a commitment to integrity, fairness, and responsibility,” which we count as three distinct values. When we accounted for nested values, the average company in our sample listed seven distinct values.

One of the most striking findings of our analysis is the sheer number and diversity of values cited. We identified 62 distinct values mentioned by at least 1% of the companies with official values statements. Integrity was the most common, listed by 65% of all companies, followed by collaboration (53%), customer focus (48%), and respect (35%). No other value was cited by more than one-third of companies, and the list contains a long tail of values mentioned by less than 10% of companies. (See “What Companies Say They Value.”)

While some values are more common than others, none are universal. Even integrity, the most frequently cited, is listed by less than two-thirds of all organizations in our sample. The lack of universal values is explained, in part, by variance across industries. All of the companies in the construction and engineering and health care services industries, for example, included integrity among their core values, while less than 20% of internet companies did so. (See “Stated Corporate Values Vary Across Industries.”) Even within the same industry, however, we observed significant variation in the choice of core values.

The diversity of values calls into question the usefulness of frameworks that attempt to reduce all corporate cultures to a handful of universal types. One popular model, for example, argues that all corporate cultures can be plotted along two dimensions — internal versus external orientation on one dimension and flexibility versus control on the other.6 The cultures that correspond to the resulting quadrants — clan, ad-hocracy, market, and hierarchy — are presented as archetypes that describe all corporate cultures.

While these dimensions are important elements of corporate culture, the resulting two-by-two matrix cannot easily accommodate crucial values like integrity, diversity, or psychological safety. Other models choose different dimensions and produce other cultural archetypes, but they face the same fundamental challenge.7 No two dimensions can or should be able to capture the richness and diversity of corporate cultures that companies attempt to achieve. Trying to force diverse corporate values onto a cultural Procrustean bed, moreover, strips them of the very elements that make them distinctive.

Do Companies Walk the Talk?

More than 80% of large American corporations publish their official corporate values. But do these professed values make a difference? If a company singles out teamwork as a core value, for example, are employees more likely to collaborate with one another compared with a company in the same industry that does not include collaboration among its core values?

To address whether stated values shape employee behavior, we first measured what companies say they value. The simplest way to quantify corporate culture would be to treat each value as binary — a company either listed it as a core value or did not. When Charles Schwab lists innovation as one of four core values, it is presumably more focused on it than Quicken Loans, which includes innovation among a laundry list of 19 elements of its culture.

To quantify each company’s relative focus on a value, we weighted it by the inverse of the total number of values listed.8 So innovation was weighted at 25% for Charles Schwab and 5% for Quicken Loans. (A company that didn’t list a specific value received a weighting of zero for that value.) To control for differences across sectors, we assigned each company to one of 33 industries.9 We then ranked each company in its industry based on the weighting for each value we measured.

To assess how well companies live up to their stated values, we used data from the 2019 Culture 500, which ranks companies on nine of the most commonly cited values. Every Culture 500 company received a sentiment score that measured how positively employees talked about a specific value in the free text of their Glassdoor reviews.10 If half the employees who discussed integrity in a company spoke about it in positive terms, for example, that company’s sentiment score for integrity would be 50%.

Comparing the rankings from the Culture 500 with official corporate values allowed us to measure the correlation between them.11 The figure below shows the correlation coefficients (with 95% confidence intervals) between official and actual values.12 The analysis reveals that there is no correlation between the cultural values a company emphasizes in its published statements and how well the company lives up to those values in the eyes of employees. All of the correlations between official and actual values were very weak, and four of the nine — collaboration, customer orientation, execution, and diversity — were negatively correlated.

Values Should Be Actionable, Distinctive, and Linked to Results

Our research reveals a gap between official values and the cultural reality on the ground in most organizations, which raises the question of how leaders can close that gap. As a first step, leaders can communicate corporate values more effectively by providing concrete guidance on desired behavior, ensuring their organizational values are distinctive, and linking them to outcomes that matter to employees. Effective communication cannot, of course, guarantee a healthy culture on its own. But it’s a good place to start.

Provide behavioral guidelines. Most employees would agree in principle that integrity, respect, and innovation are worthwhile values. They might have very different notions, however, about what these abstract terms mean in practice. Leaders can provide additional guidance by spelling out a handful of expected behaviors consistent with each value. To the extent these guidelines shape behavior across all parts of the organization, they provide a consistent framework for different functions, business units, and teams to coordinate their activities.

Biotechnology company Biogen, for example, includes pioneering among the elements of its corporate culture. Pioneering is an inspirational value to be sure, but one that employees might struggle to operationalize without further guidance. To clarify what pioneering means in practice, Biogen offers examples, including “We encourage candor to test assumptions and uncover the best ideas” and “We are open about what we do not know and ask questions to understand.” (See “Behavioral Guidelines for Innovation.”) Amazon and Nvidia, two of the highest-ranking companies on innovation in the Culture 500, likewise provide employees with concrete guidelines on how employees can incorporate innovation into their daily activities.

Articulate what makes your organization distinctive. A company’s core values should capture its unique identity — the enduring essence of the company that distinguishes it from competitors.13 When employees identify with a distinctive culture, they are more likely to incorporate core values in their daily activities and pursue their organization’s goals.14 A distinctive corporate culture can also differentiate an organization from competitors and provide a source of sustainable competitive advantage.15

Unfortunately, many organizations’ core values are so generic that they could easily serve as fodder for a Dilbert cartoon (there are more than 50 lampooning official culture statements).16 The core values of pharmaceutical supplier McKesson (integrity, customer-first, excellence, respect, and accountability) could apply equally well to an airline, grocery store, or bank.

How can leaders translate common values, like customer-centricity or integrity, into something distinctive? One approach is to translate abstract values into organization-specific behavioral guidelines. Alaska Airlines and McKinsey & Co. both emphasize customer service. The specific behaviors associated with their values, however, are tailored to their respective industries and strategies. Alaska Airlines offers tactics for front-line employees dealing with passengers, such as “engage with kindness” and “offer assistance.” McKinsey’s guidelines, including “use our global network to deliver the best of the firm to all clients” and “build client capabilities to sustain improvement” are appropriate for a professional services company serving global clients.

The McKinsey example illustrates another way to make values distinctive — by elaborating on desired behaviors in language unique to an organization. Within McKinsey, “follow the top management approach” means thinking through an issue for the client organization as a whole, rather than its impact on a single division or function. That phrase, and others like “obligation to dissent,” have been used for decades, have a well-defined meaning within the company, and constitute part of the company’s distinctive legacy.

Another approach is to take common values as a given, but then highlight those elements of corporate culture that differentiate an organization. Netflix, for example, acknowledges that integrity, respect, and collaboration are important, but emphasizes five values that distinguish the company including “encourage independent decision-making by employees” and “share information openly, broadly, and deliberately.”

Clarifying what your values mean in practice and providing insight into what truly differentiates your corporate culture requires hard work. Linguistic gimmicks are no substitute for effort and insight. Appending adjectives like “ferocious,” “unflinching,” or “relentless” will not make values more distinctive or actionable. Leaders also do well to avoid acronyms that force fit values. Would Discover Financial Services, for example, have included “volunteerism” (the “V” in its DISCOVER values) or Hilton Hotels “now” (the “N” in HILTON) if these companies went by different names?

Explain why your values matter. Official statements of culture signal what matters most to an organization, and behavioral cues provide concrete guidance on how to translate values into actions. Leaders can further clarify their organization’s values and what makes them distinctive by spelling out why they matter. Of the companies that publish corporate culture statements, less than one-quarter include any discussion of how those values help the organization succeed. And most of those companies simply assert culture is a competitive advantage without explaining the link between core values and organizational performance.

A handful of companies, in contrast, explicitly spell out the connection between their culture and desired results. A common rationale links corporate culture with a company’s ability to attract, retain, and energize the best employees. HubSpot — the No. 1 company on Glassdoor’s list of best places to work in 2020 — explains its “culture doesn’t just help attract amazing people, it amplifies their abilities and helps them do their best work.” Where companies choose to publish their core values provides a clue as to why they matter. One in five companies publish values on the section of their website targeted at potential employees. Their culture statements often include values, such as respect, diversity, learning, and caring, that are attractive to many job seekers.

