Most CEOs suffer from disruption inertia – and they don’t even know it

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Convincing businesses on the need to disrupt – to plug into new trends, to listen for weak signals in their ecosystems and to bring the outside in – is not the hard part. The real challenge is obtaining buy-in that change must take place, right now, even though the current business is profitable. Industry incumbents, in particular, often suffer from disruption inertia. As the saying goes, if it’s not broken, why fix it?

In our recent report, ‘The CEO imperative: disrupt or be disruptedin which we surveyed CEOs from the largest global companies from 26 countries and 16 industry sectors – the majority expressed little urgency relating to disruption. For this group, 60% were focusing on optimizing their current business model revenues, and just 20% were working on generating new revenue sources.

Despite their inaction, these companies gave themselves the highest overall scores in disruption-readiness. This dichotomy between self-perception and reality is being driven by a lack of understanding on what is real innovation.

Strive for innovation, not improvement

Today, improvement initiatives in organizations are often incremental and restricted to the customer experience. That’s not to say that enhancements to the customer experience is unimportant, but many organizations are missing out on some of the biggest innovation opportunities in operations – for example, using blockchain for smart-contracting to automatically track and execute agreements, artificial intelligence to improve forecasting, and robotics to automate order management.

Beyond these examples, the entire value chain could be upended by digital technology. To discover these possibilities, organizations need to understand this: being digital is not about IT, but rather a mindset that is fluid and focused on innovation.

With this appreciation, organizations will realize that they can become disruptors without heavy capital investments in technology or large IT teams. Instead, organizations need to focus on developing leadership, culture, innovation practices and external awareness.

The starting point – and the biggest roadblock – to disruptive innovation is leadership. Until leaders walk the talk, the rest of the organization will hesitate to take the risk of initiating change. And only when disruptive projects are celebrated by leaders will the workforce be motivated to set aside time away from business-as-usual activities to generate ideas.

The question is: are CEOs willing – and ready – to own the disruption agenda?

The reality is that monetizing ideas is highly risky and implementing innovative ideas can be disruptive, which will impact employees directly. As such, leaders will need the entire organization’s support to sustain innovation.

Organizations and leaders will need to be intentional in creating an innovative culture by hiring for diversity of thought, background and experience – in other words, beyond the traditional notions of diversity – and by building trust and transparency in training line managers to view failure as a learning opportunity.

Even when people have developed the heart for innovation, they may struggle to develop ideas within the confines of the current organization’s structure. To remove institutional obstacles, disruption units can be set up separate from the main business, to operate under a different set of governance, goals and reporting lines.

But how will the company support these autonomous units when they could be experimenting with ideas, capabilities and technology that fall outside of the company’s – or even the industry’s – expertise?

To address this, some leading organizations are making extensive use of advisory panels and alliances with third parties who may be from outside of their industry. They are increasingly willing to partner with and invest in start-ups. These collaborations focus on starting small and building rapid prototypes to assess if the technology is the right one for them. Where it is not, they learn to embrace the notion that digital innovation is not an end state but a journey.

Focus on the journey, beyond immediate profits

Many companies today fail to understand or accept that cumulative iterations is the path to disruptive innovation, which requires a fundamental shift in their approach to performance measurement. It is important to take a step back and understand that the objectives of an organization are not necessarily altered by the digital revolution.

Businesses are still focused on providing stakeholder value through improving the customer experience and becoming more efficient in their operations. That has not changed. Therefore measures such as ROI and cost margins will remain the key underlying metrics to measure the success of transformation over the medium and long term. Applying this long-term perspective to managing expectations on a project’s ROI is key.

In the short term, a customer-oriented approach has never been more important. Organizations will need to evaluate against the user’s experience throughout the entire digital product or service life cycle, incorporating the user’s feedback at every stage, instead of waiting till a finished product is in place. This iterative process of improvement is critical given that digital transformation programs are increasingly being delivered in shorter cycles.

Executing upon digital innovation is clearly a transformative journey for the entire organization, requiring a total rewiring of how organizations create, support and measure innovations.

Our CEO survey results reveal that many companies that consider themselves to be digital leaders today are not truly ready for disruption. Organizations, particularly incumbents, will need to fight against the halo effect of invincibility created by current success if they wish to fight disruption inertia.

Written by Cheang Wai Keat, head of advisory from Ernst & Young Advisory. The views in this article are those of the author and do not necessarily reflect the views of the global EY organization or its member firms.

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