Build an adaptive and resilient mindset.
To succeed, CEOs need to have adaptability – the ability to change – and agility – the speed of response. This includes both planning for whatever can go wrong and setting up a structure to respond quickly.
To do this, companies need to utilize a range of information and tools to gain insight into their current operations, performance and market environment and plan for different future environments. These include external insights, such as third-party data and dynamic analytics that can quickly process real-time data and help shape insights into customer demands or concerns. For example, one telecommunications business was able to use social media analytics to determine the negative sentiment caused by service outages more quickly than through internal systems.
Scenario planning that utilizes data to help simulate how a company can be impacted by a host of situations, such as a market crash or a product recall, is another key activity. For example, many organizations have built cross-functional "Brexit-ready" teams to look at potential scenarios and be ready to act once the way forward is clear.
Stress testing for multiple scenarios
Executives should regularly stress test for multiple event scenarios simultaneously. These can include both internal issues, for example a new product that fails in the market or a badly perceived leadership statement that goes viral on social media and causes major reputational harm to the company. These can also include external events akin to the broad-based market crash seen in 2008 or a major trade war. The stress test should look at situations holistically, taking into account the interdependency of events.
Executives should also conduct regular portfolio reviews to identify assets that are ripe for future disruption. These can include businesses that have few barriers to entry from new, digitally enabled competitors and business lines that could be disrupted by unexpected competitors (e.g., a consumer electronics company entering the medical devices field, an online retailer buying a bricks and mortar chain, or a ride share company taking on food delivery).
Then executives can make changes to be able to survive various scenarios, including reallocating capital to shore up core areas, divesting assets that are likely to face disruption, and making sure the organizational structure can respond to an immediate threat. This includes an examination of the entire supply chain and considering whether outsourcing some manufacturing, rather than owning it in house, can help make a company more nimble without diminishing its reputation for quality.
Among the companies that have successfully reshaped, EY analysis shows 66% have made leadership changes, whether in the C-suite or at the business unit level. Meanwhile, 46% actively reshaped their portfolios, either through acquisitions or divestitures.
Building an agile company that is empowered to make decisions
To be adaptive and agile, people across different functions of a company need to be empowered to make the decisions to quickly execute change to meet any situation.
This starts with inclusive leadership from the top, which delegates rather than controls, and which actively invites input from all levels and can be seen as taking appropriate action based on this input. The traditional top-down structure is likely to be too slow to respond to a threat in today’s environment. A key step in change management is to ensure that people feel empowered, are more aware and likely to communicate early signs of disruption.
This is also a good time to make sure business units are sharing data, rather than keeping it in silos, in order to make sure all decision makers can act based on a full set of information.
Have the right leadership for all situations
Boards and leadership teams also need to make sure they have the right leaders in place, with the right skill sets for all situations. An organization may have the best leaders for growth scenario, but these leaders might not be nimble enough in a turnaround situation.
CEOs, CFOs and the board should regularly evaluate whether the leadership team has the essential skills for all situations. They can then identify which leaders should take point in different scenarios such as crisis management or operational restructuring.
Create a platform to reshape your organization.
To give companies the time, space and capital capacity to plan and reshape the organization, they need to develop a platform to demonstrate their ability to be agile, enabling more optionality. To be effective, this needs to happen before a crisis occurs.
Half of the companies that successfully reshaped reset their strategy for growth through new alliances, agreements, partnerships or joint ventures.
Understand what stakeholders want
One key step in creating this platform is understanding the needs of all of a company’s shareholders or debt providers. Key stakeholders also include major customers, regulators, lawmakers, pension fund trustees, alliance and joint venture partners and employees (often represented by unions or workers councils).
Consider how each will respond to the types of event-driven situation you believe the company may face. Examine who has the economic, commercial and contractual leverage if you need to present proposals to re-calibrate, reschedule or change financial terms. Understand the business pressures they are under and how that will affect any negotiation. Consider what interdependencies exist between stakeholders.
Score the relationship with each stakeholder (in terms of strength of relationship, past dealings and trust). Identify the decision makers and consider who in your organization should take the lead in any negotiation that may be required.
Activists will generally do a tremendous amount of work before investing and setting out their strategic view. Executives should consider engaging with activists to discuss views and expectations, hearing them out and setting out an opposing case – if applicable, recognizing that activists expect engagement and sometimes resort to the media if engagement is not forthcoming.
Communicate regularly to build trust
Communicate regularly and strategically with all stakeholders. Make sure that they clearly understand the long-term strategic view. And listen closely to what they have to tell you, too, in order to foster a sense of partnership. Employees may have a front-line sense of how your products can perform. Financial stakeholders may have a broader understanding of the competitive landscape. Regulators and lawmakers can give an early warning of legal or regulatory issues.
This transparency is a two-way street and is a critical element for gathering the data that helps top management make informed decisions and manage risks.
Management that has built a reservoir of trust may have earned more time to take corrective action when necessary and may have more partners (rather than adversaries) when implementing that action.
