Think - AT LONDON BUSINESS SCHOOL

Scaling up or down in the Covid-19 world

Whether hibernator or thriver, Jessica Spungin says companies must match strategy to organisation to shape their response to the pandemic

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In 30 seconds...

  • There are different management approaches for businesses who had to scale down in the pandemic vs those who had to scale up
  • Scaling down typically means protecting the core and not seeking new opportunities for growth; scaling up requires quick assessment of the strategic opportunity and agile realignment of the organisation to capture it
  • The different appropriate responses require a different energy from leaders
  • In multi-unit businesses which may require both approaches to be deployed in different areas, businesses are strongly advised to use separate leadership teams to manage each challenge

I have spent the last 25 years working with organisations large and small, global and local, on matching strategy to organisational design and resource allocation.

I believe organisations step up and deliver the challenge of changes in strategy when people understand the rationale for change and the implications for what they should do differently on an individual and organisational basis, and when difficult decisions are made clearly.

Covid-19 presents just such a strategic challenge. It is an external shock that has had and will continue to have a profound effect on industry structures (good and bad); on demand from both B2B and B2C customers; on the way we work and the resources we have to spare; on the way we think about value; and how to create value during the pandemic and ultimately in a post-pandemic world.

In May 2020, I read a piece on LinkedIn by Tony Danker, CEO of Be the Business and newly appointed Director General of the CBI, on the different strategic positions adopted by business on Covid-19 (based on surveys of UK businesses). Aside from ‘business-as-usual’ (BAU) firms, Danker identified four segments of firms driven not by “firmographic or sectoral” splits, but by “leadership mindset and business strategy”.

The insights are more broadly applicable beyond the pandemic and outside of the UK. Indeed, they made me think about how to match the new strategy and organisation if you are not in the small subset (around 12%) of companies not impacted.

I began to reappraise insights accumulated from years of advising companies on matching strategic objectives to the design of their organisations, looking for patterns, and, in the simplest form, identified two broad groupings that spanned Danker’s four responder camps.

On the one hand, there are those who had to scale down; the hibernators and survivors. On the other hand, there are those who had to scale up; pivoters and thrivers. I believe there are two distinct management approaches that correspond to each camp. Moreover, separating successes from failures, I found almost no exception to the rule: don’t try both at once.

 

Scaling DOWN

Scaling down typically means protecting the core, not seeking new opportunities for growth. When I think about the challenge of scaling down, whether to survive (and conserve cash) or to hibernate some or all of your non-viable business, the following five things appear to matter

 

1 Do it properly

When faced with the reality of making people redundant or closing physical sites, downsizing can feel absolute – and it can be expensive to cut your losses and lose people, assets or sunk costs. Some organisations baulk at the cash cost of redundancies, and if you have a cashflow issue a redundancy programme is expensive.

But, as a senior executive in retail said: “It takes a lot of junior employees to move the needle on your cost base vs one departmental manager and, while the redundancy package may be more expensive in the short term, in the long run you still need people doing the work on the ground, and they’re very often the doers at lower levels rather than the managers in a multi-layered company.”

As the CEO of one media company told me: “It’s actually a rare opportunity to clear out the dead wood and reset the organisation. We’re not an industry where we have brutal performance reviews, so lots of senior people can survive by being mediocre. When we looked to downsize – driven by the lack of client spend – there were a lot of middle-to-senior managers who, frankly, we wouldn’t miss.”

However painful, you must take the difficult decisions, make the cuts and do them definitively.

 

2 Do it fast

We all instinctively know that multiple rounds of downsizing – “death by a thousand cuts” – is likely to be less successful than doing it fast, however brutal it might feel at the time. People tend to have little tolerance for ambiguity. Ambidextrous managers – those who can absorb levels of complexity and paradox in their day-to-day roles – are rare creatures. Most people perform better when they have clear objectives, expectations and timelines. Declaring, “We will downsize and it will be horrible, but it will all be over in 10 weeks” is better than just saying, “We will downsize.”

Research on recessions in South Korea in the 1990s to the credit crunch of 2008 provides evidence that long-drawn-out periods of uncertainty lead to poorer performance and more mental-health issues among employees.

Organisation design consulting specialist Quartz Associates carried out more up-to-date research between 2017 and 2019, and found a similar link between speed and success. Why? Because, as I invariably observe, the first reaction to a restructuring announcement is for pretty much everyone in the organisation to panic until they know if their job is safe – and then to think about the jobs of their friends, boss, colleagues, direct reports. Everybody freezes. Nothing moves. (See Figure 1.)

