12 Feb 2009
And now comes the really hard part. Recession has been confirmed in most of the industrial world. But, what now?
Listen to the podcasts now:
Michael Jacobides part one | Michael Jacobides part two | Don Sull | Julian Birkinshaw | View all podcasts
What can and should the leaders of the world's organisations do to survive and prepare their organisations for the world beyond? In the third of its series of briefings on the continuing crisis, London Business School faculty offered their insights into the practicalities of business leadership for 2009 and beyond. The faculty contributing ideas were Michael Jacobides, Don Sull and Julian Birkinshaw. In this compendium we provide their distilled wisdom.
Industry architecture -- the set of rules and roles that exist in a sector - tends to be taken for granted. This happened in the financial services sector.
Firms like Microsoft, Google and Apple have succeeded partly through managing the architecture of the sector to their own advantage.
Periods of crisis are when companies can rethink their structure and value proposition.
"Any way of structuring the financial services sector has rules, roles and impacts. It's not about the state being more or less important, it's about understanding how the existing set of rules and regulations shape the sector and shape its viability."
"There are a number of efficiencies that can be found by reorganising and streamlining. The first is by changing the way the organisation works. The second is by reconsidering what types of goods and services may actually be required. For instance, we're seeing a shift from aspirational products to an emphasis on value. I don't think that firms are taking advantage of these changes in the collective psyche, to the extent that they could. And the third is you can reorganise the issue of who does what and, as such, who takes what in the economy. Companies need to have a clear vision about how their sector is structured and what products need to be produced."
"We should think about the new rules in the economy, as it is being reshaped. There are opportunities for restructuring, either through new alliances or through M&As."
"To take new opportunities you need guts and you need clarity of vision; it's more about judo than boxing. It's about reorganising your sector, finding ways in which you can leverage other people's position and advantages. It's about countering the pathologies that exist within firms. It's about sorting out what is a cyclical and what is a secular change in the sectors you're in. It's about identifying the new value propositions."
A downturn is a clear break with the past, an opportunity for organisations to make changes that they should have probably been making anyway and accelerating the changes underway (as Samsung did).
Companies like Toyota, Nokia and Cisco were forged in spectacular adversity, but only through bold thinking and action.
"A lot of a CEO's life is trying to change a huge inert juggernaut that wants to go on the same trajectory it's been going on for 50 years. During downturns it actually gets a lot easier and that's a huge opportunity. But, I guarantee eight out of ten executives are going to miss it."
"The question everybody is asking is what costs should we cut? That's a good question but it's not a great question. The great question is how can we cut costs now in a way that will maintain our cost discipline going forward when the economy turns up again?"
"Most CEOs drive with one foot so when things are going well they press on the gas, full speed ahead and then comes the downturn and they put their foot and slam on the brake, cut costs. What great managers do is press the gas during downturns too."
"Most CEOs are pussycats when it comes to tough decisions. They spread their resources like peanut butter evenly to avoid conflict. The problem is, come the downturn, they try to apply the same peanut butter approach to spreading the pain."
"It's a unique opportunity for executives. A lot of organisations are going to survive to fight another day. The question is what you do on top of that and that's the opportunity that unfortunately most managers miss."
Risk is the likelihood of some sort of negative end result multiplied by the magnitude of that potential downside.
Two types of risk: false positive risks -- invest in some assets and then it is worth less; and false negative risks when you decide not to do something.
False positives are easily focused on because they cost people their jobs.
Companies make false negative risks all the time and they tend to be relatively unseen things, but can get you into trouble.
The more you avoid one type of risk the more you actually take the other type.
Three ways to make risk management decisions: formalise your processes; outsource it (eg to credit rating agencies); or personalise it.
A sense of purpose in an organization personalises and minimises risk.
"If you look at Goldman Sachs and JP Morgan, two of the survivors among the big banks, there is much more of a culture of personal ownership around who owns the decisions."
"There are three elements to personalisation of risk management. One is around the quality of the insights that come your way. The fact is most big companies make decisions on remarkably poor quality of insight. Second, there is personal accountability. Third you need a supportive culture."
"If everybody understands what the overall mission of the organisation is, it is much easier for the culture to support its objectives."
"We've studied nuclear power plants and aircraft carriers where you can't afford to make any mistake at all. One of the interesting findings is that even the maintenance engineer has a personal view on the big picture. And his or her job is not just maintenance; it's to understand how maintenance fits into the bigger picture. Their job is not just the little cog in the system. Their job is to have a view on how the whole system fits together. And by having lots of people thinking about those issues, it's much easier to ensure that the system as a whole doesn't make catastrophic errors."