Nearly the same percentage of companies (18%) include core values in their code of business conduct, which, unsurprisingly, emphasizes integrity, honesty, fairness, and strict compliance with applicable laws. Deutsche Bank, for example, underscores the importance of integrity in rebuilding trust with key stakeholders: “By living these values and beliefs in daily interactions with our stakeholders, employees have a critical role to play in helping us to restore the trust lost during the financial crisis.”

Companies can also spell out the link between values, behaviors, and performance. Netflix explains that employees are expected to be “extraordinarily candid with one another” because “we will learn faster and be better if we can make giving and receiving feedback less stressful and a more normal part of work life.”17 The company’s value of “avoid rules” is, according to Netflix, critical to maintaining agility in the face of changing market circumstances.

Explaining the rationale behind specific values helps employees (and other stakeholders) understand why the organization prizes certain values above others. Illinois Tool Works’ emphasis on decentralization and entrepreneurship is appropriate for a diversified conglomerate, for example, but would not suit a global professional services company that needs to collaborate across offices and practice groups to serve multinational clients. Clarifying the purpose of values also makes it easier to measure whether they are working. HubSpot, for example, could track attrition among employees they want to keep to assess whether their culture is doing its job.

Leaders love to talk about corporate culture. Many companies, however, display a disconnect between what leaders preach and what is practiced throughout the organization. Improving corporate culture is a long journey that demands a holistic approach and sustained effort over time. During the next year, the Culture 500 project will publish a steady stream of content exploring how leaders can build and sustain a healthy corporate culture.

As first steps in improving their culture, leaders can take a hard, evidence-based look at how well their organization is living up to its espoused values. Which elements of your culture are working well? Which are falling short? Where are the pockets of cultural excellence within your organization? Which teams are undermining your culture?

A cultural diagnostic may reveal that your values are too abstract, generic, or divorced from results to shape how employees act on a day-to-day basis. In this case, you may want to refresh your core values to make sure they capture the distinctive essence of your organization, provide concrete behavioral guidelines, and clearly link to outcomes that matter to employees.

Having a great idea is essential to innovation, but that’s only half of what’s needed. Securing the resources to implement the idea is just as important — and potentially more difficult. The inventor Nikola Tesla, for example, came up with several transformative ideas — for electric induction motors, wireless telegraphy, radios, and remote control — but he died penniless because he couldn’t line up the resources to commercialize them. In contrast, Thomas Edison, arguably less brilliant, died wealthy and famous because he was good at both coming up with ideas and winning the necessary support to turn them into reality.

Every innovator faces what we call the innovator’s paradox.1 Quite simply, the more novel, radical, or risky the idea, the bigger the challenge in acquiring the necessary resources. Although many people say they like radical ideas, the greater the risk and uncertainty, the more skittish would-be supporters (investors, bosses, partners, and so on) become. Many great ideas die on the drawing room floor because entrepreneurs fail to persuade others of their potential. Before jumping in, potential backers want ideas to be proven or the uncertainty reduced in some meaningful way. The ability to overcome the innovator’s paradox is key to becoming a successful innovator, whether you work inside a company or are trying to launch a new venture.

How can you prove an idea can work if you lack the resources to start developing it? Even the leanest of lean startups needs a basic level of resources to test its ideas, and truly big ideas need more. In a world where more ideas than ever are competing for resources — whether that’s financial backing, good team members, permission to pursue an idea, or customers — innovators who learn how to win support are the ones who gain traction.

To understand how successful innovators and entrepreneurs go about winning critical support, we conducted more than 100 interviews. We spoke with well-known innovative leaders such as Jeff Bezos (Amazon), Elon Musk (Tesla and SpaceX), Marc Benioff (Salesforce.com), Shantanu Narayen (Adobe), Indra Nooyi (PepsiCo), Mark Parker (Nike), and Jeff Weiner (LinkedIn), as well as less-well-known innovators. The good news is that the capacity to win support for your ideas isn’t something you have to be born with. Indeed, by leveraging the tools and practices we describe in this article, you can develop this skill. As Benioff, founder and co-CEO of Salesforce, told us, “My ability to generate innovations [for Salesforce] has basically built up over time.” Over 20 years, he has accumulated what he calls innovation capital, which has allowed him “to try new things — to change the organization, change the products, change what needs to be changed.” Benioff claims that as his ability to “try new things” has grown, his associates have built their own innovation capital that helps them sell their own ideas.

Politicians with political capital can get others to join them in pursuing their objectives; business leaders with innovation capital can attract the resources needed for innovation to flourish. Innovation capital consists of four factors: who you are (innovation-specific human capital — your capacity for forward thinking, creative problem-solving, and persuasion); who you know (innovation-specific social capital — your social connections with people who have valuable resources for innovation); what you have done (innovation-specific reputation capital — your track record and reputation for innovation); and the things you do to generate attention and credibility for yourself and your ideas (what we call impression amplifiers).2

While all four elements contribute to one’s innovation capital, the first three are built over time through sustained effort. All of them are important, but in this article we will focus on the fourth element: the actions you can take now to win support for your ideas.

How Amplifiers Work

On the surface, the impression amplifiers we heard innovators talk about are not particularly surprising. To the contrary, they include the types of things you might expect:

• Comparing: Finding the right analogy to convince supporters your idea will succeed.
• Materializing: Making an abstract concept tangible, visible, and real.
• Storytelling: Crafting a narrative that gives listeners a reason to believe.
• Signaling: Connecting to other credible groups that confer legitimacy on your idea.
• Applying social pressure: Creating a sense of scarcity (the feeling that people need to act now or they’ll miss out).
• Committing: Convincing others through a visible, personal, or irreversible action.

Although these impression amplifiers may sound simple, there is an art to using them well. Each one taps into a distinct and powerful psychological principle supported by research. Most of the innovators we studied didn’t consciously realize that they used these techniques. They seemed to intuitively recognize that when trying to win support for significant new ventures, they had to go beyond conventional tactics such as data analysis, financial forecasting, and strategic planning. To overcome the innovator’s paradox, they often relied on the impression amplifiers described here.

Comparing: “We’re the Airbnb of the X industry.” In 2000, when Robin Chase cofounded Zipcar, an online service that allowed drivers to rent cars for short periods of time, the obstacles to success were massive. At the time, only 50% of Boston-area residents had internet access, and only 25% had mobile phones. Hardly anyone spoke about platforms or the “sharing economy,” and there was little innovation in the transportation sector. Prospective investors had a hard time grasping why people would be interested in an internet-based car-sharing platform. Many of them just listened and nodded politely.

The breakthrough came when Chase discovered how to use the comparing amplifier, drawing an analogy between her idea and something people knew and saw in a positive light. Initially, Chase thought she was using this technique effectively: She described the business as car sharing. But that comparison actually turned many people off. (Imagine if you described the hotel business as bed sharing.) Chase realized she needed a better comparison. To find it, she carried around note cards and tested names and analogies with people she met. Finally, she latched onto a comparison people understood and liked: automated teller machines. ATMs allow individuals to get cash whenever they need it. Zipcar, Chase explained, “was like an ATM, but it’s wheels when you want them.”

Armed with the right analogy, she started to win investor support for her idea. “When I used the comparison ‘wheels when you want them,’ investors finally got it,” she told us. “Words really matter, and getting the comparisons right was nontrivial.” In the end, Zipcar was sold to Avis in 2013 for $500 million. But it might never have gotten off the ground without the right comparison.

Comparing turns your idea into something people can relate to and, ideally, get excited about. It draws on the psychology of mental shortcuts (heuristics) and how we use analogies to understand new concepts, form judgments, and make decisions. In practice, research shows that startups that use analogies and metaphors in their prospectuses achieve higher valuations during initial public offerings.3

How to use comparing. Our research suggests that effective comparisons follow several key principles:

• The best comparisons capture both the opportunity and the solution. The problem with Chase’s initial car-sharing analogy was that it only described the solution and didn’t excite people about the opportunity. Customers and investors could relate to the ATM analogy and knew how ATMs had revolutionized the banking industry.
• For any given idea, there are often multiple potential benefits. So, when looking for the right comparison, see what resonates with your audience. Zipcar, for example, offered features such as convenient scheduling, booking by the hour, and “green” mobility — but convenience struck the strongest chord.
• Comparisons are especially valuable for complex ideas. If we said that Ethnamed is a Chrome plug-in that allows users to bind email addresses with crypto addresses, most people would be puzzled. But if we said it’s like Venmo for cryptocurrencies, potential users would more easily understand it and see the potential value.