So, do what you need to as fast as you can, based on facts, and as transparently as possible. And have a baseline of how many people you had before restructuring. Every delay not only gives leaders the opportunity to add more people to the organisation chart (a process I call “hiding people under the sofas”) but also gives leaders the opportunity to buy more sofas under which to hide the bodies.

 

3 Ground it in strategy

In Strategy and Organisational Behaviour classes at London Business School we teach how the organisational environment needs to support the strategy. Basing scaling-down choices on a clear understanding of the strategy and how and why it needs to adapt is an oft-forgotten critical-decision loop.

One of the biggest mistakes companies make is to believe that spreading the pain fairly across the organisation is better than taking a scalpel to the parts not directly related to strategic advantage. It’s not: you need a strong sense of which parts of the business can provide strategic advantage. These need protecting. This is not as easy as it sounds, as a strategic shift will not have road-tested all of these.

Nevertheless, it is critical to understand how you currently create value. Is it your asset management, your people and their relationships, your scaling of technology and IP? Can you explain your price point and pricing differential versus your competitors? If you know why you’re able to drive the revenues at the margins you achieve, you can have sensible conversations about where you can cut and where you should avoid cutting.

Consider a rather extreme counterfactual for a B2B business: fire all your relationship managers! This will immediately and substantially improve the bottom line. Great for in-year performance, but strategically ridiculous beyond that timeframe.

Likewise, outsourcing customer service to a call centre may be expedient in the short term, but if your source of competitive advantage is insights from your customer management, why would you not want to own the people and data directly?

In tough times it’s difficult to ringfence clearly all that you need to protect and organisational leaders will be told, “It can’t be cut, it’s strategic!” But if you know which operating model choices drive value, you can at least think hard about how and where to apply the scalpel, and invite dissenters to use analytical rigour on value creation in their arguments – which can help everyone align on the strategy and the downsizing.

 

4 Recognise and manage survivors’ guilt and orphans

So, you’ve scaled down with speed to the strategic core – what now? First, let’s learn from other restructuring periods, as well as from the post-M&A world where the challenge of integrating companies can be as traumatic as a downsizing. From research and practice, I observe two things, both of which lead to lower across-the-board performance unless managed proactively. Those who survive perform worse after a restructure because: a) they may have ‘survivors’ guilt’ about friends and colleagues who have been let go and this impacts their mental health; and b) they may have lost their ‘sponsors’, networks and mechanisms for getting things done.

After a major M&A deal in the industrial sector, the senior managers of the target organisation all took early retirement or voluntary redundancy. Middle managers were encouraged to stay (part of the reason for the acquisition was to tap into their skills in marketing and functional excellence).

But 12 months after the deal closed most had left anyway: without their mentors and sponsors, they couldn’t navigate the new organisation. They didn’t know how to get things done or whom to influence to get the necessary resources and insight. This is just as true for scaled-down organisations; even more so if you factor in the guilt of surviving a redundancy programme.

Reversing the performance dip requires careful communication, connecting with and embracing those remaining, and a proper (maybe even individualised) stakeholder plan for re-energising those left behind. And I don’t mean broadcast webinars and fancy posters. I mean understanding at a base level who sits in whose network, both before and after the scaling down; who has been most impacted, given their networks; and how to enable people to access the organisation in a new way if their normal operating modes have had to change – which leads me to my final insight on scaling down.

 

5 Reconnect the organisation

Be it scaling down or just reorganising, one of my key mantras to CEOs and HR directors is: “I don’t care how you organise the lines, boxes and accountability of the org chart – the trickier bit is reconnecting things once you’re done.”

Why? Because most organisational design and development work focuses on the organogram and the division of accountability through some kind of RACI analysis (who needs to be responsible, accountable, consulted and informed), but forgets that, although role clarity is important, most organisations work laterally as well as vertically. Getting things done happens as much through a network, defined process, committee or common values and behaviours (culture, for short).

If you take people out or force units together to save on managerial or duplicative cost, it may change the way the organisation made things work prior to scaling down – so you need to introduce monitoring and further intervention to restore connections.

Take the example of the two customer- relationship management units which were combined after a downsizing at an organisation I worked with. They collected the same data with a similar but not identical remit; one working under marketing, the other product development. It made sense to join the two teams together under a single manager and eliminate the overlap in running customer data separately in two places for separate teams. But first there was an argument about where the new unit would sit (which boss would ‘win’).  Then, following their merging, the team that felt they had ‘lost’ needed to be connected back to their original home in a different way, without being ‘owned’ by the other.

