Ram Charan: Are You The CEO You Need To Be Now?

The biggest risk—and opportunity—in your business today? Your leadership, says Ram Charan, one of the world’s top CEO coaches. A guide to what you and your team must do to grab competitive advantage and exponential growth in a digital age.

Companies are created, expanded, allowed to wither and die or get revived by their leaders. Walmart started to digitize in 2001, but those efforts didn’t go anywhere until Doug McMillon became CEO in 2014. Microsoft was treading water until Satya Nadella took over. Larry Page and Sergey Brin created a new competitive field. So did Mark Zuckerberg. These are reminders of what should be obvious: that leadership matters to the success of a business. 

We are now in a period when leaders are tested continuously against changing conditions and against one another. Digital leaders so far have an edge, not because they are younger and tech savvy but because they lead in ways that are inherently better suited to a digital company in the digital age. 

Understanding what is different about digital leaders will help everyone who has been successful in a traditional setting and must now change their habits and mental gears. It might sound harsh, but those who find they do not match up against what leadership demands in the digital age should consider taking a different role and clearing the path for someone else. Rupert Murdoch of 21st Century Fox and Frank Lowy of Westfield conceded all or part of their businesses to others who were presumably better suited to run them. More of these leadership changes will come. 

But no one is predestined for success or failure. It is an open game, and we are seeing the challenge to current leaders playing out in real time. 

Making Disney Digital

Take The Walt Disney Company, an American icon. Bob Iger became its CEO in 2005 following a decades-long career in broadcast television. The company pumped out a more-than-respectable EPS and dividend for many years under his leadership (and Iger was named Chief Executive’s CEO of the Year in 2014). But as media watchers saw Netflix taking off, they saw no discernible match from Disney. Some began to question how and when Disney would respond to the steepening decline of broadcast and rise of video streaming. 

Disney CEO Bob Iger

For much of Iger’s tenure, he had sought to reinvigorate the company’s content production, especially animation, which had lost its mojo. The most direct path to refreshing Disney’s creativity, he believed, was to acquire Pixar, which had been wielding its creative and technology skill to produce everyone’s new animation favorites, including Toy Story and Finding Nemo. Iger made the persuasive case to Steve Jobs that a deal would be good for Pixar and Disney, Jobs agreed, and the deal was finalized in 2006. 

The pursuit of quality content led to two other major acquisitions that soon followed: Marvel Entertainment in 2009, with its library of comic book characters, and Lucasfilm in 2012, with its Star Wars franchise. The acquisitions lit Disney’s box-office success on fire. In 2016 (also the year Shanghai Disneyland opened), four new releases generated more than $1 billion each in worldwide box office receipts. 

Still, while digital technology had been on Iger’s watch list for many years, there was no indication that the media giant was taking video streaming seriously. Until 2017. Suddenly, Iger’s references to disruption and digital technology led to action. Disney jumped into video streaming in a big way. 

BAMTech, a Manhattan-based start-up created to stream live baseball games, would be key. It had built Hulu’s streaming service, as well as HBO Now’s and others. Disney had earlier made a small investment in the company; then, in 2017, it negotiated to expand its stake to 75 percent. BAMTech built a streaming service for Disney-owned ESPN that launched in 2018, and another, which we now know as Disney+, that launched in late 2019. Having BAMTech build the digital platform was faster than building it in-house but required a commitment of $1.5 billion. 

That dollar amount was small in comparison to what became another piece in the Disney digital puzzle. In mid-2017, shortly after Disney expanded its BAMTech investment, Rupert Murdoch opened a conversation with Iger about 21st Century Fox assets. That got Iger and his strategy chief, Kevin Mayer, thinking about which parts of Fox could enhance Disney’s offerings and increase its scale. Fox’s movie studios and presence in India’s growing market would be major boosts to Disney’s global expansion. Fox also had a sizeable stake in Hulu, which would add to its own and give Disney majority control of a third streaming service that it could use as the conduit for content that did not match the Disney+ family-friendly brand. 

Negotiations followed, and the Fox deal closed in 2019, with Disney taking on yet another big acquisition and financial commitment—to the tune of $71 billion—in the midst of the transition to streaming that was already under way. By the end of 2019, Bob Iger had placed his bets and committed tens of billions of dollars to connect directly with consumers and ensure an ample supply of quality content. Disney had begun to reclaim the content it had licensed to other companies, eliminating a reliable source of revenues. And it established a price of $6.99 a month for Disney+, low enough to appeal to average families. 

All of those decisions meant that earnings and cash would take a hit in the short term and the moneymaking model would change. Instead of earnings per share, Iger focused on the number of subscribers as the more important measure of performance. 

