Covid-19 Crisis, Embracing turbulent times? – Part 3

As a follow-up to my series of articles on the Covid-19 crisis I’d like to share a few ideas on what corporations could do to adjust and embrace turbulent times. Now, a few words of warning. I generally dislike these kinds of discussion because they end up giving advice that are either clumsily vague (‘remove silos and be more agile’) or dreadfully unrealistic (‘rebuild your innovation process from the ground up’).

My take on the « best advice » to give you would rather be to steadily adjust course with a long-term plan. As for most businesses you probably won’t have enough resources anyway for quite a few months. But the lessons you are learning as we speak and the strategic vision you might develop doing so, will have long-lasting consequences.

For operations and management

Since the early eighties Peter DRUCKER called for more decentralization and simplification in corporate structures. I’d say it’s the right time to accept that the usual command and control / top-down model is too slow to adapt and evolve in turbulent times.

While a lot of cost-cutting will be done, it will be important to keep a cool head and a 3 year perspective. The mistake in turbulent times would be to slash what seems too expensive to afford within the next 6 months without further discussion. If you have an extensive portfolio of product lines and services (which you probably have, because let’s face it you’re not Apple or Tesla) your instinct will be to fall back on the most profitable ones right now. Fine, but doing so will kill your next S-wave and will force you to reinvest massively to reboot your market presence sooner than you think. And because you certainly overestimate the life expectancy of your current cash-cows, you might be caught in an extremely unpleasant spot by the end of the year.

The obvious caveat to my recommendations of gauging your costs with a long-term perspective is that you might lack this very perspective right now. Which is fair. Then invest in rebuilding your strategic vision as a top priority. Work on no non-sense future market scenarios. Keep it simple and map the junctures in the market that are always coming up in the same way in these scenarios and the ones that might differ wildly. You won’t have a perfect crystal ball, but at least you’ll get back some degree of control by identifying which junctures are stable enough to validate some of the hard choices ahead of you. (More on this in the next part.)

When speaking of simplification another trap is that contrary to Drucker’s vision though, extreme outsourcing has lived. Linked to radical financial optimization, the model of getting rid of all internal support processes and functions have built up critical fragility in corporate structures. Many business ecosystems end up being complicated codependent house of cards.

Internalizing back supply chain or customer service could be part of the long-term plan you need. It might not be an enthusiastic pitch for your next executive committee, but doing the job to be done in-house will have many virtues looking ahead of us. If only for talents and know-how’s retention that will be hit hard when your prolific army of subcontractors rapidly unravels in various stages of bankruptcies.

In the same vein, maintaining various forms of cash flow redundancies and liquid investments should be a top priority for your financial department since three weeks ago. Extreme debt optimization is splendid when you’re cruising a ten year bull market. Now the party is over. Adjust accordingly.

Enhancing redundancy with alternative pathways to production and go-to-market is also an obvious move on paper, but also one that will require finesse. Where are the real key fragilities in your operations and how to mitigate them? If you’ve never gone down that analysis road yet, you might be in for some rude awakenings. Better be informed and on top of this though.

I’m very aware that changes ending up in raising cost of goods sold will be difficult to sell to most shareholders who have developed the attention span of hamsters on crack cocaine. So yes, privately-owned companies will fare better in these turbulent times because they structurally have more leeway to manage operations on their own terms. But in any case, remember that in a few months the very same investors will start to cool off and reconsider who is still alive and not too badly impacted in the market.

Surviving is not enough for now. You already need to invest again, albeit with surgical care.

Lastly a word of caution on agility gurus who will prone for further dismantling of your core assets (both material and immaterial) and indoctrinate teams in 5-step magical methodologies. If anything, you need to regroup, recover and reorient, not get in a radical retooling of your business. And because the future will remain uncertain for a few years, promoting a single type of mindset and approach to your market will inevitably create extreme fragility for your structure. This is not the time for that.

For strategy and innovation

If you weren’t adept of exploring your market ahead of the foreseeable horizon (from 6 months for e-commerce to 8 years for aerospace) you’re in it for quite a challenge. Nothing insurmountable mind you. Something demanding thought, not unlike reconstructive surgery and re-education therapy for your innovation muscles.

For the companies that will survive the initial cash-flow crash, exploring ahead of the curve with regular frequency should be part of the monthly executive committee review for the foreseeable future. As I said many times over, innovation is now business as usual.

The key reason to map out junctures in the market is not to bluntly think you’re going to know exactly what to do with laser precision, but to rebuild optionality before you commit to operational sunk costs.

Need a quick recap on optionality and what it means in innovation?

Optionality is initially a financial term that describes investments with « good » asymmetric upsides in regard of « limited » downsides. The reason why startups were interesting in open innovation strategies was not because they were more agile or had more chakras open than your own innovation team. It was because they were dirt cheap to invest in (compared to your own average costs at transforming R&D in innovative products), and you could invest in many of them exploring different innovation pathways. The one that would have been successful enough would have been a low-sunk cost investment with tremendous upside in leading your core business ahead of the curve.

Optionality in that sense translates for corporations in an innovation portfolio strategy.