Examine capital capacity
The CEO, CFO and other leaders should closely examine not only a company’s capital capacity, but also how effectively capital is allocated. Is there a proper balance between funding near-term needs and projects that can provide the resiliency to adapt in the face of a threat? The EY report found that only 40% of CFOs say they can change their capital allocation approach quickly enough to consider new opportunities and modify pre-planned investments. EY research shows that 84% of companies that have successfully reshaped optimized their capital allocation strategies.
Among the steps executives can take to effectively examine their capital allocation is to focus on a number of metrics that reflect an outside-in perspective. They then need to tie these directly to creating shareholder value, continuously improving them by examining each investment and implementing lessons learned and aligning capital allocation, strategy and communications.
Proper capital allocation is essential for fostering growth in a disrupted environment where established companies are sometimes losing out to more agile start-ups. A sound capital allocation plan allows a company to react quickly to reshape its portfolio in response to a new competitive environment by investing in new markets, technologies and products in a nimble fashion while still focusing on the long-term growth strategy.
Reshape with agility, building in optionality.
Stress testing, reviewing the portfolio, understanding and engaging with stakeholders, and examining the capital allocation structure can enable company executives to form a holistic view of their business. They can then make data-driven decisions to prepare the company to adapt to both the current business environment and any future disruptions and opportunities. The key is to act on that information.
It is important to develop different options. For example, a company that focuses on selling a business unit to free up cash and improve liquidity can be in deep trouble if the transaction does not go through. But if, in addition to the transaction, the company is driving a rapid working capital improvement plan and the sale and leaseback of equipment, these additional options give the company more paths to solve the problem. If more time is available to reshape the business, then longer term options have proven to be successful. For example, EY analysis shows 59% of companies have successfully reshaped by introducing new products and services, while 64% optimized their financial and operational performance.
Make data-driven decisions
Executives should look at a number of areas and consider the right changes to ensure an agile future, based on the data-driven analysis they have conducted and the company’s overarching values.
- Finance: is the company sustainably financed to master the daily business as well as a transformation? Does it have flexibility for the unexpected?
- Operations: is the operations backbone of the company sound, or does it need realignment? Does the supply chain need to be transformed to allow more sourcing flexibility in the wake of trade disruptions or to more quickly react to customer needs? Does the company have the workforce with the right skills to adapt to the future?
- Cost: how does the company’s cost base benchmark against its competitor set? Is there scope to reduce costs or increase flexibility by switching fixed cost to variable cost?
- Market strategy: does the company have the right geographic footprint to reach consumers? Are there areas for expansion or, conversely, non-core markets to exit? Does it need to expand into new channels, such as enhancing its digital sales presence? Do products and pricing align with customer needs? Are there opportunities for short- or long-term revenue enhancement?
- Innovation: are digital operations both state-of-the-art and flexible enough to quickly adapt to new market realities? Is the company forming close connections with customers, such as employing a strong social media strategy that listens to and responds to customers?
- Cash flow: how does the company perform against its peer group in converting profit to cash? Can the working capital cycle be improved through managing receivables, payables and inventory? Does the company have appropriate visibility on short- to medium-term cash needs?
- Transactions: is management regularly using acquisitions and divestment in a strategic way to reshape the company? Is it forming strategic alliances and joint ventures to nimbly react to the market realities when taking on new capital commitments is not an optimal choice?
Take impactful actions, quickly
Reshaping the strategy and developing plans to deal with disruptive events can be a futile exercise if followed by weak execution. Corporate history is littered with examples of very high-performing companies, which became poor performers or failed because they did not respond to the disruptive event with sufficient courage, speed and determination. Oftentimes, delay results in viable options closing because of the loss of stakeholder and market confidence, or because mild underperformance becomes more acute and, for example, creates a cash crisis.
In a recent EY poll of over 2,000 participants, 63% think complacency is one of the biggest challenges to reshaping organizations.3
Reshaping at speed is hard. Human beings, in general, don’t like change. Taking impactful decisions quickly and breaking the status quo are key to the successful execution of plans to compete in this new environment.
Standing still is no longer an option. CEOs, CFOs and the board need to understand the drivers of change that most affect their companies, stress test their assumptions for a variety of simultaneous scenarios to understand the interdependency of events and assess the likely impact in a data-driven, objective way. They need to make sure their organizations are structured to allow a quick and agile response and be ready to communicate with their wider ecosystem of stakeholders when it does. And lastly, ensure leadership takes the bold and fast actions when needed. Only then will their companies be able to reshape themselves to thrive now and reinvent themselves in an uncertain future.
Show article references#Hide article references
- Reshaping your organization for sustainable growth EY webcast poll of over 2,000 respondents, 10 June 2019.
- Embankment Project for Inclusive Capitalism, November 2018, page 3; Brand Finance 2018 GIFT™ (Global Intangible Finance Tracker, an annual review of the world’s intangible value), October 2018.
- Reshaping your organization for sustainable growth EY webcast poll of over 2,000 respondents, 10 June 2019.
With investors punishing underperformance more quickly and severely than ever, decisive leadership, data-based responsiveness and the ability to reshape quickly are the key characteristics a company needs in this new environment.