The Failure of CEOs to Identify Business Risk

A surprising number of powerful executives at the top of leading corporations are captive to a special class of internal convictions that relate to the future direction of the industry in which they compete. When these convictions and “visions” are out of tune with the evolving market, they obscure the ability of otherwise smart and knowledgeable executives to adjust their strategies accordingly. When a company’s strategy no longer fits market reality, I call the situation “industry dissonance.”  The risk of industry dissonance is the risk that executive assumptions can lag behind industry reality and that companies’ strategies therefore do not reflect the new conditions.

Inevitably, when industry dissonance arises out of changing industry conditions, new competitors, or more agile ones, take advantage of these changing circumstances to offer customers a better deal or a new route to serve their needs. Industry dissonance offers opportunities to some and grave risks to others. Such was the case when PC networks took the market away from large and expensive mainframes, and IBM, refusing to admit the new reality, suffered large losses. At the same time, it practically handed the market to Sun Microsystems. Such was the case when small, efficient Japanese cars took over the American market and left General Motors in the dust. GM simply gave the market away with its strategy of gas-guzzlers and old-style unreliable cars, despite technological changes, consumer changes, and supply-chain changes (“just-in-time inventory management,” for example) that were already available to it.

A “new” industry of bottled water replaced cola drinks for many younger people, while Coke fixed its attention for many years on its hated rival, Pepsi. Canon took global leadership away from Xerox with, first, smaller and cheaper machines, and then with better features and reliability while Xerox stuck to its failed strategy of expensive-to-service leased copiers, and later an empty theme of “the document company.” Such was also the case for Kodak, which was busy with a disastrous diversification strategy, including a misguided venture into the pharmaceutical industry, all the while assuming its lead in film technology would be sustained indefinitely. Fuji came from behind and took over the global lead, damaging Kodak’s monopoly in the U.S. market as well. Polaroid rested on its laurels, selling high-margin instant cameras and film and refusing to see the new digital age as the end for its instant film market, until Sony and HP and Canon and Fuji and Kodak’s advanced digital products bankrupted it. Industries do not stay static, and companies that fail to see the dynamics of change and adapt to it are overrun by others who do.

The failure to identify the risk of industry dissonance and act on it is not related to a specific industry, company size, or even how slow or fast a market changes. It does relate to the culture inside a company, its market position, and the organizational mechanisms it uses to identify and control strategic risks. Dominant players and arrogant cultures are always more susceptible.

Executives who are trapped in their obsolete assumptions often refuse to believe the intelligence flowing from their own people, who deal with the markets, the customers, the suppliers, and the competitors on a daily basis. In the absence of a formal system capable of overcoming their convictions and alerting them to dissonance risk early enough to make a difference, they wake up only when the crisis hits and performance is down. By that time it is often way too late for them, their companies, their employees, and their shareholders, who often pay the price of blindspots.

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