Think - AT LONDON BUSINESS SCHOOL

How the best businesses are adapting for survival

The economy must go through a period of ‘creative destruction’. Here’s how business leaders can make it less destructive and more creative

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In 30 seconds:

  • How are businesses adapting their strategy to survive the global pandemic and how can policy support change at a national level?
  • Policy should minimise the loss of employment, skills and fixed capital created by the creative destruction necessary within firms, between firms and between industries.
  • To answer this challenge within companies, leaders should consider strategic resilience as a new way of thinking.

What role does management have in helping companies and the UK economy make the radical adjustments required to get through this economic crisis?

John Van Reenen, Gordon Y Billard Professor in Management and Economics at MIT Sloan, and Julian Birkinshaw, Professor of Strategy and Entrepreneurship at London Business School, considered the latest research as part of the Wheeler Institute’s UK economy webinar series and sketched an action plan for government and business.

Within a tough economic picture for the UK, Professor Van Reenen outlined how the market’s reallocation of resources is linked to management quality. It is a process of reallocation that sees the market delivering more output towards the more productive, more efficient firms, as the less productive and less well managed firms shrink and exit. This process matters because it accounts for almost half of all growth, says Professor Van Reenen. This means that, while firms can grow and become more productive, the reallocation process is equally important.

“Rethink your businesses to reflect the deep uncertainty”

This ‘creative destruction’ also represents a policy challenge. Policymakers must facilitate this reallocation while minimising unemployment, the loss of human capital, obsolescence and the loss of fixed capital.

Is the UK ready for creative destruction?

In research with Nick Bloom and Raphael Sadun, Professor Van Reenen has ranked nations and companies by management quality. In this ranking, the UK is ranked below Germany, US and Japan but above southern European nations. This indicates that the UK is quite well placed to facilitate this reallocation.

However, it is important to note that the range of quality within nations is large. This means that the UK’s ‘fat-tail’ of relatively less well-managed firms is indicative of a less competitive environment and a less well-equipped economy than Germany’s, the US’s or Japan’s.

For firm strategy, this means three things need to be front of mind, says Professor Van Reenen:

Demand effects

In the short run, most firms are experiencing a massive collapse in demand that goes hand in hand with a hit to liquidity. Here policymakers should aim to prevent good firms from succumbing, by buying them time to rebuild balance sheets.

Workforce effects

In times of great uncertainty, give autonomy to local managers and to resist the tendency in a crisis to centralise decision making. Professor Van Reenen’s research has shown that, in bad economic times, it's good to allow local innovation and local decisions, because they are close to the ground and know what's happening. He believes this decentralised sensitivity will be especially important in the turnaround as we come out of lockdown.

Navigating the future

In the short run, saving money is important but consider investing your time now. When demand is low, make organisational changes or invest in online training. Here the opportunity costs of taking people away from the front-line is low and should generate a long-run improvement to productivity.

“These are tough times, especially for the UK,” acknowledges Professor Van Reenen. “But there are opportunities… if we can get the reallocation right to drive growth. And at the micro level, at the firm level, there's an opportunity for a lot of organisational change and a lot of innovation.”

The CEO’s view on the great reallocation

At the firm level, Professor Birkinshaw argues business leaders have got to fundamentally rethink their businesses to reflect the deep uncertainty.

He likens it to driving in thick fog. Leaders must be prepared to think in terms of scenario planning. They must think in terms of developing options, building out resources and activities that give their organisations an opportunity to move in a different way.

If strategic agility is essentially a way of building teams that make them much more iterative and fast moving and responsive. Then, by contrast, the resilient organisation is about building the ability to manage downside risk.

“These are tough times…but there are opportunities”

The aim of this strategy is to build a capacity in systems to absorb disturbance and still retain the basic function and structure of the organisation.

Professor Birkinshaw has developed a hierarchy of needs within resilience to illustrate the concept. It starts with survival at the base, stepping up to operational resilience, which is securing financing or a supply of products, and strategic resilience is another step above that. Strategic resilience is about how adaptive a business can be to respond to changes in customer demand, while operational resilience is about being able to serve existing customers using an existing business model.

Some UK companies are just hoping for survival. Some will be profiting like the UK’s digital sector. In the middle, Professor Birkinshaw sees a fascinating dichotomy. Firms in the middle are tasked with not just resizing and surviving but also reinventing everything they do. To manage this, companies in this position, must understand why customers came to them in the first place, and this is a question of strategic resilience.

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