Sir Donald Gordon Professor of Entrepreneurship and Innovation; Professor of Strategy and Entrepreneurship
Think at London Business School
What makes managers stick to a strategy might be less straightforward than it looks
By Oded Koenigsberg
Corporate turnaround experts have specific skills: they get to the heart of the problem quickly, they prescribe necessarily tough and radical action, and they have the nerve to carry it out. These are not “steady as she goes” people. They grasp nettles, uproot them and clear the way for fresh growth.
Michael G. Jacobides, Sir Donald Gordon Chair of Entrepreneurship and Innovation and Professor of Strategy at London Business School, teaches the School’s popular turnaround elective, and his research is on how firms adjust to turbulent environments. Having considered some drastic corporate drama stories, and studied the rise of platforms and ecosystems, he is well placed to offer thoughts on how businesses might survive the coming recessionary period and get beyond that to resume a growth path.
Turnaround experts have been busier than they’ve ever been, he says. And there is certainly plenty to learn from turnarounds. A crisis can be a clarifying moment, a time when delayed or daunting measures can no longer be put off.
It is a moment to question priorities, Professor Jacobides says, and to consider how the strategic environment is changing. Sure enough, everyone wants to know how deep and how long this crisis will be. He cites his colleague Professor Andrew Scott’s exploration of what is likely to happen to the economy; we are faced with a possible “alphabet of recoveries” (U, V, W, L and so on). But whatever shape this crisis has, it’s clear that it’s deep, and serious, so we may want to focus on what you can do first, to survive, and second, to move beyond survival in a changing world.
To cope with the crisis, you may have to consider some quite substantial changes to your business – and the sooner you do it, the better you’re off, especially if you need debt restructuring, capital infusion or even ownership change.
But keeping a clear head and thinking lucidly at a time of crisis is not easy. Fear and other psychological responses can drive irrational and ineffective behaviour.
Shock can lead to inertia or just plain wishful thinking (adopting the “ostrich position”). Leaders may freeze. The pace of change can overwhelm, leaving people confused as to how to respond, or perhaps just complacent. Urgency may only develop long after the time for action has passed, and the freedom to manoeuvre is severely constrained.
The good news is that the world will eventually get through the current crisis, just as it did a century ago after the so-called “Spanish flu”. But how can you ensure your organisation survives?
Professor Jacobides argues that certain specific types of leadership behaviour are required at a time like this. Leaders need to respond quickly and address reality. They must acknowledge the new, difficult facts on the ground. People need their leaders to be honest, simple and direct. So crisis leadership will look and feel very different from steady state or “good times” leadership.
Communication style is at the heart of this. Some colleagues in the business – investor relations, legal or communications directors perhaps – may be tempted to massage the message somewhat. But this is not a time to be economical with the truth, Professor Jacobides says.
“When the situation is dire people need to be told,” he says. “You have to have a clear, bold, realistic narrative.” Provide a clear sense of direction, which is robust and consistently communicated – even if it is not good news.
“Provide a clear sense of direction, which is robust and consistently communicated – even if it is not good news”
This is especially true as far as relationships with the banks or creditors are concerned, Professor Jacobides adds. A good approach is to under-promise and overdeliver. This will reassure creditors. “Their confidence is driven by your ability to show you will deliver something consistently, not by the beauty of your projections,” he says.
Professor Jacobides draws a neat morbid analogy with COVID-19: businesses with underlying health problems – too much debt or strategic problems – will suffer more, and may not make it. If you have been running on very tight margins, or are overleveraged, your odds will be slimmer.
A 2019 study of 3,900 companies by Bain & Co found that survivors are more discriminating in what they cut. Others simply cut horizontally – capex, expenses, R&D – but did not change portfolios much. Winners are more selective – they kept up R&D and maintained stakeholder relationships (as Professor Ioannis Ioannou has also argued).
There are two major tasks facing corporate leaders: survival and rebirth.
Staying afloat to think another day may require refinancing or rethinking the ownership structure, or a debt to equity swap. This is not the time to delay such decisions. “The time to be speaking with your bank is yesterday,” Professor Jacobides says.
Creditors require clarity and early warnings: straight talk. You also need multiple scenario plans. You cannot know how long this current situation will last.
If you are cutting back it is better to do more sooner, rather than adopting a more gradual or tentative approach, Professor Jacobides says. Cash has to be preserved as far as possible, and yet try not to be too harsh with suppliers – you are going to need them. You will have to communicate more than you think you might need.
Rebirth comes next. For this you will need a revised, perhaps reinvented business model, which is resilient enough for the new times. You cannot keep the old model. You will have to fix the underlying problems and causes of difficulty, not just the symptoms.