Iger made his case convincingly to investors and had to do the same for those inside the company. The old moneymaking model was being disrupted and so was the organization. A new group was formed to create content specifically for the direct-to-consumer market. New business segments, with labels such as “Direct-to-consumer and international” and “Parks, experiences and consumer products” reflected the new orientation and separated the creators from the data crunchers. To bring Disney employees, investors and consumers along, Iger traveled the globe to explain Disney’s plans and to listen. And he got the board to support a new incentive structure. 

So, is Iger a digital leader? It was not a given that Iger would adapt to the tenets of competitive advantage in the digital age, given his experience and background. Any leader coming of age in a stable business environment and especially those in a company that has been dominant, if not monopolistic, can struggle to adjust to the dynamics that exist today. But he seems to have followed the new rules: 

• Seeing what consumers value most: great content, lovable characters and wanting to consume entertainment in new ways 

• Using a digital platform to connect with and learn about individual consumers with the potential to personalize their connection with Disney characters and stories 

• Creating a moneymaking model that focuses on building scale 

• Engaging eco-partners—such as Verizon, offering Disney+ to its customers—to scale up the number of subscribers 

• Changing the social engine to support the company’s new positioning and moneymaking model 

As CEO, Iger seemed to think and act like many of the digital leaders I have observed. He had an open mind; kept learning and discerning new patterns; and was imagining something new, thinking big and steering the organization to boldly pursue it despite the risks. In short, he had the mindset, skills and courage to lead in the digital era. 

Any company that is or wants to be digital must have leaders who match up against the criteria a digital company requires. Iger was not expected to be a digital leader when Disney’s board of directors gave him the CEO job in 2005, but by the time he announced his retirement on February 25, 2020, he had become one. The same can be said of B2W’s CEO Anna Saicali and Fidelity Personal Investing President Kathy Murphy, both of whom developed their careers in traditional companies and became digital leaders. 

What is a Digital Leader?

The most significant differences I see in the leaders of digital companies versus the leaders of traditional or legacy companies have to do with their cognition, skills and psychological orientation. What is particularly relevant is how these things blend together to link big-picture thinking with pragmatic matters of moneymaking, execution and speed. Each of the descriptions below captures an aspect of how digital leaders succeed. 

• They have the mental capacity to think in terms of 10x or 100x, to imagine a future space that doesn’t exist, and the confidence that they will overcome whatever obstacles they might encounter. They are knowledgeable about and supremely focused on the customer and have the imagination and vision to conceive of an end-to-end customer experience and a large-scale future space.

• They can see how the moneymaking and the company’s ecosystem will work together in new and sustainable ways.

• They are willing to make big bets and to withstand initial losses of profits and cash amid doubts and skepticism because they have a clear picture in their minds of how things will work. 

• They are able to build ecosystems on an enormous scale and believe every market they enter is expandable. 

• They have a facility for and are comfortable with data-based analysis. Facts and knowledge—not predictable outcomes—give them the courage to act. 

• They blend data with intuition, examine future trends and adjust their actions and offerings as new data and facts emerge. 

• There is a fluidity to their thinking. They welcome change and even seek it. They are, in fact, the source of what others perceive as relentless change. People talk about how digital companies are disrupting industries, but most of their leaders don’t start with that intention. 

• They are motivated to create something new. Their fluid, iterative thought process makes the once-a-year strategy review obsolete. Instead, it is ongoing.

• They are hungry for what’s next and willing to create and destroy. Their psychology is geared toward high speed, urgency and continuous experimentation.

• They constantly search for what can be improved and what can be created that could be important to consumers and provide a new source of revenue. 

• They are not afraid to cannibalize what they have or abandon what isn’t working.

• While legacy company leaders expect a formal presentation with every “i” dotted and every “t” crossed before they approve an initiative, digital leaders make big bets without the formal apparatus. 

• They focus on the customer benefits and allow for uncertainty. Their psychology, habits and DNA are predisposed to explore, experiment, learn and adjust, and to quickly cut losses when necessary.

• They have the observational acumen to absorb hard data and piece together what does not yet exist. AI and algorithms can help digitally-adept companies sort out operational complexity, but the leaders of these companies must be able to juggle many variables as they change the basic components of their business. 

• They are not overwhelmed by the speed of change and are comfortable with the concept of creating MVPs, or minimally viable products—a good-enough version of an offering that can be tested and iterated quickly based on customer feedback.

• Their ability to handle the constant flood of new information allows them to react quickly to the speed of social media and word-of-mouth and to continually look to shift resources and rebalance short-term and long-term goals. 

• This kind of fluid thinking and ease in taking in new and complex information goes hand-in-hand with continuous learning. Such leaders stay abreast of what is new and challenge themselves to learn about things they know nothing about. 