Said differently, if you try to adapt to the Covid-19 crisis with your usual linear innovation pipeline, with stop-and-go reviews and a central business plan… You don’t get something essential: as we speak there is no way you (or anyone) can foresee where to go next. Blindly adopting a unique strategy to get out of the turbulences is like playing the Euro-million as a last minute effort to save yourself from the Titanic sinking..

On the contrary playing around with a compact portfolio of a few scenarios branching out in different directions, investing in them just enough to be able to probe the market without overreaching, and creating opportunities to read key signals ahead of the competition, is a fail-proof strategy.

Investing in optionality has also a special beauty in turbulent times:

If you ‘have optionality,’ you don’t have much need for what is commonly called intelligence, knowledge, insight, skills, and these complicated things that take place in our brain cells. For you don’t have to be right that often. All you need is the wisdom to not do unintelligent things to hurt yourself (some acts of omission) and recognize favorable outcomes when they occur. (The key is that your assessment doesn’t need to be made beforehand, only after the outcome.)

Option = asymmetry + rationalityNassim Nicholas TALEB – Antifragile, 2012

As someone who has been working in the field of rupture innovation even in-between crisis, I usually fiercely advocate for building a reverse pipeline (an innovation pipeline that expands, not narrow-down and refreshes itself with new possibilities over time). But I don’t think that this is the time right now. You only need an extremely scaled version of this logic to help you move forward.

One last thing…

I know I shouldn’t write about it because it’s not what you want to hear. But… Now might be the time to consider a pivot around your current (past?) business model. I’m not saying that everyone should, or even that it’s the ideal time — far from it. One of the key of proper strategic thinking is to always know what is the worst scenario. Before firing your teams and scrapping all assets, the possibility of radically reorienting the activity should be less destructive.

Be then aware that a strategic pivot comes in many flavors:

Pivoting around your production tool and core skills to offer new products to new markets (think: Zodiac Nauting shifting to Zodiac Aeronautics).
Pivoting away from your product while maintaining your market (think: IBM shifting away from mainframe computers to consulting).
Pivoting your value chain around (think: Amazon or Alibaba ways of bundling and unbundling).
Pivoting from your market (think: going from B2C to B2B to reach for less volatile customers).

Exploring these worst-case-scenario moves as some of your « optionalities » would be the sensible approach.

For leadership and culture

The last level of adaptation to the turbulent times ahead of us should have been done years ago. If you haven’t there is no way this will happen overnight. That being said, the best time to plant a tree was 30 years ago… or now. So let’s point at some concrete goals your leadership team could consider regarding your business culture for the next 3-5 years.

At the root of adapting a business culture to high uncertainties, is the necessity of building up internal flexibility. Yes, it’s been nice to say for a decade or two that you were working cross-silos, etc. but now is really the time to get there. Which doesn’t mean trying to go crazy with 5-dimensions org chart matrices. You might rather start thinking of these goals:

Creating shared accountability for 30% of business units’ projects;
Experiment with a few cross-divisons permanent teams;
Create an internal open training and mentoring team on your best practices and know-how’s;
Expand quickly to an external training program with your supply chain;
Work on redesigning your core offer with your key customer;
Etc.

The collaborative redesign is usually one of the killer program I usually get to work on in this context. Take one of the key cash cow of a B2B business, invite a key customer to rediscuss and readapt it in a 3-6 months program: boom! Easy win (if sometimes tricky to manage) involving representatives of several departments from both sides.

After some time and a few successes implementing such actions, starting to think on how to level up your organization and implement deeper cultural changes will come up naturally. For now? Let me say it again: if you haven’t been ready before the crisis, now is not the time for radical measures.

Increasing your business resiliency (anti-fragility) could also be approached with a simple paradigm: every time one of your key activity is managed in a too directional way, make sure to have a few leaders in charge of balancing this in another direction.

You have a strong internal R&D pipeline? Then who’s in charge of an open innovation program? You have a well-integrated distribution network? Who’s starting a direct-to-market approach? Etc. Remember that your pre-Covid-19 organizational super-powers might be toxic right now. Yes, I’m looking at you just-in-time-manufacturing…

This will lead to some level of internal competitiveness and probably tensions here and there. But this is a necessary step at allowing your corporate perspective to expand and then progressively adjust to strategic self-cannibalization when and where necessary.

What I would advocate with these examples is that you start to explore your cultural flexibility and muscles yourself. The worst outcome of the Covid-19 crisis (well, past a plain and harsh bankruptcy before the end for the year) is having one of the big five consulting jumping in and explaining to you how you should start working from now on. There is no scenario where this ends well.

Conclusion

To sum-up all this, my key points are:

Don’t jump in an hectic reconfiguration of everything. Keep your head cool and despite a valid sense of urgency, decide and implement for the next years — not weeks.
Turbulent times require that you coordinate operations, leadership and culture. Most companies in normal times do that in a passive way and the core change you’ll have to face as a leader in your organization is to coordinate these levels tightly.
Don’t jump in any sort of managerial bandwagon, trend or cult. There is no fail proof template to what you will have to achieve leading your teams ahead.
And lastly, understand that what were your strengths a few weeks ago, might now be your worst enemies. This is the deepest change you will have to face and this one is urgent.