Think at London Business School
Rampant inflation, supply-and-demand pressures, rising interest rates… LBS experts discuss how the cost-of-living crisis could pan out
By Andrew Scott, Linda Yueh, Paolo Surico, Lucrezia Reichlin, Seb Murray
As someone who has spent a lifetime analysing disruptive innovation, I believe leaders and managers have a key role to play when it comes to developing strategy to cope with an increasingly uncertain future. And, like my colleague Lynda Gratton, I see appropriate strategic responses as inherently “sustainable” in the sense that they are aimed at equipping organisations with longevity and individuals with more fulfilling lives. I think it helps to break this down into three levels: the strategic, the organisational and the individual.
Companies operate in a very uncertain world today, where things change fast. Strategy is about making difficult choices to give the organisation direction. At the strategic level, these choices relate to which customers to target, what products to offer and what kind of distribution is right for the industry. The problem, of course, is that you make these choices, then the environment around you changes – and all of a sudden you’re faced with a serious challenge.
Fixed direction versus flexibility
The challenge at the strategic level is how, on the one hand, you give a sense of direction to the organisation by telling people clearly, “Look, this is where we are going”, while on the other hand remaining flexible enough to adjust to the ever-changing environment around you. This is about striking the right balance, because if you have to change your strategy every few months in order to remain flexible, you’re going to have a very confused organisation. People will say, “One day you’re telling me we’re going this way; the next day you’re telling me we’re going that way.” So, leaders must chart a path between being overly prescriptive by saying, “This is the direction and we’re sticking with it”, and being overly reactive by being so flexible that they lose direction.
Finding the balance
How do you navigate the choppy waters and find that balance? This is going to be a key challenge at the strategic level for organisations and it’s the leader’s responsibility to find that balance. I believe that, instead of making big bets for the future by, say, investing £100 million in a new technology or a new acquisition, leaders should increasingly make a series of smaller bets. Once a small bet is proven correct, you can make another small bet, and if you build in this way many small bets will rapidly lead you in the right direction.
Don’t guess – learn!
Another recommendation that I believe is increasingly useful in this uncertain world is don’t guess – learn. Instead of sitting around and thinking, “I’m not sure exactly what the future holds in store, but I think we should go this way” – which to me sounds like a guess – go out and experiment. If you think something is the right move, conduct a small experiment that moves you slightly in that direction, see if it works, build on it and move to the next one and the next one, and so on. The good old days when you could rely on market analysis, then invest all your money in that direction are over: analysis has to be replaced by experimentation and big bets have to be replaced by small ones.
The organisational level
At the organisational level, I always tell leaders that you have to become an agile organisation in this fast-changing world – by which I mean it’s not enough for the boss simply to say, “Okay, we need to change direction”. First of all, people must be willing to change direction; second, your structures and processes must be sufficiently adjustable to allow you to do so. Being agile was always a very useful characteristic of a good organisation, even 100 years ago, but in today’s world, it is much more important than that – it’s no longer a luxury; it’s a requirement. This begs the question: what does agile mean? It means recognising very quickly that things are changing. This is key – leaders have to spot that something is happening out there that they need to respond to, and that they need to do it quickly. You cannot wait two years while things happen around you, then respond. That’s not agile – you’re going to be dead by then. You have to recognise early that change is afoot, then evaluate what to do fast.
Agility needs autonomy
Organisational agility has to be embedded in the DNA of the company. Leaders have to find a way of instilling it in the behaviours of people so that they allow the organisation to be agile through their day-to-day behaviours. By this, I mean that people should behave in certain ways that promote agility at all times. There are many ways to put agility in the DNA of the organisation, but an essential element is to give people autonomy. For example, everyone in the company should have the autonomy to monitor what’s happening around them, assess the situation and decide how to respond because they have the autonomy to do so. If, for example, you’re a multinational headquartered in Europe with offices all over the world and an employee in the Philippines or Philadelphia sees something happening locally, you don’t want them to wait for headquarters to issue an order to respond because, by the time they recognise that something is happening, it may be too late. You want your people on the frontline to be on the lookout for what’s happening in the local market, quickly assess what that implies, decide what to do and implement a plan of action.
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“Instead of making big bets for the future by investing £100 million in a new technology or a new acquisition, leaders should increasingly make a series of smaller bets”
At the individual level, you need people who are willing to adjust behaviours and modify beliefs. We all operate with certain assumptions and many of our beliefs are still valid, but some may be outdated. We may have developed them over the last 25 or 50 years of our lives, so they were based on a society and an external environment that’s totally different from today’s.