Materializing: Show — don’t just tell. When technology entrepreneur Elon Musk founded SpaceX in 2002, no private rocket company had ever won a contract from NASA. Another rocket company, founded by billionaire Andrew Beal, had recently filed for bankruptcy after failing to persuade NASA to buy its low-cost disposable rockets. So Musk, whose idea was to develop reusable rockets, faced an uphill battle. Leaders at NASA, in Congress, and at large aerospace companies saw SpaceX as a joke — a bizarre effort by a Silicon Valley hotshot that was destined to fizzle. The company struggled to pitch its ideas to key decision makers. “At the beginning, we had to beg NASA to even pay attention,” recalled Lawrence Williams, a former SpaceX executive.

How did Musk break through the resistance? By showing people what SpaceX planned to do — a tactic we call materializing. On the eve of the centenary celebration of the Wright brothers’ first powered flight in 1903, Musk loaded a recently completed Falcon 1 rocket onto a gigantic trailer and drove it down Independence Avenue and along the National Mall in Washington, D.C., before parking it in front of the National Air and Space Museum. He invited the event’s attendees to inspect the rocket. The spectacle got NASA’s attention — and showed off what SpaceX was capable of building. The following month, NASA administrator Sean O’Keefe dispatched a team to visit SpaceX in Southern California,4 and they were impressed — so much so that the agency invested $140 million in 70 SpaceX flights over the next decade.

In essence, Musk advanced the idea of space travel by turning it into something tangible — in this case, a physical prototype. Because our brains prefer the tangible and visible over the abstract,5 people respond to visual objects and remember them better.6 Making abstract ideas tangible also makes them seem more realistic and believable. Research shows that entrepreneurial teams that materialize their ideas are less likely to fail,7 presumably because they are better at winning the support needed to turn the idea into reality.

How to use materializing. Being skillful at materializing is an art, and it’s essential to understand what your supporters will be looking for when you materialize your idea. In some cases, the critical question will be “Can it work?” and in others it will be “Will customers want it?” Materializing along the wrong dimension or in the wrong way can lead to problems — something the founders of Arrivo, a Los Angeles-based transportation startup, discovered the hard way. The company had developed an ambitious plan to build a high-speed system that would reduce traffic by transporting vehicles and people through vacuum tubes and tunnels. But the founders failed in their attempt to bring their idea to life. Their prototype was badly constructed, leading to test rides that were both slow and bumpy. Transportation officials soon lost confidence in the concept and withdrew their commitments.8 What can companies do to avoid similar mistakes?

• If the big unknown in your supporters’ minds is whether customers want your offering, focus first on materializing the demand as opposed to whether it works. For example, when Rent the Runway founder Jenn Hyman came up with the idea of renting designer dresses over the internet, it wasn’t clear whether women would rent a dress for a special event. So before setting up the logistics and distribution system, Hyman did low-cost experiments, first with physical locations and then online, to see how women would react to renting dresses. The data convinced Bain Capital to invest in the venture.
• If the key question for your supporters is more technical — “Will it work?” — focus your efforts on meeting that requirement. For example, when the executive team at Caterpillar resisted a radical new way to create a hybrid heavy excavator that would use less energy than a traditional diesel excavator, Ken Smith, head of the heavy excavator division at Caterpillar, put the team to work, showing it could be done. Although the resulting prototype was so ugly that they called it Medusa, it worked, and it convinced executive leadership they could create a new excavator using 33% less energy.
• Materializing can be particularly important for radical ideas. The more novel the idea, the more likely that simply asking customers for feedback can mislead you. For example, many customers hated the abstract descriptions for such innovative products as the Aeron chair, Reebok Pump shoes, and even the iPhone. But when they actually tried these products, they changed their tunes.

Storytelling: Triggering emotional reactions. Soon after Vanessa Quigley finished describing her idea for a new photo-sharing service aimed at parents back in the fall of 2013, Gavin Christensen, the managing partner of Salt Lake City-based Kickstart Seed Fund, told his partners that he hated the product but thought they should invest anyway. How did Quigley convince a hard-nosed venture investor to get behind an idea he disliked? More than anything else, she told a good story.

Although many people have heard about the power of stories in business, few have the ability to use them well. In most organizations, stories are chronologies, mission statements, or thinly veiled manipulations. What made Quigley’s different was her use of a narrative, with strong characters, conflict, resolution, and, most of all, emotion. She recalled the day when she found her 7-year-old son in tears over a photo scrapbook his kindergarten teacher had made for him. She described the guilt she felt — after all, she had hundreds of photos on her phone that she had never shared with her son or other family members. Based on this experience, she created an app called JustFamily to make it easier to share family photos.

Christensen remembers being impressed by Quigley’s story but frustrated by the product itself. Each time he tried to use the app, it crashed. Yet when Quigley talked about the underlying emotions and the need to capture and share memories, he was swayed. “The need was so fundamental, and Vanessa made it so personal,” he said. “I knew that they would figure out how to solve it eventually.” The company, which now operates as Chatbooks, allows users to create printed scrapbooks with ease from Instagram photos. Within two years, the business had revenues of more than $30 million.

Successful storytelling triggers emotional connections that can prompt listeners to suspend disbelief and even to take action. Studies in neuroscience have shown that stories can cause the minds of storytellers and listeners to “sync” (that is, to develop the same brain patterns) and “couple” (connect and anticipate what the other experiences),9 an effect that increases your ability to persuade your listeners: Their brains literally start to match yours. Moreover, psychology research underscores how good stories can capture our attention, transport us to the world of the storyteller, and release brain chemicals that increase the likelihood of persuasion and action.10

How to use storytelling. Although most leaders think they know how to use stories, there are basic rules many people forget. Effective stories are personal, create a narrative arc, vividly paint the opportunity or threat, and create an emotional connection. Master storytellers use several tactics:

• They develop a narrative arc, with characters, conflict, and resolution (the classic hero’s journey). For example, when David Hieatt, a successful advertising executive and entrepreneur, moved to Cardigan, Wales (population: 4,000), he was struck by the fact that the town had once been the center of jeans manufacturing in Britain. When talking about his new apparel company Hiut Denim, Hieatt found it effective to describe the failed jeans industry, the people who were left behind, and his quest to become a force for good by bringing jobs back to the area.
• They tie listeners into the story. Consider Alibaba’s Jack Ma. Although Ma had flunked out of school multiple times and failed at his first two startups, he was still able to convince investors to back his idea for Alibaba.com.11 He was particularly effective at getting both employees and investors engaged with his story by telling them about the company’s historic quest to create a better future for small-business owners in China by opening the frontier of the internet for them.
• To not set unrealistic expectations around distant or long-term objectives, storytellers avoid making specific claims and focus on more abstract promises.12

Signaling: Building legitimacy through others. Over a decade ago, Brad Jones, an executive at Melbourne, Australia-based ANZ Bank, had an idea for addressing a serious problem affecting low-income people in emerging economies such as Cambodia. Many of these people were “unbanked” and thus were more likely to lose their cash, have it stolen, or pay big commissions to send money over any distance. Jones envisioned a mobile money platform that would allow the “bottom of the pyramid” to access the same benefits as people with bank accounts. Although Jones secured some initial funding for his Wing Cambodia venture from his bank just before the financial crisis, it faced the chopping block as the bank looked for ways to save money during the impending downturn.

In his efforts to find funding, Jones began reaching out through his social network and was able to convince ANZ Bank’s head of corporate social responsibility to feature Wing Cambodia in the bank’s annual report. He was also able to obtain a grant from the Australian government to support the initiative, which brought additional attention and legitimacy to the venture and helped insulate it at a time when other projects were being slashed.

