Below, the IoD’s Course Leaders offer their reflections on what the current situation teaches us about the directors' role in strategy and leadership.
Simon Haslam CDir
Organisations should have two mechanisms for strategy and decision making: 1) a normal cadence (e.g. six-monthly or annual re-focus/refresh) and 2) exceptional circumstances. Too many organisations are single-paced and don’t appreciate the need for both mechanisms. The need for the second mechanism for strategy is growing.
Covid-19 is several orders of magnitude harsher than Brexit (for example) as an external change affecting organisations. Not only is the Corona pandemic a new level of harshness for the vast majority of leaders, but an effective strategic response is beyond the gift of most organisations. Most organisations would not survive Covid-19 without state intervention. The question becomes about the level of organisational resilience that leaders govern around. How economically sustainable should leaders design their organisations to be? What degree of external change stops the fundamental model being viable?
Many societies are significantly based on efficient organisations that generate returns (think pension funds, etc). The economic model we have in place is the one we’ve asked for, but there are other ways. I chair a bus company and we deliberately have cash reserves which cover eighteen months of operating costs. We are not a cash-efficient business – we’ve no external investors demanding returns, we don’t sweat assets, we don’t distribute profits. But we can take a punch and we'll be good for 2021. This bus company, however, would be an unspectacular generator of financial wealth.
I think it’s worth mentioning that ‘a good leader knows when to ditch the plan’ and that the ability to be agile as a business is a huge strength. So how to refocus the business? Which parts of the business can change rapidly, and what cannot? How quickly can things be changed? What is the minimum scale of operations that can be sustained? This will include establishing the minimum our customers need, or will accept, during a crisis? It is about ruthless focus to achieve survival. Where do we – and where can we – make money? What can we still do to retain competitive advantage? (i.e. what can we sensibly retain, or even enhance, to keep our customers loyal?)
And importantly – how can we retain our staff and treat them well? I am hearing terrible stories of companies still paying huge executive and shareholder bonuses while laying off or underpaying staff. That will come home to roost. Culling staff could make you way less agile and effective. It’s a time when we need staff to go the extra mile. Staff who have seen colleagues laid off or treated poorly are less motivated to over-perform. The often modest costs saved can have a huge cost on business performance.
I think strategy has never been more important, leadership too. We still have to assess the internal and external drivers and choose options, but we have to do it faster than ever before. Inertia is the worst response to the crisis.
Covid-19 is first and foremost a human tragedy. Staff are petrified about their jobs and their future, not to mention their health. Leaders will be judged on how they react, how they show empathy, and how they support and comfort those in need.
Strategically, the patient has been rushed to the Intensive Care Unit due to unforeseen complications. But the patient can survive if appropriate actions are taken, without losing sight of what to do when the patient is transferred back to a general ward and ultimately discharged. The strategic priorities have changed – for now. Cost-cutting and laying people off may well be considered necessary, but these are reactionary tactics.
The stakeholder map needs to be redrawn pronto. Supply-chain positioning is also of crucial importance in order to understand the interdependencies and the respective vulnerabilities. On the finance course we talk about cash burn, cash-flow resilience, and the need for the board to always maintain financial flexibility. For example, could you borrow more? Do you have unused banking facilities? Could shareholders recapitalise? Never has this been so crucial, now that we’ve been forced into economic hibernation.
This also illustrates how risk-register findings are sometimes not followed through. Many companies have previously identified the possibility of a pandemic or a ‘black swan’ effect. Putting something in a box to colour code is no help unless the financial ramifications are worked out and discussed.
How boards react will be very telling. Agility will indeed be tested, as will the values. As we keep on telling our clients, ‘Hope is not a strategy.’