• They are literate in the application of algorithmic science and value fact-based reasoning. But they know that data is not always sufficient. 

• They rely on metrics and transparent data to drive execution. 

• They are highly disciplined in ensuring that their people deliver results on time. 

• They are skilled in selecting the right people for the right jobs and are quick to move people to other positions who are not suited to the job as it changes. 

• Digital leaders are willing to reconceptualize the organizational structure so that decision-making takes place closer to the customer to improve the speed and quality of decisions. 

• They are comfortable giving those under them the freedom to act, while using data and incentives to increase accountability and execution. 

• The word courage has been associated with strong leadership throughout history in every walk of life, from war to sports to politics. For digital leaders or traditional leaders becoming digital, courage has a specific granularity. They have the courage to act decisively, often making bold moves despite the fact that the emerging landscape is often based on incomplete information and unknowns. Their courage and boldness come from their ability to take in and sort through a flood of new data and information, combined with the raw nerve to take risks. 

This final bullet is certainly true of Bob Iger, who entered the streaming race later than many expected. He took on a lot of debt to buy Fox and Hulu, knowing full well that pricing could be a race to the bottom, while incurring heavy cash expenditures that will reduce earnings and could invite attacks from the media, investors and activists. 

If the repositioning of Disney proves to be untenable, it could damage the Disney brand as well as Iger’s reputation. But Iger had the cognitive ability to figure out a path for Disney and the sheer nerve to place a big bet on it. 

Tests of Leadership

Today’s fast-paced digital economy is not an era for the timid. But leaders who take bold action without having the requisite skills are merely reckless. 

When leaders fail, it is usually because their business skills do not fit the challenges of the job. Poor judgment in allocating cash and the failure to hire and train the necessary talent are common shortcomings. For example, we know that autonomous (or self-driving) vehicles (AVs) are coming in the near future, but no one knows when, where, how quickly they will be adopted and who will dominate. 

Companies in that space will rise or fall based on how well their leaders can navigate the fog of uncertainty in that emerging market space. AVs depend on huge amounts of data, and their development entails a great deal of risk. As we’ve already seen, accidents in the testing and development phase can have an outsize impact on consumer acceptance. Some leaders are pursuing AVs aggressively despite the risk, while others are moving more cautiously. 

Ecosystems will inevitably compete against each other, and mistakes here, including moving too slowly, may be an existential threat. Leaders have to imagine how the moving parts will fit together, build the relationships and be comfortable sharing information with eco-partners, versus going it alone, as they are accustomed. 

The total revenue of the global mobility market is unknown, but total car ownership is in decline worldwide. Leaders vying to compete in that space will have to find a moneymaking model that works. That is an especially big challenge for leaders of traditional automakers. Ford, for one, has a cash problem. Ford got a new CEO in October 2020 who is hastening development of electric and autonomous vehicles. Ford spent $1 billion to convert its German manufacturing plant to EVs only. Can Ford outcompete Tesla and newly minted EV makers? Is its partnership with Argo on AVs a winning combination? Will it have sufficient cash to fund its investments in those areas? 

Ford is testing AVs in three cities, while most other automakers are testing in just one. Ford stands to benefit by getting data from varied settings, but can it afford to do so for an extended period of time? The CEO has to be willing to shift resources as necessary, withstand a barrage of criticism over suppressed earnings and have the skills to deftly explain the narrative to investors and employees.

These are business issues leaders in the auto industry have to reckon with, and their decisions have serious consequences. Note the turnover in the CEO positions at BMW, Ford and Daimler. 

Bob Chapek, who succeeded Iger as Disney CEO in February 2020, had to weather whatever impact the new moneymaking model would have on the cost of capital. Disney’s stock price held up well at the end of 2019 in light of high initial subscription numbers for Disney+, but it was unclear if those numbers were sustainable and if investors would accept lower earnings per share. In 2018, Disney earnings estimates for 2020 were $8.20. By late 2019, estimates for 2020 had fallen below $6. Covid-19 wreaked havoc on earnings, but Disney+ was a bright spot: By early 2021 subscriptions had jumped to more than 94 million.

Reed Hastings, co-founder and CEO of Netflix

Will CEO Reed Hastings be able to continue to attract funding for Netflix as the competitive landscape shifts? Netflix’s continued success depends on Hastings’s ability to keep the moneymaking model working, even as other companies attempt to lure consumers away with new entertainment options. Netflix has been able to raise prices in recent years without significant blowback. Would the company become unattractive to funders if Hastings lowered prices at some point to attract new subscribers? In April 2020, on the heels of adding 15.8 million new subscriptions in the first quarter and having positive cash flow for the first time in six years largely because of a slowdown in production, Netflix announced that it was raising $1 billion in low-cost debt split between euros and dollars. In January 2021, it had 200 million subscribers and announced it would not need to assume any more debt to fund day-to-day operations. 