Jones used signaling, which involves making connections — such as alliances, relationships, and awards — to build legitimacy and support for Wing Cambodia. Signaling works because of the human tendency to follow others we admire or see as experts. Research examining more than 1,000 startups found that if the startup had the endorsement of a development organization (such as an incubator), its chances of receiving funding increased from 5% to 44%, even after controlling for the ability of the founders.13

How to use signaling. The goal of signaling is to prove to supporters that what you’re doing is legitimate — and that others believe in you. As you try to create these signals, keep in mind your audience and what signals they will find most valuable:

• Although signaling is often helpful, research suggests that it’s particularly valuable in the early stages of a project, when it is difficult to assess the project using more objective measures.14 Try to obtain endorsements, awards, or notable acknowledgments to increase your chances of winning support.
• Select the right types of endorsers for your project. When the uncertainty is tied to the technology (“Can we build it?”), it’s important to get endorsements from individuals or institutions seen as the “experts” (such as leading scientists). On the other hand, when there’s uncertainty around demand (“Will people buy it?”), you’ll want endorsements that can influence potential customers and create demand.
• Institutional endorsements can be more valuable and enduring than endorsements from individuals because supporters assume that institutions have done more to verify the legitimacy of your idea and are taking a greater risk by endorsing you. In the case of Wing Cambodia, for example, the institutional endorsements in the form of exposure in the bank’s annual report and the Australian government grant were more credible than the word of any one person.

Applying social pressure: “Don’t be left out.” A junior manager in a large organization was struggling to get his company to accept the use of robots for tracking inventory. He had done a lot of research on robotics and felt that there were now good opportunities to deploy them. But the company’s executives weren’t sold — most felt the technology was too immature and risky. So the junior manager tried a different approach: He convinced the CEO of one of the company’s recent acquisitions — a much smaller company — to test the robots in his stores. When the other, more skeptical executives heard about the experiment and the positive results it was generating, they immediately agreed to test it themselves.

Creating a fear of missing out (often known as FOMO) can help spur commitment from those who worry that if they don’t act quickly, they might lose an opportunity. It works on psychological principles tied to scarcity: People want things other people want, and they are drawn to items that are either scarce or difficult to obtain. In a famous study, researchers found that customers wanted a product more if they were told it had sold out.15 In the example above, the executives feared that other companies were moving ahead with the robotics technology, and they didn’t want to be seen as laggards.

How to leverage social pressure. Communicating a sense that time is of the essence can get reluctant supporters to move in the right direction, but you need to do this carefully. People skilled at using this impression amplifier apply the following tactics:

• Fear of missing out works best in competitive situations. Having discussions with multiple potential sponsors, employees, or partners in parallel (rather than sequentially) and letting them know that others are considering the opportunity can be very effective.
• Create the right circle of competition among backers. The purpose of using social pressure is to overcome potential supporters’ tendency to hold off on making a commitment until you’ve resolved all the uncertainties of the project. Research shows that having investors with profiles and orientations that are too similar can be a problem.16 You can overcome this weakness by going after sponsors who are sufficiently different from one another and don’t know how to predict one another’s behavior.
• Prep candidates in advance. Few people are willing to commit right away. It’s helpful to expose potential partners and investors to an idea multiple times before trying to get them to sign on. This approach has been shown to work well.17
• Don’t overplay your hand. Using fear of missing out should not be about creating false expectations or misrepresentation — that will backfire. Rather, it’s about using a competitive dynamic to get people to back your project.

Committing: Putting skin in the game. Denver Lough, a third-year resident at the Johns Hopkins University School of Medicine, faced a dilemma. Before beginning his training in facial plastic and reconstructive surgery, he developed an idea for generating new skin using a patient’s own cells. He had done some preliminary lab tests showing that the technology worked on mice and felt confident that the same approach would work on humans. If he took the idea to a major medical center, Lough thought he could get lab space and resources to test the idea. But the medical center would want a large equity position, and it wouldn’t be able to provide the resources needed to launch a company to commercialize the technology. Lough took his idea to a number of venture capitalists and angel investors. But the investors he contacted wanted too much control or weren’t willing to invest in the technology without human clinical trials and patents protecting it from imitators. Lough needed money to develop and prosecute patent applications, and to prove the technology.

Lough left Johns Hopkins early, forgoing future opportunities to earn in excess of $750,000 per year. Instead, he and a fellow resident, Ned Swanson, founded PolarityTE, a biotech startup that would develop Lough’s technology for regenerating new tissue. The fact that the two young researchers were willing to take the risk proved critical to their ability to attract investors and key talent. As one investor noted, “They were willing to get up and leave and lay it all on the line, even when they were so close to finishing that they could see the light at the end of the tunnel. That said a lot.”

Committing involves standing up for an idea or project you believe in and showing other potential supporters that you are willing to put skin in the game. This might include investing your own money or giving up an attractive employment option. Making a big — perhaps even irreversible — commitment to a project gets people’s attention and boosts the likelihood that others might become backers as well. Committing is particularly effective when the innovation is complex or when details cannot be fully revealed because the innovator wants to protect trade secrets. The psychological principle of loss aversion (when the desire to avoid losses has a stronger pull than the opportunity to achieve the equivalent gains) suggests that we don’t expect people to do things that will lead to big losses.18 Indeed, it’s assumed that those willing to take major risks are confident they’ll be successful, perhaps because they know something we don’t know.

How to use committing. Using committing well requires some care. We don’t typically recommend that you bet the farm (after all, what happens if things don’t work out?). So here are some tactics to show people you are confident without risking everything:

• Create credible commitments, ideally with your abundance rather than your scarcity. For example, in the early days of Tesla, investors were skittish about investing in Musk’s bold and expensive plan. However, when Musk offered to fund the company with his own capital, others joined in, believing that his willingness to bet his own money meant he was confident the business would succeed. (We should note that Musk had plenty of capital to work with; unlike many other innovators, it’s doubtful he was putting his family or his future in danger.)
• Have a plan B. Although commitment involves sending a strong signal, you shouldn’t paint yourself into a corner, in case things go poorly. In scratching below the surface of seemingly “irreversible” commitments, we found that innovators often had a plan B. Lough, for example, wouldn’t be able to return to his residency at Johns Hopkins. But he knew his skills would have value at other medical institutions or biopharma companies if the venture didn’t work out.

The successful innovators we studied, including those who have built highly successful organizations, started with a creative idea. But they quickly learned that creativity was not enough. “Ideas are easy in many ways, and there’s no shortage of great ideas,” Nike CEO Mark Parker told us. “It’s the ability to bring those ideas to life and at scale that becomes important.” Parker understood that successful innovation requires resources, and persuading others to commit those resources is no small task.

To promote their innovations, effective leaders rely on a set of tactics to gain attention and credibility for themselves and their ideas. Successful entrepreneurs and innovators everywhere face the innovator’s paradox: They need to convince others to back risky ideas that may ultimately flame out. Although all of us can build up human, social, and reputation capital over time to win support for our ideas, in the short term we must learn to apply other techniques to shore up our innovation capital so that we can assemble resources that can turn creative ideas into reality.

Why Some Retailers Are Thriving Amid Disruption

A growing number of retailers that were struggling before the coronavirus crisis are now crumbling amid social distancing requirements — yet other companies are thriving despite months of shutdown. The resilience of these successful retailers is due to their transformation of traditional business models. Their examples offer a model for making a quick digital pivot, which is what players must undertake in this economy to survive.

A Framework for Talking About Race in the Workplace

In response to widespread calls for racial justice throughout the country, many companies have newly committed to discussing race in the workplace — but where to begin? Wharton management professor Stephanie Creary offers a framework for managers in corporate environments to initiate such conversations. Questioning whether we’re addressing these issues in the right way is normal, but it helps to ground such conversations in evidence and good intentions.
 

Supplier Diversity Initiatives Reap More Than Financial Rewards

Though often dismissed as a “feel good” option, B2B supplier diversity initiatives can reap financial rewards. Such initiatives can help companies reward their own bottom lines while strengthening their supply chains and supporting positive social change. Buyers must make deliberate choices in order for such initiatives to bear fruit and move the economic needle for themselves and their suppliers.

