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The three keys to success in uncertain times

4th June, 2009 - Posted by Editor - No Comments

business flexibility, awareness and resilience

The future belongs to companies whose senior executives remain calm, carefully assess their options and nurture the flexibility, awareness and resilience needed to deal with whatever the world throws at them.

Organisations need greater flexibility to create strategic and tactical options they can proactively and reactively use as their conditions change; they need a sharper awareness of their own and their competitors’ positions, and they need to become more resilient.

This is according to Lowell Bryan and Diana Farrell, the authors of a McKinsey Quarterly report entitled, Leading through uncertainty, urging business leaders to overcome the paralysis that dooms any business and start shaping the future.

Bryan and Farrell say that taking stock of what senior executives know about the business environment is a good starting point that will likely require changes in strategy. Even then, many leaders will remain lost in the fog of enormous uncertainty.

To avoid impulsive, uncoordinated and ultimately ineffective responses, companies must first evaluate a broad set of macro-economic outcomes and strategic responses; then act to become more aware, flexible and resilient.

Strengthening these business areas will not just ensure survival, but allow companies to seize the extraordinary opportunities that arise in periods of great uncertainty.

Although executives won’t have any real answers in the short- or medium-term, the decisions they make now are critical as they will determine how well organisations perform now and their long-term competitiveness. The winners will be those that – despite the complexity, confusion and uncertainty – make careful decisions, honestly assess the different scenarios, consider their implications and prepare accordingly.

In particular, companies must think expansively about the possible outcomes. The range of potential outcomes regarding the uncertainty surrounding the global recession is so large that many companies may not survive.

The broad grid of possible macro-economic scenarios

Bryan and Farrell outline the issues executives need to consider in terms of flexibility, awareness and resilience, below:

Greater flexibility improves strategic and tactical options

Companies must now take a more flexible approach to planning. And each should develop not just one, but several, coherent, multipronged strategic action plans. Every plan should embrace all the functions, business units and geographies of a company and show how it can adapt in a specific economic environment.

In fact, the plausible range of outcomes in today’s business environment calls for senior executives to adopt a “just in time” approach to strategy setting, risk taking and resource allocation.

A company’s 10 to 20 top managers could, for example, have weekly or even daily ‘all hands on deck’ meetings to exchange information and make fast operational decisions.

Greater flexibility also means developing as many options as possible that can be exercised when trigger events happen or when the future becomes more certain.

The options companies consider will often be proactive moves. For example:

• Which acquisitions are attractive and on what terms?
• How much capital and management capacity would be required?
• What new products best fit different scenarios?
• If one or more competitors should falter, how will the company react?
• In which markets can the company gain market share?

As companies prepare for such opportunities, they should also create options to maintain good health under difficult circumstances. If capital market breakdowns make global sourcing too risky, for example, companies that restructure their supply chains quickly will be in a much better position.

If changes in the global economy could possibly make a specific business unit obsolete, it is critical to finish the preparatory work necessary to dispose of it, before every company with the same kind of business unit catches on.

A crisis tends to surface options. Slashing structural costs while minimising damage to long-term competitiveness is one of many options organisations wouldn’t consider under normal circumstances.

Unless executives evaluate their options early on, they could later find themselves moving with too little information or preparation and therefore make the wrong decisions, delay action or forego options altogether.

More aware through informed business intelligence

As problems with credit destroy and reinvent business models, and market volatility whipsaws valuations, companies desperately need to understand how their revenues, costs, profits, cash flows, risks and balance sheets will fare under different scenarios.

This information will allow executives to plan for the worst, while hoping for the best. Be prepared to answer questions like:

• If the recession lasted more than five years could the company survive?
• Is it prepared for the bankruptcy of major customers?
• Could it halve capital spending quickly?

The answers to these questions could help companies better prepare for and help them recognise, as early as possible, which scenario unfolds. This is critical knowledge in a crisis. When lead times disappear quickly, companies can seize the opportunity; but only if they act before the entire world catches on to the probable outcome.

Better business intelligence also promotes faster, more effective decision-making. Companies often gain insights into potential competitor moves by weighing news reports about competitors’ activities, stock analyst reports, and information gathered by talking to customers and suppliers. Without this kind of intelligence, especially in a crisis, companies could miss opportunities to snare assets in distress.

To get this kind of business intelligence, companies need a network typically led by someone with strong support from the top.

This executive’s mandate should include creating “eyes and ears” across businesses and geographies in specific focus areas like, for example, competitors’ responses to the crisis as well as gathering and exchanging information.

A network is critical, because information is most useful if it moves vertically as well as horizontally. Salespeople should exchange knowledge about what is working in economically distressed regions, so that employees can help each other.

Assembling bits of information, facts and anecdotes helps companies make sense of what’s happening in an industry.

For example, a supplier says it has no difficulties with funding, but first-hand knowledge from other sources indicates that the company is struggling to meet its payroll. Such warnings allow executives to get a full picture much more quickly than they could by sitting in their offices and interacting only with direct subordinates.

Being more resilient means losing energy sapping structures and behaviours

A crisis is a chance to break ingrained structures and behaviours that sap the productivity and effectiveness of many organisations.

Although such moves often take a year or more to pay dividends, they are valuable in any scenario and, if hard times persist, can help companies survive.

Employees may dislike this approach, but most will understand management’s aim to make the organisation more effective.

These structures often burden professionals with several competing bosses. Internecine battles and unclear decisions are common. Turf wars between product, sales and geographic managers kill promising projects. Searches for information aren’t productive and countless hours are wasted on pointless e-mails, telephone calls and meetings.

Experience shows that streamlining an organisation to define roles and the way those who hold them collaborate, can greatly improve its effectiveness and decision-making.

When jobs must be eliminated, the cuts mostly reduce unproductive complexity rather than valuable work.

McKinsey’s report highlights Cisco’s approach in shedding 8 500 jobs in 2001. When the company redesigned roles and responsibilities to improve co-operation among functions and reduce duplication of effort, talented employees were more satisfied in a more collaborative workplace.

Many functional areas offer big opportunities: greater effectiveness, lower fixed costs, freed-up capital and reduced risk. This could be the time to redefine and reprioritise the use of IT to increase its impact and cut its cost.

Other companies could seize the moment to control inventory, to re-examine their cash flow management, including payments and receivables or to change the mix of marketing vehicles and sales models in response to the rising cost of traditional media and the growing effectiveness of new ones.

As customer preferences change, competitors falter, opportunities to gain distressed assets emerge and governments shift from crisis control to economic stimulus, the new industry dynamics that will develop in the next year or two will produce new leaders and laggards.

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