How to update what you believe
Since the external environment has changed – and is changing all the time – there’s a high probability that many of the things we have taken for granted until now are no longer valid. How do we navigate this ever changing environment? First of all, people need to recognise that this is the case. This means asking yourself, “How can I assess which of my beliefs are still valid and which ones I need to adjust?” The only way to do this is to compare a belief to the evidence. For example, if as a leader who was brought up in the 1960s, I might believe that I should behave in a completely hierarchical way and tell people what to do, because that’s what successful bosses do. Is that belief still valid? Or is hierarchy not as important now as it was 30 years ago? How are other leaders behaving? If they are behaving in different ways and being successful, it might mean that I have to start managing people in different ways. We all need to question, reconsider and be willing to change beliefs and behaviours at the individual level so that the company is agile at the organisational level.
As a behavioural scientist, I study decision-making, negotiation, influencing and communication, so I approach this question from the perspective of how to influence individuals to effect positive change at the individual and group level. To me, this comes down to scaling behaviours. Patagonia is a great example of how to behave at a corporate level in order to influence people at scale and, equally importantly, to communicate progress. September 2022, 50 years after founding Patagonia, Yvon Chouinard gave it away. Instead of selling the company, which was valued at about $3 billion, or taking it public – both of which he was always disinclined to do for ideological reasons – he and his family transferred ownership to a non-profit organisation to ensure that its $100 million annual profits are used to combat climate change and protect undeveloped land around the world. Today, the climate crisis is the most disruptive threat to business, societies and citizens worldwide. The example of Patagonia takes corporate attempts to protect the environment a quantum step further. The company has got involved at every level of the community, from connecting people online to local events, supporting protesters and helping launch petitions around environmental initiatives. It is initiating action from the grassroots right up to state level.
The point here is that we need to scale up in terms of influence and change. Anne-Marie Bonneau, the Zero-Waste Chef, said, “We don’t need a handful of people doing zero waste perfectly – we need millions of people doing it imperfectly.” We need leaders and others to understand that very small acts, however imperfect in themselves, can have huge consequences when extrapolated to much larger numbers. In the context of sustainability, for example, it’s not that we need 100% of people to recycle 100% of goods 100% of the time: just a 1% change in behaviour can have global impact when scaled up.
How do you bring about wider change in business and society? This relates to the power of habit: people commonly underestimate its exponential capability. The Covid-19 pandemic gave us a great example. In the early days people thought, “It’s fine for me to go out and interact with just one other person”. But, as we know from historic social contagions, pandemic diseases follow an exponential function – that’s why they’re called “pandemic”.
Take this thought experiment. Ask someone, “If you step outside your house and take 30 steps, where will you end up?” People can easily mentally calculate the distance to within one or two metres – they’ll say, “If I leave my house and take 30 steps, I’ll be at number 33 Sussex Place.” Now ask them to repeat the process, but after each step double the length of the next one, so they’re taking successive ‘steps’ of one, then two, then four metres and so on. Now ask them where they will lend up and they will likely say, “I’ll get to the next town or maybe the coast”. In fact, you would circumvent the globe at least twice. People have a really hard time understanding this, so effecting change is about communicating how a multiplier effect can operate to transform apparently insignificant changes into much larger outcomes.
A famous experiment that I’ve found useful in conveying the effect of compounding is the domino effect, which was identified in 1983 by Lorne Whitehead (a physics professor who also advises on entrepreneurship and innovation) who showed how one domino can knock down another double its size. Whitehead’s experiment was later replicated to show that, if each domino in a sequence is made 50% larger, the 23rd domino would be taller than the Eiffel Tower, the 31st would dominate Mount Everest by almost 3,000 feet and domino number 57 would almost reach the moon. Translated into human behaviour, it's a nice visual image that shows how millions of people doing a few things imperfectly can have a huge impact.
"Affecting change is about communicating how a multiplet effect can operate to transform apparently insignificant changes into much larger outcomes"
Staying with climate change, we have these lofty goals whereby we say, “We need to get to x by 2030”. The goals are laudable in themselves: the problem is, they sound unattainable. People fail for lots of different reasons, but one of them is not understanding the psychology of habit formation and how small changes have a compounding effect at the societal level. The more leaders focus on this, the better people will understand it. If you can nudge everyone to do something slightly better, you can achieve a phenomenal impact.
Related to the issue of changing habits is the importance of measuring progress. Companies engage in a lot of signalling of what they want to do, but it’s crucial to measure progress and to communicate how far we have progressed; however little it may seem momentarily. Management guru Peter Drucker said: “What gets measured gets managed” – it quickly became a management truism – but people underestimate how the simple act of measuring and keeping tabs of progress gets imbued in the culture of the organisation. The minute you start measuring something, people start to focus on managing it. If you communicate the small steps you have taken, it highlights to others how far and how quickly things have progressed, even though that progress began with a baby step.