Too Much Information: Handling News Overload

Halfway through 2020, we’ve already been through a lot — wildfires, widespread protests, and, of course, a pandemic — and our ability to process all of it may be reaching its limit. Being constantly confronted with urgent, distressing news can feel like a mental distributed denial of service (DDoS) attack or sink us into spells of “doomscrolling.” Adapting to this endless deluge of information may require a change in our news consumption habits.

What Else We’re Reading This Week:

• 12 of our most popular MIT Sloan Management Review articles on strategy
• Countries led by women have suffered fewer confirmed COVID-19 deaths than countries led by men. What will this mean for future perceptions of female leadership?
• On the other side of the pandemic, American consumers may have fewer product choices — but we may be better off with four kinds of toilet paper rather than 40
• “It’s time to stop framing equity around a business case”

Quote of the Week:

“This is an intense time of job insecurity, and so the best thing you can do to encourage people to take a vacation is to actually take one yourself. And that means try not to answer emails on that day. In the long run, a day off is not going to end the world. And it can have huge benefits in terms of how your people feel, if they feel supported, and whether or not they actually are going to take the breaks that they need as well.”

— Mollie West Duffy and Liz Fosslien, coauthors of the book No Hard Feelings: The Secret Power of Embracing Emotions at Work, in this week’s episode of the Three Big Points podcast, “The Secret to Supporting Your Workforce in Critical Times”

“Strategy, at its heart, is about choice,” write the authors of “Turning Strategy Into Results,” an article featured below, which takes a keen look at how leaders translate the complexity of strategy into guidelines that are simple and flexible enough to execute.

A winning strategy for an organization is not based on an individual choice but an expansive, countless number of decisions happening every day across all parts of a business — product, customers, technology capabilities, and more.

In this collection of a dozen of the most popular MIT Sloan Management Review articles on strategy, renowned researchers and academic voices examine the critical choices managers make in companies every day. From insights on goal setting and communicating strategic priorities effectively, to testing and scaling new business models, these articles will help leaders sharpen their strategic thinking to face new challenges.

1. With Goals, FAST Beats SMART

Donald Sull and Charles Sull

The conventional wisdom of goal setting is so deeply ingrained that managers rarely stop to ask if it works. The traditional approach to goals — the annual cycle, privately set and reviewed goals, and a strong linkage to incentives — can actually undermine the alignment, coordination, and agility that’s needed for a company to execute its strategy.

2. A Structured Approach to Strategic Decisions

Daniel Kahneman, Dan Lovallo, and Olivier Sibony

Reducing errors in judgment requires a disciplined process. The authors provide leaders with a framework that is easy to learn, involves little additional work, and (within limits) leaves room for the leaders’ intuition.

3. The Shareholders vs. Stakeholders Debate

H. Jeff Smith

An age-old question has never been more relevant than it is today: Should companies seek only to maximize shareholder value or strive to serve the often-conflicting interests of all stakeholders?

4. Turning Strategy Into Results

Donald Sull, Stefano Turconi, Charles Sull, and James Yoder

Businesses develop strategies to address complex, multilayered business environments and challenges — but to execute a strategy in a meaningful way, they must produce a set of specific priorities focused on achieving clear goals. Rather than trying to boil the strategy down to a pithy statement, it’s better to develop a small set of priorities that everyone gets behind to produce results.

5. The Truth About Corporate Transformation

Martin Reeves, Lars Fæste, Kevin Whitaker, and Fabien Hassan

Analysis reveals that conventional wisdom about big, risky change initiatives is often wrong. In this article, the authors provide a number of factors that can help large companies beat the odds.

6. The Four Models of Corporate Entrepreneurship

Robert C. Wolcott and Michael J. Lippitz

Companies have four ways of building businesses from within their organizations. Each approach provides certain benefits — and raises specific challenges.

7. Scenario Planning: A Tool for Strategic Thinking

Paul J.H. Schoemaker

Among the many tools a manager can use for strategic planning, scenario planning stands out for its ability to capture a whole range of possibilities in rich detail. By identifying basic trends and uncertainties, a manager can construct a series of scenarios that will help to compensate for the usual errors in decision-making — overconfidence and tunnel vision.

8. Beat the Odds in M&A Turnarounds

Martin Reeves, Lars Fæste, Daniel Friedman, and Hen Lotan

While M&A deals and turnarounds are individually hard to pull off, combining the two can be even more challenging. Yet an analysis of roughly 1,400 M&A-based turnarounds showed that six management actions can help acquiring companies improve their odds of success.

9. Strategic Decisions for Multisided Platforms

Andrei Hagiu

Some of the fastest-growing businesses in recent decades — companies such as Facebook, eBay, and LinkedIn — are multisided platforms that enable interactions between two or more sets of participants. But the spectacular success of many of these companies isn’t easy to duplicate. Building a multisided platform business requires savvy decisions on everything from design to governance to pricing.

10. The End of Scale

Hemant Taneja with Kevin Maney

For more than a century, economies of scale made the corporation an ideal engine of business. But now, a flurry of important new technologies, accelerated by AI, is turning economies of scale inside out. Business in the century ahead will be driven by economies of unscale, in which the traditional competitive advantages of size are turned on their head.

11. Your Company Doesn’t Need a Digital Strategy

George Westerman

With new technologies entering the market every day, it can be exciting to look to what’s next for AI, robots, and the internet of things, but the focus on technology can steer the conversation in a dangerous direction. In various industries, including banking, paint, and shipbuilding, digital leaders are finding that technology’s value comes from doing business differently because technology makes it possible.

12. Six Steps to Communicating Strategic Priorities Effectively

Donald Sull, Stefano Turconi, and Charles Sull

Leaders can signal their commitment to a strategy by clearly communicating their strategic priorities to external stakeholders. Clear, credible priorities linked to explicit metrics offer a framework for assessing progress toward the company’s goals.

A crisis reveals as much as it devastates. Retailers that were struggling before the coronavirus outbreak are now crumbling. Not well positioned to pivot going into the crisis, J.C. Penney, with more than 800 stores and nearly 85,000 employees, recently filed for bankruptcy, joining Neiman Marcus and J. Crew in the running list of retail casualties in the last two months. Other retailers have been forced to pivot quickly, and some have done so successfully, like Target, which reported a 141% first-quarter increase in digital comparable sales, albeit at a significant cost. Walmart also appears to be well positioned and saw a comparable sales increase of 10%, including a 74% jump in online sales.

However, in March, overall U.S. retail sales, including online transactions, suffered an 8.7% drop. That was the largest monthly decline on record since 1992, when the data was first made available by the Census Bureau — until April, when almost 630,000 outlets were forced to close, plunging sales by another 16.4%.

In China, where businesses are further ahead in reopening than in the United States and other countries in which peak outbreaks occurred later in the year, wearing a mask and having one’s temperature checked when entering a mall or supermarket are compulsory. As retail resumes in phases in portions of the U.S., it’s expected that measures to promote physical distancing and prevent virus transmission will remain in place for months to come. All these create friction, which will decrease foot traffic for another few months. No silver lining is in sight. The decline is likely to continue, if not accelerate.

And yet, a mortal blow to retail has not been felt universally. Some companies are thriving amid the darkest of months.

Consider Peacebird, a billion-dollar fashion retailer with seven brands and 4,600 brick-and-mortar stores. It’s a Chinese brand with a growing reputation for resilience. The company achieved revenue of more than 10 million yuan ($1.41 million) during the first three weeks of the Chinese New Year starting Jan. 25, the period when the coronavirus outbreak ravaged Wuhan and triggered the complete lockdown of the sprawling capital of Hubei Province. During the subsequent month of February, Peacebird continued to ship a total of 490,000 online orders while fulfilling 2 million transactions via its retail network.

Yet Peacebird is hardly alone. Cabbeen Fashion, a leading Chinese menswear designer brand, managed to top 2 million daily sales via WeChat Mini Programs during the first week of February, leveraging China’s largest social media app without resorting to pricing discounts. Multibrand jeweler Ideal similarly fast-tracked its “New Retail” initiative to navigate the crisis. It turned the company’s sales associates into livestream broadcasters on social media, each managing their own virtual store.