I advise clients to have an explicit ‘debugging’ step after a reorganisation, consciously going back to check on the unintended consequences of the new organisation design. This is what scaled-down organisations should be thinking about doing in the next three to six months. That means a formal check-up not only on orphan employees, but also on how the organisation is working under a reduced structure and what mechanisms might need introducing to ‘tweak’ the new, leaner version of the organisation to ensure the lateral operations work well again.

These are tricky times. Scaling down is an opportunity to be more agile, healthy and able to respond to the next uncertain event. It’s about survival or hibernation until things pick up – just make sure to check on the strategic, mental-health and horizontal consequences of what you have done.

 

Scaling UP

On the other hand, there’s nothing like a crisis to bring out the opportunities in business. Struggles push us to be creative. In the Be the Business survey, companies striving to survive without downsizing tried to reallocate resources or pivot to new business opportunities to stay afloat. The concept of pivoting is very common among startups. The idea is that you use the knowledge and resources gained from your first ‘try’ to realign to a better business model by changing the who, what or how of that originally intended.

Some 21% of companies felt the need and found the strength to pivot, and for 9% the pandemic was the opportunity they needed to grow. That means, for about 30% of companies, it was about capturing available growth and responding fast.

This stretched capabilities and pre-pandemic operating models to their limits. Medical-supply companies of PPE and other products; online retailers or the online retail arm of existing retailers; distributors and delivery companies; and digital connection software companies such as Zoom are the companies whose fortunes were transformed during the spread of the pandemic and the shift in consumer and business behaviour.

There are nuances between thriving and pivoting. In many ways, thriving is business-as-usual – except that, when opportunity arises, you need to scale up the resources you have to hand as fast as you can. Pivoting, on the other hand, may require you to acquire complementary resources, or to redeploy existing resources to a new market space and draw on your most creative skills to realign things against an unforeseen opportunity. But both are sprints that have more in common than what sets them apart. They require quick assessment of the strategic opportunity and then agile (re)alignment of the organisation to capture it.

Basic agility will help you manage this speeding rollercoaster. Having the ability to adapt and the right mindset for course correction as you go are important, but in practice giving some thought to the challenge of managing fast-paced scale-ups can also help. To this end I suggest three simple checks:

 

1 Know the pinch points

Like the scaling-down challenge, scaling up isn’t as simple as first glance might suggest. The link between strategy and organisation is perhaps even more frustrating in this environment.

Downsizing focuses on ringfencing well-established sources of competitive advantage. The biggest issue in scaling up is managing through a series of ‘pinch points’ or scarce resources – which may have been latent and may need reconfiguring, building or acquiring – to enable the path to growth.

Companies should be asking some or all of the following questions: What are the critical constraints to our current business model? Is our growth scalable? Is this linear (highly unlikely in manufacturing environments; more common in tech-based plays), or are there step changes in capacity we need to predict and plan for as we grow? If we are pivoting, which current resources can be redeployed most effectively and fast enough to take advantage of the opportunity?

In talking to companies who pivoted, such as big retailers and restaurant chains, they said, “We knew the existing business was inevitably going to struggle, but we could see a way to build a proposition, given what we had to hand. The challenge was how fast we could redeploy the existing resources.”

For example, in London we saw complete stockouts of flour in supermarkets during the early months of the pandemic, yet there was sufficient flour available in the food chain – it was sitting in catering-sized bags with wholesale providers of flour to bakers and cafes. The limiting factors were a combination of packaging in consumer sizing, and supermarket supply chain and shelf allocations. The pivot was identifying how to get 5kg bags of flour to the consumer. Some local cafes worked out how to sell through the ‘bring your own container’ model, others sold catering-sized bags, and within about a month catering suppliers pivoted to offer doorstep deliveries to consumers, too.

Michael Korn, Chief Innovation Officer and founder of medical-screen company Kwikscreen, had to deal with an explosion in growth in the first three months of the pandemic as his biosecure hospital screen became a real solution in many healthcare settings. He was a thriver.

Reflecting on the initial challenges he faced, he said, “At the start of the pandemic, we saw demand more than triple within a three-month period … and then it was a case of whack-a-mole. Growth becomes a series of bottlenecks you need to resolve. First, it’s production capacity, then it’s materials, then it’s cash and then it’s having enough people able to manage and sell to meet the demand and capture the opportunity.”

Talking to Michael and others, you realise that some pinch points are predictable and others give you no advance notice. A tech-based food retailer such as Ocado may have seen 40% year-on-year growth since March 2020 and know in advance that one key pinch point is van capacity (hence banning bulky bottled water at the height of lockdown). But it may not know that another pinch point is the volume of traffic possible on the mobile app, leading to web-based ordering only and online queues.

"The more you can experiment with strategic opportunities using variable rather than fixed costs, the better"

2 Buy, borrow, build, leverage – and when to do it

Once you know your pinch points, you have the challenge of scaling them up with the right cadence. You need to think of this in terms of what you need and when, as well as managing the challenge of lead/lag times in a proactive way.

For the pivoters, we know that there were many who, during the pandemic, reallocated resources away from businesses which were stalled/hibernating towards anything they could adapt or continue to operate. Two examples of this in operation: reallocation of employees from John Lewis retail (closed) to Waitrose (increased demand); and Sofar Sounds using skills in event management to create live online events with the ability to donate to artists as a means of payment.

In the recent Annual CMO Survey by the Leadership Institute at LBS, 56% of CMOs said they reallocated marketing spend to expanding into new offerings. For example, Pret-A-Manger accessed new sales channels by partnering with Deliveroo and having dark kitchens, and by selling frozen Pret croissants through Tesco.

Many things can be bought in, but almost everything has a lead time, so almost nothing can be resolved instantaneously.

Some things can be borrowed until you can backfill if you decide they are of strategic importance. Cash can be borrowed if you are growing so fast you need to pre-order supplies and are waiting on invoices paid; people can be hired temporarily or skilled people body-shopped from consulting or interim recruiting agencies until you can grow your own manufacturing or sales teams; even premises can be hired temporarily, as needed.

In fact, the more you can experiment with strategic opportunities using variable rather than fixed costs, the better. This allows you to adapt more easily as things unfold.

Of course, some things can’t ever be bought in or borrowed. It takes time to build a reputation or a network of trusted relationships. If you’re Zoom and your business and installed base balloons, it takes time to send out the version which has higher levels of security. Think of the Zoom-bombing episodes which happened in the early months of the pandemic. Some things need to be built in-house and there is no short cut.

Pret’s shops originally closed in March 2020. The croissants made it to Tesco freezers a year later. Pret CEO Pano Christou says some developments were accelerated due to the pandemic (and maybe the supermarket channel was already in the works before the pandemic) but it still took 12 months to find an alternative outlet and build the appropriate sales and distribution channels – and it’s hard to imagine how you would borrow a route to market.

Dierickx and Cool’s 30-year-old article on the nature of strategic assets holds true here: resources and capabilities such as presence and footprint that are important to strategy often take time to build. Indeed, that’s precisely why they’re a source of strategic advantage. The concept of ‘death by growth’ is real and companies who don’t manage the pace of responding to the ‘whack-a-mole’ challenge can run out of cash, capacity, quality control or credibility purely by growing at a pace beyond their capacity to absorb the growth.

 

3 Go with the grain

Finally, focus on your strengths. Every organisation has strengths as well as weaknesses; every opportunity for growth is a threat to the status quo for someone else.

“Go with the grain of the organisation” is a mantra I often quote to CEOs I work with. Strong organisations that support great strategies are founded on something that works. That means being able to identify the ways of working that are helping and working to your advantage; doubling down on them can help you ride the wave of opportunity without getting distracted.

This is also a reflection of your mindset. Research on companies who successfully respond to disruptive innovators shows that those who treat it as a threat and an opportunity do better than those who treat it as a threat alone. “Go with the grain” implies you know the strengths implicit in your strategic choices and how to build on them.

Strategic choices also create narrowing of opportunities and reduce your ability to be agile – but here’s the paradox. In response to a disruption such as Covid-19, you need your organisation to be agile and focused.

Michael Korn said his main learning about the peak demand spike Kwikscreen faced last year was, “focus on what you do well and forget the rest. You need to double down on the things that are working and not get distracted by too many opportunities and nuances.”

The risk of distraction and lack of focus when in thrive or pivot mode is a huge risk to delivery and actual strategy execution. So, build on the strengths that matter and don’t get distracted by other opportunities and business models until the core has stability.

 

A final word

In contrast to scaling down, scaling up with speed requires a different approach altogether. It needs a different energy and requires leaders to behave very differently from scaling up.

The real challenge is in trying to do both simultaneously, which can be the case in multi-unit businesses. Here, I strongly advise using separate leadership teams to manage each challenge.

A CEO who tried to do both told me she had nightmares in which she was trying to rub her head clockwise and her stomach anticlockwise… all while walking a tightrope in the perfect storm of the pandemic and Brexit. It’s a fitting analogy. But at least she was socially distanced!

Jessica Spungin is Adjunct Professor of Strategy and Entrepreneurship at London Business School and David and Molly Pyott Foundation Director, The Hive