Murray Eldridge CDir
Clearly organisations differ widely in terms of labour and asset intensity, run-rate, cash burn, etc. But in any sector, there will always be one or two players who have decided to build in more resilience than others. In the current situation, most leadership teams will be engaged in survival thinking only. Very few will be trying to identify a future ‘green landing zone’ – somewhere they have a chance of not just landing the rapidly descending plane, but giving it the opportunity to take off again at some future moment. I’m currently working with a ‘people intensive’ business that, while in the midst of taking emergency measures, has already identified opportunities to pursue as it emerges from this event. This breadth of thinking is visibly providing hope for its people and also showing them that their leadership has got a grip, is thinking clearly and isn’t just offering panicked responses.
With respect to strategy that responds to exceptional circumstances, the ability to consider two aspects – opportunity and resilience – will be crucial. Often consideration of these two aspects must be simultaneous, since being able to ‘resiliently’ come through the far side of an extreme event(s) often provides similarly extreme opportunities.
If increased volatility (and the exceptional events it creates) is now a fact of modern commercial life then, far from obviating the need for 3–5-year strategic thinking, it makes the need for it more important. However, this comes with an important caveat. It also requires increased intellectual horsepower, rigour and robustness of thinking and taking much wider perspectives of possible futures. For example, the use of, and increased attention to, robust scenario thinking and planning. Those organisations that have considered, war-gamed and planned for extreme events, and have a series of contingency measures and actions already thought through, should have the flexibility of action to not just survive, but emerge in a condition that will allow them to make the most of the new, emerging landscape.
A lot of boards will be facing very tough decisions about whether the company is actually a ‘going concern’ or not – there are big legal ramifications. Depending on your year-end, you might need to delay signing the accounts while you work on this.
If resilience is measured in survival time, then operational leverage is the enemy, even more so than debt leverage. (Meaning a high proportion of costs are fixed rather than volume-related.) Will we have to de-leverage our companies and economies more after all this?
Other stakeholders, and not just employees, may remember your decisions in times like these. There may be opportunities as well as threats. Searching for them may be a good morale-booster in the midst of so much bad news!
At the more macro scale, what sort of economic biosystem do we want? What could offer more resilience? More smaller businesses (de-risked by eliminating slow payments)? And while we're waiting for that: what suppliers, partners and customers do you want to work with as an individual company?
Considering the interpretation of and response to Covid-19 from a strategic perspective, detailed below are some diverse and sometimes contradictory viewpoints that I’ve encountered over the past couple of weeks.
- C19 is nothing to do with strategy. It’s about battlefield triage in response to a catastrophic event. The imperative is for fast decision-making to minimise cash out and maximise staff stability, then adopting a low-energy ‘standby’ stance, pending easing of lockdown. It’s Crisis Management 101, not Strategy. (View from a global retailer.)
- C19 is everything to do with strategy. When has there been a better opportunity to re-examine the fundamentals of who we are, where and how we play, how we add value and our basis for sustainable competitive advantage? So that when we emerge on the other side (which we will), we are in a better place to win. (View from an international private schools network.)
- C19, like any external shock, creates the conditions for some to thrive and others to perish. The manufacturers of masks are sitting pretty, as are the makers of disinfectants and cleaning products. And there’s never been a better time to be a shelf stacker or delivery driver. Is this no more than strategic Darwinism, with the winners being those best suited to the environment and/or best able to adapt? (View from an Asian insurer.)
- C19 acts as a (welcome?) accelerator for the digital transformation that most organisations are going through (at varying speeds). Transformation has moved from a choice to an urgent necessity, and it’s a great opportunity to move to ‘digital first’, flexible, dispersed operating models, particularly in service and knowledge-based sectors – i.e. bringing on what we wanted to do anyway. (View from an automotive player.)
- C19 underlines the obsolescence of ‘classical’ linear strategic thinking and the imperative for agile, joined-up strategy and execution. (cf. Rumelt.) Not to be confused with ‘making it up as you go along’, which many do.
- C19 exposes the limits of the private shareholder capitalism model, the gig-economy labour model and laissez-faire state minimalism. It might serve as a catalyst for more enlightened, triple-bottom-line governance and strategy, including an inevitable call for a greater central political role. (cf. Wuhan, S Korea)
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