Then you have Forest Cabin, a cosmetics company that decided to go online with full force, promoting products through multiple livestreaming platforms and several social media apps. After its sales plunged by more than 90% during the Lunar New Year holiday as half of its physical stores were forced to close, the company made a stunning recovery during a two-hour livestreaming session on Valentine’s Day in which the founder appeared. That move alone brought in some 60,000 visitors and sold over 400,000 bottles of the company’s flagship camellia oil. During the week of International Women’s Day, from March 1 to 8, the company reported a fivefold jump in online sales.

The resilience of these companies is due to one simple fact: They have transformed their traditional business models rapidly by leveraging a plethora of digital practices. And this transformation is hardly unique to China: It is what players must undertake in the economy of the pandemic to survive.

Some retailers do more online. The U.K. retailer John Lewis is setting up an online hub giving advice to new parents and providing well-being services. Walmart and Target are doubling their efforts in curbside pickup, a service where customers order things online, drive to the store, and wait while a worker loads everything into their trunk. Perhaps most drastic of all is Nike, which managed to post 5% in revenue growth during the quarter that ended Feb. 29 — even though over 5,000 of its stores in China, a key growth market, were forced to close during January. With the help of livestreaming, Nike’s online sales in China increased by more than 30%. The brand launched the Air Max March Party on March 26, which was broadcast online on Alibaba’s Tmall. It attracted some 2.7 million viewers and 24 million likes, which translated into more than 5 million yuan (about $705,000) in sales in a mere three and a half hours. As a result, Nike’s sales revenue for the greater China region dipped only 5% in the first quarter of 2020, a figure that even Apple couldn’t match.

How do incumbents achieve such resilience? Here are five lessons for every traditional retailer:

1. Accelerate operations through multichannel marketing. Speed matters as retailers switch their operations from an offline or mixed model to online-only sales. Peacebird chairman Zhang Jiangping responded by going all in on e-commerce, and he personally drove the transition. He issued a notification to all sales agents giving them the authority to post content on social media channels while representing Peacebird. Then, in a milestone occasion on Jan. 28, the fourth day of the Chinese New Year, retail director Andre Gao hosted Peacebird’s first livestream session. His session, which over 100,000 people joined, inspired and excited many sales agents at the company. Thousands of in-store sales managers were motivated to become online sales agents.

Note that such digital-first pivots are not exclusive to Chinese companies. U.S. kitchen and housewares retailer Williams-Sonoma is doing the same thing. Although a lot of its digital tools were already in place, during the lockdown, the company quickly added services such as virtual design chats with experts, an ask-the-expert chat, and enhanced virtual design options. Despite closing its over 600 stores, the group posted an increase in comparable sales of 2.6%.

Meanwhile, department store Intime launched live commerce when the virus closed its 65 stores. All sales agents, working from home, interacted with customers via Taobao Live — the livestreaming platform run by Alibaba — and reached as many new clients in a three-hour period as they would have in six months inside an actual store. It’s a future that Bloomberg dubs “the next frontier of shopping.” That’s why Swedish home-goods retailer Ikea also took to a livestreaming session in March to promote the launch of its new Tmall store.

In light of these examples, business leaders should reframe their current thinking of multichannel approaches to retail and embrace livestreaming as an important arena to create direct, real-time engagement.

2. Retrain for revamps. While many traditional retailers are busy laying off or furloughing hundreds of salespeople, some are opting for skill upgrades. Jeweler Ideal proactively transformed its sales associates into online influencers, or, as they are known in China, key opinion leaders (KOLs). To help employees less experienced with social media marketing and live presenting, the company expanded its online corporate university to include special curricula on such topics. Later on, jewelry expert and KOL broadcaster Ming Zhang was recruited to train Ideal’s employees to further upgrade their broadcasting skills. Regardless of their role and position, employees could have immediate access to online training, and hundreds have since become effective presenters. Companies can and should take steps to retrain employees across different positions.

3. Empower teams. At Peacebird, the executive team has dramatically increased the autonomy of its front-line sales teams. Teams can decide, for instance, which marketing format to use — from livestreaming, to friend-circle promotion, to group-buying tactics. The company also tracked the success and conversion rates of different formats and shared this information through the online sales network, empowering employees to use collective data and knowledge.

Meanwhile, the company also launched a virtual chatbot, an online sales service system, and, finally, a set of standard operating practices, along with a scoring and measurement system for customer-facing employees. The system tracks conversion rates to identify the online sales practices that result in the highest actual sales. Such focused activities helped activate sales teams, provide needed resources, and offer quick feedback loops.

4. Fuel offline traffic. Physical department stores and shopping malls in the U.S. have long struggled to compete with online players. However, physical stores can be an important asset to connect with customers when coupled with technology — or, more precisely, brick-and-mortar stores remain an important asset to connect with customers despite the arrival of e-commerce. The amount of space needed may have decreased, but the need remains nonetheless: This is where human interaction takes place. Coupled with technology, brands can provide a seamless experience. In fact, online success may fuel offline foot traffic to brick-and-mortar stores. During the first week of March, as China began to ease traffic restrictions, Forest Cabin saw its online sales rise by 400%, matched by another 140% jump offline. “Our offline layout will remain unchanged because of digitalization, but we will focus more on the integration of online and offline sales and customer engagement channels,” said founder and CEO Sun Laichun. “In the future, it is imperative that different channels are optimized and integrated.”

5. Virtualize the back-end supply chain. Amid the closing of physical stores during quarantine, retailers can gain agility by investing in virtualizing their back-end inventory systems. For example, Peacebird shared real-time sales data with suppliers and franchisees, who, in turn, integrated it into various enterprise resource planning (ERP) systems to generate aggregated data analytics. Transitioning from a push to a pull strategy, Peacebird lets demand determine when and how it should ramp up production.

To quickly meet the needs of this new strategy, the company leveraged its existing cloud-based warehouse management system (WMS). The scalability of a cloud-based supply chain proved crucial: Over 65% of its total offline sales were shipped through its cloud-based WMS across 3,000 chain stores, which amount to nearly 10 times the total in 2019.

Finally, production is organized as a network of factories, some of them — but not all — owned by Peacebird. The company’s own factories have the highest flexibility and complete the design-to-production cycle within a week. Meanwhile, the partner factories supply the company with more conventional economies of scale but with longer turnarounds.

Business leaders should consider rethinking how their back-end supply chain could be more responsive to demand by leveraging existing cloud solutions. That’s how efficiency and flexibility can both be achieved.

The coronavirus has been devastating for many companies, turning countless shopping malls into retail wastelands. Yet the pockets of success also illustrate a path to forge ahead, despite the most challenging conditions, highlighting the wisdom of the saying, “no crisis should go to waste.”

Preserving Your Company Culture When WFH

The pandemic resulted in a sudden, widespread shift to remote work, leaving many people feeling nostalgic for even the mundane facets of office life. Office life helps sustain organizational culture — the largely taken-for-granted beliefs and practices that underpin how people work together — but dispersed work arrangements can endanger it. Leaders can take deliberate action to protect and sustain company culture with these recommendations.

Building New Skills to Manage Through Disruption

Crisis, it’s said, begets opportunity — making the current coronavirus crisis an extraordinary cauldron in which to develop new skills. For better or for worse, the practice of core leadership skills that we all know are important (and may ordinarily struggle to implement) is no longer theoretical, having suddenly become a daily exercise. Leaders are developing new skills and seeing a meaningful payoff in three critical areas: prioritization, innovation, and humanity.

Are Leaders Hired to Tackle Racism Being Set Up to Fail?

In the midst of a national reckoning on systemic racism in America, major leadership departures have highlighted who does and doesn’t hold power. But companies bringing in new leaders to help tackle issues of race must also be mindful of the “glass cliff” phenomenon. Being elevated to high-level positions when things are going poorly can bring significant successes, but the risk of failure is also elevated.