These ideas are taken from the psychology of change, which also shows that transparency is key, because it helps build trust and credibility. That’s why it’s also important to communicate not just progress, but missteps. Often, leaders think that if you reveal your mistakes, it signals a lack of competence and erodes trust. If anything, however, the reverse is true: it helps build trust and credibility. For leaders, it’s about easing the psychological friction that change implies for many people. People resist change for many reasons. If they can be helped to overcome their often-unconscious resistance it can not only help them develop as individuals, but nudge us gently towards attaining big societal goals.
As someone who researches the future of work and the interface between people and organisations, I once wrote a book entitled The Key: How Corporations Succeed by Solving the World’s Toughest Problems, which asked what would happen if companies actively anchored themselves in their communities and supply chains. What if they leveraged their unique capabilities to address the complex global challenges of today, such as climate change and youth unemployment?
So, I approach these issues from a people perspective. That means, in terms of ESG, I look at the ‘S’ – the social part. Historically, corporations have not done this systematically, but they are beginning to adopt a new perspective. For example, Siemens’ chief human resource officer is also the company’s head of sustainability, so organisations are today waking up to the fact that their sustainability goals are synonymous with the people-side of their businesses.
I think every CEO should be thinking about three aspects to this. The first is that the word “sustainability” really describes the future. If I say, “This is sustainable”, it means it’s going to be here in some future sense – it’s not going to die or disappear tomorrow.
From a people perspective, the focus is on the future. There are two parts to this. The first is, how do you help your current employees stay skilled in the future? This is the big reskilling agenda. Many organisations are now realising that they can’t just keep on recruiting new people – they have to develop their current employees and, if they go through some sort of organisational change in the market, they have to reskill people.
The second aspect of the future focus is social mobility. Leaders are currently very focused on diversity – as, of course, they should be – but they need to focus increasingly on social mobility. This means asking how do we build an organisation where the kid in the sink estate a mile down the road can join us when they don’t have that chance now? This is about actually creating sustainability in our working lives and the social environment around us.
The second consideration leaders have to take into account is, who is this for? The answer is: it’s for everyone. Not so long ago, when companies started to think about sustainability, their actions were directed at their employees. What they are realising now, however, is that it’s a lot to do with their entire ecosystems. For example, if you’re a large multinational such as Unilever and you want to reduce your carbon footprint, just doing it with your full-time employees isn’t going to scratch the surface – there are millions of people in your supply chain. With regard to the people-side of sustainability, it’s not just about your employees – it’s about your partners, it’s about your supply chain and it’s about everyone in their orbit.
The third consideration for CEOs is about naming and signalling. For example, we have seen a huge amount of work going into accrediting companies’ carbon-footprint stories in recent years. If a company makes grand claims in this area, there’s a global accreditation process that asks, “Have you actually done it? And, if you haven’t, how can you be trusted?” Historically, the accreditation process has been lacking when it comes to the ‘S’; the social aspect. If you say, “I’m reskilling people” or “I’m promoting social mobility”, how do we know your claim can be trusted? But companies are now realising that their employees and their investors want to know what they’re doing with regard to the ‘S’ of ESG, so they are really moving forward on it. The most obvious area here is gender parity.
In some countries today, including in the UK, it’s a government requirement to reveal the wages of men and women in your company, and similar accreditations are taking place in other areas. In social mobility, for example, there’s now an accreditation- rating organisation, the Social Mobility Foundation, that analyses whether social mobility is taking place in your company. Ultimately this comes down to leadership, because it’s about what leaders decide to signal.
One notable example of this is Mastercard’s big sustainability initiative, which is around social inclusion. The company has established the Mastercard Center for Inclusive Growth to advance “equitable and sustainable economic growth and financial inclusion around the world”. The company’s aim is to get one billion people around the world into the banking system. Of course, this has a direct commercial payoff for Mastercard, because previously unbanked people will borrow money from it, but the aim is translated into social goals that show what the organisation is interested in. And, because the goals have a set of metrics that are publicly available, the company can be held to account in terms of progress towards achieving its social aims.
Costas emphasises that autonomy is a fundamental part of corporate agility, and I think this is so true. But there are also real benefits to autonomy at the individual level because it gives people more control over how they manage their lives – and when people have more autonomy, they can build in the resilience needed to navigate an increasingly uncertain future.
Think at London Business School
John Dore looks at the trends shaping the future of work and shares advice on how leaders can better navigate this hybrid world
By John Dore