Cultivating Digital Leaders

Leadership obsolescence is a reality. Many leaders in traditional companies developed their cognitive skills around incrementalism versus rapid and exponential growth. Many used price increases or acquisitions to boost revenues rather than to create new market spaces (note Procter & Gamble’s pattern of premium pricing and Disney’s price increases at its theme parks). Many lack technology skills and knowledge to survive in today’s landscape or may have a weaker appetite for risk. 

Understandably, it is hard for them to imagine what technology makes possible and to enthusiastically drive exponential growth. They may have no experience in building relationships with eco-partners and no exposure to the power of a digital platform. Most leaders in positions of power in legacy companies have come up through functional or vertical silos—from marketing, finance or operations. If they started at the bottom, they had to rise up six layers or more. That kind of career progression gives them little if any consumer experience or few opportunities to build their business savvy. Even leaders who have run a profit and loss unit probably did so without balance sheet responsibility and may be handicapped in trying to conceive moneymaking models that are suited to the digital age. 

Up-and-coming leaders had to fight for resources, play politics and be evaluated based on how well they met the numbers. Reviews in legacy companies are largely focused on the rearview mirror. Some had performance metrics around customer satisfaction or a Net Promoter Score index, which are not forward-looking metrics and do not reflect imagination or vision. 

Leaders who came up through consulting firms had their DNA shaped by analyzing multiple industries and massaging facts to get meaningful insights. They tend to be very good in cutting through internal and external data and can often see the big picture. But a large percentage ultimately fails because they lack experience managing a large organization or building top teams, or because of their personality. Their expertise and intelligence allow them to think they are the smartest person in the room. But as a result, they stop listening and are unable to develop and steer the company’s social engine. 

Turnover among CEO leaders at traditional companies will likely increase. A good percentage will find it near impossible to convert their mindset and skills or will be unable to do so fast enough. Traditional companies intent on transforming into a digital one should consider whether their leaders can make the shift. If not, they may need leaders from the outside. Amazon has become a talent factory and a popular source for recruiting. 

At the same time, companies that do a deeper search might unearth potential digital leaders in their midst. I have observed a number of situations, beyond those at Fidelity, B2W and Disney, where a leader from a traditional company put the organization on a digital trajectory. 

Leadership “potential” should be based on the qualities that digital leaders share: a basic knowledge of algorithms, a customer orientation and business savvy, as well as personal leadership traits such as imagination and a drive to execute. In particular, the blend of skills and personal traits must result in good judgment. 

People can learn and change. I have seen experienced executives at the highest levels of traditional organizations eagerly learning what platforms, algorithms and data can do for their company, and the scope of their thinking and imagination has been enlarged. Some of these leaders now believe that achieving 10x growth is possible, whereas they did not before. They are able to imagine satisfying a customer need that stretches out further in time, seven years or more, and have begun to experiment and 

test what that market space could be. They know that competition is inevitable and are learning to experiment faster and accept some failures. 

Millennials represent a richer vein of leadership hope for the future, but they may need to develop their social skills. Those with a background in computer science can nail coding and platform and app development, but their thinking has a downside. It is binary. Such experience can condition people to see things in black and white. They may lack empathy or nuanced social skills, which are critical in a digital company’s team-based organization. Coaching can help. And on the whole, taking a risk on a younger person with expertise in the digital world but who lacks experience running an organization may be a better bet than turning to traditional leaders who lack the relevant cognition, skills and psychology. 

The digital giants are few in number. There are only about 20 worldwide. But their leaders, too, face competition. Many succeeded as a first mover in their space, with little to no competition. They now have to think about whether they can continue to grow on the path they’ve chosen or whether to succumb to pressure to boost earnings per share at the risk of slower growth. Even with well-developed moneymaking models, platforms, brands and consumer connections, new challenges are emerging, such as dealing with regulators or taming culture. 

I feel confident that a new generation of leaders will arise to meet the challenges of today’s digital world, probably from many different sources. Clarity about the criteria these leaders must meet will help identify them. Clearing a path for their growth will allow them to develop, probably much faster than we think. It may mean overlooking others to favor the necessary skills over extensive experience. Organizations that understand how digital leaders are different, and search them out and nurture them, will have an edge over companies that do not. 

That’s competitive advantage in the digital age.

 

Excerpted from Rethinking Competitive Advantage: New Rules for the Digital Age (Random House, April 2021) by Ram Charan and Geri Willigan. Excerpted by permission of Currency, an imprint of Random House, a division of Penguin Random House LLC, New York. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.