Don’t Let Your Strategy Be Hijacked

Thanks to the connectedness of social media, it’s much easier for consumers to unite against companies in strategy hijacks — situations in which companies must adjust their strategies due to consumer backlash. These recommendations can help organizations diversify offerings to keep customers content and to monitor, preempt, and respond to disruptive strategy hijacks.

What Else We’re Reading This Week:

• Creating an anti-racist workplace requires measuring outcomes across all people practices in organizations — “from recruiting and hiring to promotions, compensation, and attrition”
• How intelligent is your AI? Here are four key questions to ask
• Five tips for data protection while working remotely

Quote of the Week:

“Opportunity marketplaces tap into all of the organization’s talent, protect employment, build loyalty, and enable the organization to effectively respond to shifting priorities in the short term and thrive in the long run.”

— David Kiron, Jeff Schwartz, Robin Jones, and Natasha Buckley in “Create a Crisis Growth Plan: Start With Opportunity Marketplaces”

Early in 2020, wireless sound-system manufacturer Sonos announced that it would no longer provide support for some of its oldest products: wireless speakers launched between 2006 and 2009. The company argued in an official blog post that the wireless speakers had been “stretched to their technical limits in terms of processing power” and “would no longer receive software updates or new features.” Moreover, systems containing both new and legacy products would no longer receive updates, making perfectly functional devices more-or-less useless, according to some critics. Hordes of angry users took to Twitter under the hashtag #SonosBoycott and argued that loyal early adopters were being punished. It did not take long for Sonos’s CEO to reach out, stating “We heard you. We did not get this right from the start,” and promising continued technical support for older devices.

This example illustrates a strategy hijack — that is, a situation in which groups of dissatisfied customers overtake the control of an organization’s strategy. Sonos is far from alone in having its strategy hijacked: Adidas, Coca-Cola, Carlsberg, H&M, and Lego, to mention a few examples, have had to adjust strategies in response to consumer backlash.

Our research explores the underlying causes of strategy hijacks, the changing nature of consumer-company dynamics, and resulting implications for leaders. Together, our findings suggest a fundamental shift in power dynamics in the realm of strategy stemming from technological and social developments that have changed how companies and customers interact. Thanks to the connectedness of social media, it’s becoming much easier for consumers to unite against companies — and thanks to the transparency of widely available data, it’s now also much easier for consumers to keep an eye on company behaviors.

Why Are Strategy Hijacks So Prevalent Now?

We argue that strategies increasingly become hijacked due to significant technological developments and fundamental changes in consumer behavior. Specifically, customers have become more entitled, engaged, and entangled. (See “Three Dimensions of Customer Behavior.”)

Let’s explore each of these dimensions of the modern customer.

Entitled. Customers become more entitled due to both technological and competitive developments. Technological developments have accelerated customer demands, both in terms of customization, real-time responsiveness, and customer centricity. Moreover, companies increasingly compete with each other to fulfill consumer needs. In many ways, the situation can be described as “the Red Queen’s race,” in which companies run faster and faster just to stay in place. As a result, what were extraordinary, nice-to-have features meant to delight customers have become taken-for-granted baseline features that are expected by customers. Failure to deliver on the features expected by customers triggers strong responses. In other words, customers have become entitled.

A symptomatic example of customer entitlement arose when Mondelez International announced that it was changing the iconic shape of its globally recognized chocolate bar, Toblerone, by leaving out every other mountain peak, thereby reducing the weight of its 170-gram bar to 150 grams. The company blamed rising ingredient prices and indicated that the new shape would allow it to maintain the same price. The announcement fueled immediate attention and outrage online, as illustrated by a Google Trends search around the day of the announcement (see below).

When we first read the strategic announcement from Mondelez, we predicted that Toblerone’s consumers would “hijack” the company’s strategy and force it to revert to the initial shape — and we were right. Companies can’t scale down performance on taken-for-granted expectations, illustrated by Mondelez’s 2018 reintroduction of the Toblerone bar — in its original shape and even bigger than before.

Engaged. Companies increasingly want to engage their customers, and technology has been a driving force in connecting consumers to companies and each other. Users have been given tools to codevelop products with companies, online communities have applied themselves to problem-solving product features, and loyalty programs and analytics have helped companies understand consumer behaviors and deepen consumer ties to products. Consequently, many customers develop deep, personal relationships with organizations and brands. While such engagement is important for satisfaction and loyalty, it can also result in dissatisfaction if the organization acts in ways that are incongruent with customers’ ideals.

For instance, the Swedish clothing brand H&M recently faced consumer backlash around potential “greenwashing” following accusations that the company burned unsold clothes despite issuing ambitious sustainability statements. H&M experienced further backlash some time later when the company ran an advertisement that many consumers regarded as racist. Whether their critics were right or wrong in their outrage, consumer engagement always entails the risk of turning sour. When you develop a relationship with consumers, you similarly provide them a stake in your business.

Entangled. Social media has increasingly entangled customers and companies in intricate, interconnected networks. Companies increasingly want to connect with customers on social media and seek positive word-of-mouth communication among consumers. Customers, too, desire this type of connection and, consequently, are immersed in virtual networks of fellow consumers, businesses, and other stakeholders — all trying to influence each other. As a result, changes desired by consumers or other stakeholders cannot be isolated but spread like ripples in the water in these entangled networks.

This was evident in the complicated case of Lego, Shell, and Greenpeace, in which each organization and its consumers was entangled in networks and connected via social media. In 2014, Greenpeace began to pressure Lego to end its partnership with Shell by launching a YouTube video showing a Lego universe slowly drowned in oil. The video quickly went viral and obtained widespread support among consumers. After three months of aggressive campaigning, the Danish toy company announced that it would not renew its contract with Shell.

What Can Strategists Do?

Strategy is about making choices and accepting trade-offs. But when customers hijack your strategy, they make choices on your behalf and, ultimately, change or even reverse your strategies. What can strategists do in such situations? We offer four pieces of advice.

Predict and preempt. Ideally, strategists must recognize that plans may be in danger of being hijacked by customers and take preemptive measures to counteract such resistance. We were able to accurately predict the troubles that Mondelez would face when it decided to change Toblerone. Had the relevant managers done the same, effective preemptive measures might have been put in place, perhaps by launching a “Toblerone light” version alongside the conventional Toblerone. By doing so, the company would have avoided taking customers by surprise and in fact would’ve offered consumers an additional choice — reducing the risk of a hijack. The simple rule is: Think it through and take the risk out.

React and revert. If a strategy has already been hijacked, the company must react and, if necessary, revert to the initial position. This response was demonstrated by the Danish brewer, Carlsberg, after launching a new signature beer bottle to replace its standard bottle. Both consumers and distribution partners (especially bar owners) vehemently protested. After three months, Carlsberg’s management team, swayed by customer pressure, lowered its prices for the new bottle. Yet, this was not enough to satisfy consumers, and in the end, Carlsberg relaunched its standard bottle in the Danish market. Companies need to be similarly flexible and keep U-turn options open.

Monitor and mobilize. Companies must continuously monitor sentiments among their customer base and, when applicable, try to mobilize customers around the new strategy. In a surprising turn, consumers have actually begun to show interest in New Coke, the infamous marketing failure popularized by the 1980s nostalgia of the hit series Stranger Things on Netflix. Coca-Cola has partnered with Netflix to capitalize on this sentiment by bringing back New Coke for a brief time. In so doing, Coca-Cola not only utilizes its ability to monitor consumer sentiments, it also mobilizes those sentiments for its own benefit.

Divide and diversify. Another key element of dealing with hijacked strategies is to unbundle the overall strategy into separate projects. The organizations considered here typically did two things at once: They introduced a new product and removed an old one, thereby creating room for a hijack. By treating the two issues as two strategic projects, organizations can simultaneously address different consumer segments and buy themselves time to execute the projects at different speeds. For instance, had Carlsberg introduced the new bottle alongside its old bottle, and only discontinued the old bottle when and if consumers embraced the new one, the company’s strategy probably would not have been hijacked.