“You cannot keep the old model. You will have to fix the underlying problems and causes of difficulty, not just the symptoms”
Because new times are emerging you will also have to think about the changed behaviour of both colleagues and customers. They will be forming new habits: on average new habit formation settles in after 66 days. The current lockdown will be creating new habits which will persist.
A joke has been circulating recently: “Who led the digital transformation of your business? Was it the CEO, the CIO, or was it…COVID-19?”
Digitalisation, long put off in some quarters, has arrived – fast. Life will not be returning to normal. A study by the BCG Henderson Institute has looked at longer term implications of new customer behaviour. Commercial real estate, for example, could suffer if people spend more time at home.
The effect of the crisis will be similar to that of a wildfire, Professor Jacobides suggests. Yes, there will be destruction. But new opportunities will emerge too. New businesses can grow.
For example, Bookshop.org has established itself in the US as an alternative to Amazon. It is a low budget, independent platform helping smaller booksellers to stay in business, and providing an alternative for those who do not want to shop with Amazon.
My Local Token, in the US state of Virginia, has developed a cryptocurrency-based token that will work in local shops of participating high streets. This is a way for shoppers to support their local city centre, and government to focus its support on retail generation.
More broadly, digital ecosystems will become a lot more important, Professor Jacobides points out. This too has been a long time coming. We have seen in recent years the eclipsing (in terms of market capitalisation) of traditional stock market champions – Exxon, GE, Total, Citibank – by the digital giants: Microsoft, Amazon, Google, Apple, Facebook, Netflix. These big firms will have an even stronger hold in the future. We are so reliant on them, as this crisis has pushed everything to be mediated by digital interfaces. Consumers have been forcibly adjusting to new forms of service delivery- with digital intermediaries, who orchestrate digital ecosystems. Finding ways to compete through these ecosystems will become a top priority.
This raises the question of how our societies deal with data.
we, as citizens, connect to businesses and government. The Chinese government has long fostered collaboration with tech companies, and the major tech players there have collaborated with the state on pandemic-related information. Western societies have very different views on the sharing and use of data. In South Korea, Hong Kong and Taiwan, for example, the government has played a “key actor” role; in Singapore, the state is more of a facilitator. Where should we be on that scale?
Another big unknown is the question of regulation. In the past, regulators were not comfortable thinking about business models, Professor Jacobides says, but this may be about to change. There will be a discussion about how we use our data, and this may change the strategic landscape. Regulators’ pent-up mistrust for the Big Tech players may get a temporary détente because of their support in dealing with the crisis, but their important role is meant to backfire. So the landscape may change drastically: 2020 will be a year of transformation.
Given all this, leaders will have to wrestle with how their business will be embedded in digital ecosystems, whose very shape may change.
Whatever society decides, this will be a time to reposition and invest, Professor Jacobides insists. We should look upon this disruption as “a fortuitous discomfort”. The next three years will have been compressed into a few months.
“Don’t let history dictate your future,” Professor Jacobides advises. “Break from the tyranny of the past.” Your company’s allocation of capital will have to change. A McKinsey Quarterly study has shown how effective capital reallocation can lead to success and higher shareholder returns.
Firms will need to think about how they reallocate capital. There may even be opportunities for unexpected M&A transactions, prompted by distress. The ownership landscape will be different, changing the map of entire sectors.
He suggests a simple two-by-two matrix to help with your decisions. Ruthlessly and quickly divest from businesses which are challenged today and promise little in the future; consolidate and expand where the future prospects are good, and there is little pressure today; harvest or reposition “cash cows”, which are not bleeding today but are heading to trouble; and build up those businesses which may be struggling now but look likely to generate strong revenue in the future. And, as you do so, consider how each business affects your current position in terms of cash-flow, and how much future profit it may bring in. It is the tradeoff between today’s (scarce) cash use, and tomorrow’s profit potential that should be used to guide your choices.
There are a number of tantalising new questions thrown up, with no immediate answers. Whether the dip is fairly limited or steep, whether the distribution model becomes digitised or not, whether Big Tech disrupts a little or a lot, what about other strategic choices? What will be the most vulnerable business models? Is it selling products and services, or shifting to a subscription model, which had become a favorite by early 2020? And, how will your competitors’ vulnerabilities change the landscape?
Whatever the answers, your management style and priorities are going to have to change, along with all this. In discussions with creditors you will not only need one turnaround story for a temporary revenue and cash dip, but also a Plan B if the current trends are not temporary. It’s time to ask the big questions – not just batten the hatches.
In all, here are Professor Jacobides’ suggested priorities for the next few weeks and months: