Chapter 1: The Great Disruption

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National Cash Register was formed in the midst of the “Semi-Panic” of 1884. Apple launched its iPod in 2001. Tough times don’t stop innovation. Managing in the Great Disruption requires companies to master constant change — or suffer the consequences.

My three-year-old son usually begins the day with boundless optimism. He bounces out of bed, gets his breakfast, and is ready to take on the world. As it brightens outside (yes, he's usually up before 6 a.m.), heinevitably goes to the window. If it is a gloomy day, he will turn around with a forlorn look on his face and say, "Daddy, the dark clouds have rolled in" (a phrase taught to him by Ms. Wendy at day care).

For companies passionate about growth and innovation, the dark clouds indeed rolled in last year. As financial titans fell, Wall Street trembled, Main Street froze, consumers and investors panicked, and everyone seemed to hesitate while waiting for stability to return, the notion that innovation must be entering a period of dormancy seemed inevitable.

Historians appropriately termed the economic wasteland of the 1930s the Great Depression. Output shrunk, unemployment rose, and people fought hard just to get a job. It wasn't a completely chaotic time, however. If you compare the list of companies that made up the Dow Jones Industrial Average in July 1930 to the July 1939 list, you would see that twenty-two of the thirty companies remained the same.

While the 2000s prior to 2008 have had economic and geopolitical shocks, just about everyone would agree that the economic situation was substantially more stable than that during the Great Depression. Yet, if you compared the companies that constituted the Dow Jones Industrial Average in July 1999 to the July 2008 list, you would see that twenty-two of the thirty companies remained the same.

In other words, the past decade's stability was a mirage; there wasn't really much calm before the storm. Over the past decade, technological improvements and a stark increase in venture capital financing have made starting and scaling businesses easier than ever. The rise of Brazil, Russia, China, India, and other emerging markets mean market leaders have to deal with more sharp-elbowed competitors than ever before. Industries are frantically converging and colliding. These changes have made it harder for great companies to maintain greatness. Leaders in a range of industries can attest that they have been grappling with the effect of these forces for some time.

Consider Microsoft (which became a component of the Dow Jones average in November 1999). A decade ago, the only threat to the company seemed to be the prospect of a breakup orchestrated by the U.S. Justice Department. The company has grown steadily over the past decade, from $15 billion in revenues in 1998 to $60 billion in revenues in its most recently completed fiscal year. It has built big businesses in new markets like mobile phones, video gaming, and home entertainment. Its reward? A stock price that has decreased relative to the market among widespread concern that there is no way the company can counter the threat posed by Google.

Or think about beleaguered newspaper companies. The emergence of the Internet in the late 1990s seemed to be an obvious threat to most companies. Yet by 2002, most newspaper companies had launched successful Web sites and enjoyed operating margins approaching 30 percent. Today the industry is fighting for its very survival. Tribune Company, whose diversified media properties include the Los Angeles Times, the Chicago Tribune, and WGN America, went bankrupt in late 2008. In 2005, Lee Enterprises purchased Pulitzer Inc. - a company two-thirds its size-for roughly $1.5 billion. By the end of 2008, the combined entity was worth about $75 million.

An appropriate name for today's times is the Great Disruption. Change is ripping through markets at unprecedented pace. Competitive advantage that took decades to build disappears seemingly overnight. While output might shrink and unemployment is sure to rise, companies that master these forces still have a chance to thrive; those that don't are sure to struggle.

No one is certain yet how the malady facing the global economy will play out. The worst might be behind us; it might not. Regardless, many companies are going to face severe challenges. Does that mean that would-be innovators should go into deep hibernation? Instead of thinking of the next great thing, should innovators hide out in seemingly safe operating roles until the current storm passes? Not if history is any guide.

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