When consumers become more entitled, engaged, and entangled, your strategy runs the risk of getting hijacked. When customers hijack a strategy, the strategy’s trajectory starts to resemble that of a boomerang returning after being thrown. While this return is an excellent quality for a toy, it is very expensive for a company’s marketing strategy. Corporate managers can decide to trade out a potential boomerang for an arrow that will hit the target. By following these recommended practices — anticipating future hijacks, navigating once your strategy is hijacked, using consumer sentiment to your advantage, and simultaneously managing different interests among consumers — your strategy’s trajectory will transform from a boomerang into an arrow that is energized by the masses to meet your consumer target.

Editor’s note: Elsewhere is a column that highlights ideas from other media platforms we believe are worth your attention.

Office Space — Sized Extra Large

Remote work has become the new norm for many organizations during the COVID-19 crisis, but at some point, most companies will want to find ways to bring employees back to the office. Of course, the big question on everyone’s mind is, how do you do it in a manner that’s both workable and safe? While there’s no single solution that can apply in every situation, senior executives, designers, and logistics and medical experts are scrambling to identify the best options.

In “Our Offices Will Never Be the Same After COVID-19. Here’s What They Could Look Like” (April 13, 2020), Fast Company lays out some of the possibilities. Among them are ideas for safe workplace configurations developed by Cushman & Wakefield, the global commercial real estate services business, based on its recent work with companies in China. In addition to staggering the number of people in the space at any one time, configuring desks at least six feet apart, and covering work surfaces with disposable placemats, the plans call for setting up clear traffic patterns, with arrows on the floor, to restrict employee interactions and help control the spread of pathogens. At its own offices in Amsterdam, the company is able to monitor employee movement with electronic beacons. Cushman & Wakefield also stresses the importance of office air quality, noting that China was able to bring workers back relatively quickly because office buildings were already equipped with advanced air-filtration systems.

Reimagining Cities

With cities freed from their usual traffic congestion during pandemic lockdowns, it’s easier to imagine an urban environment that caters to pedestrians and bicyclists rather than cars. Wired reports that as more people take to the road on foot — and vie for their six-foot radius of space — urbanists see an opportunity to permanently redesign streets and open spaces to prioritize bikers, walkers, and public-transit users (“The Pandemic Could Be an Opportunity to Remake Cities,” April 13, 2020).

Cities are experimenting with a number of temporary measures. A good number have blocked selected streets to car traffic, for example, while Berlin, Bogota, and Budapest have all added more bike lanes. Public-health concerns have driven some cities to disable buttons that activate pedestrian “walk” signals, and now walkers automatically get their turn in the traffic light cycle. City planning researcher Tabitha Combs of the University of North Carolina at Chapel Hill tells Wired that by making this small change, cities have “let the cat out of the bag that it’s something they can do.” Whether these improvements stick remains to be seen.

Classes in Crisis

For a short while after the World Health Organization declared COVID-19 a global pandemic, many called the disease a “great equalizer”: It struck everywhere, and it seemed that anyone, rich or poor, was vulnerable. As the crisis has developed, its effects have been starkly unequal, with low-wage workers and poor and minority communities largely suffering the worst health and economic consequences, particularly in the U.S.

Writing in The Atlantic (“How the Coronavirus Could Create a New Working Class,” April 15, 2020), Olga Khazan explores the widening rifts between white-collar employees who easily switched to remote work and have been able to ride out the crisis from home, and those who, if they still have a job, are exposed to possible contagion at work. The experts she interviews expect a rise in populism as a result of the pandemic — but it’s unclear “whether it will be leftist populism, in the style of Sen. Bernie Sanders, or conservative populism, in the style of President Donald Trump,” Khazan writes. She suggests that if the history of past pandemics is our guide, the working class may emerge in a stronger position.

In December 2007, Shantanu Narayen took over as the CEO of Adobe. The timing seemingly could not have been worse: Not only did Narayen and his team have to confront disruptive developments such as the rise of new platforms like the iPhone and the emergence of nimble software-as-a-service (SaaS) competitors, they had to do so in the midst of a financial crisis that upended markets around the globe.

But in the face of upheaval, Adobe launched a comprehensive transformation strategy. In 2008, Adobe tested a software-delivered model of Photoshop. A few years later, the company stopped producing packaged software and moved to a completely SaaS model, charging a monthly subscription fee to access its products online. In 2009, Adobe made the bold decision to purchase the web analytics and marketing company Omniture for approximately $1.8 billion, a price 40% lower than Omniture’s pre-crisis peak, but 2.5 times above its mid-crisis trough. That acquisition would serve as the cornerstone of Adobe’s efforts to build a new growth business related to advertising services and analytics. From 2009 to 2019, Adobe’s revenues tripled, and its stock price went up by 29% a year.

The story of a company acting boldly in the face of tough times is not unique. Innosight research shows that financial downturns can be a great moment for “on-the-brink” disrupters that have laid a solid foundation but have not yet crossed $1 billion in revenue. Facebook, Alibaba, and LinkedIn, for example, all thrived during the Great Recession (Facebook crossed the $1 billion revenue line in 2010). New companies can start in downturns as well. Indeed, close to 100 unicorns were created between 2007 and 2009, including notable new businesses that responded to challenges surfaced by that period, including asset-sharing platforms Airbnb and Uber and financial services platforms Stripe and Square.

There will be ample opportunity for existing companies and aspiring entrepreneurs to create similar success stories in the months and years ahead. The turmoil of COVID-19 has catalyzed preexisting trends around the adoption of digital platforms and services as well as moves to decentralize health care via telemedicine and preventive solutions. Innovators can ride those trends to create growth, but doing so requires that leaders show the courage to consciously choose their futures.

Where Do You Want to Go?

One factor inhibiting incumbent response to disruptive change is that leaders predictably delude themselves — in less polite terms, they lie to themselves — and therefore underestimate the threat of disruption and overestimate the difficulty of successful response. Leaders convince themselves that current data shows that they are safe, even though that data lags behind the impact of in-process disruptions. Or they say that innovation is risky, where the real risk is not investing in innovation. Put another way, companies increase risk by not taking risks.

One of the most critical delusions that has been laid bare by the COVID-19 crisis is that now isn’t the right time to think about the future. It is natural for leaders to say these words in the face of significant short-term uncertainty and a seemingly never-ending list of near-term issues to address. However, somewhat paradoxically, short-term uncertainty makes it even more important to think about what’s next.

Consider the moment in Lewis Carroll’s classic Alice’s Adventures in Wonderland when Alice asks the Cheshire Cat for directions. “That depends a good deal on where you want to go,” the mischievous cat responds. Alice says she doesn’t know. “Then it doesn’t matter which way you go,” the cat says. After all, if you don’t know where you’re going, any road can take you there.

Of course, leaders must make sure they preserve the present and ensure that their employees are safe, their operations are effective, and they can manage their cash flow. But it is even more important in uncertain times to have a clear and compelling vision of the future. A clear vision highlights once-in-a-lifetime opportunities to double down on growth strategies while competitors are on their heels, to acquire assets that would otherwise be unaffordable, to strengthen capabilities required to create tomorrow’s business model, and to accelerate moves in new directions.

Move Forward With Courage

To think about how to frame the options in front of you now, consider how Amazon CEO Jeff Bezos has contrasted what he calls Type 1 and Type 2 decisions. Type 1 are irreversible. Type 2 are like “walking through a door,” meaning you can always go back. Many short-term choices executives make in a crisis are Type 1, such as exiting a market, significantly cutting or pausing investment in a function, or changing channel strategy. These decisions can be made quickly, but they are very difficult to unmake.

You need to pay attention to how you are approaching decisions that are difficult to unmake. You can unconsciously prioritize the past, making short-term choices that could unintentionally impair your ability to respond to the underlying forces at work in your industry. Or you can consciously consider the future when weighing such options and thoughtfully make short-term decisions that both preserve the present and increase your odds of moving in new and bold directions.

The default unconscious choice increases the odds that you wake up one day staring at an insurmountable gulf between where you are and where you ultimately want to be. The courageous conscious choice allows you to connect future-back thinking with present-forward thinking and emerge from the current crisis with increased resilience and adaptability.

History shows clearly that opportunities are present no matter how dark the times. The future starts tomorrow. Have the courage to consciously choose to navigate disruptive change. Own the future.