11 Jun 10 Recession, change and the heroic leader

John Kay (Beware the cult of the heroic chief executive FT, June 9) provides us with an excellent summary of the failings of the dominant, heroic leader.

My research, conducted after the 1990s recession, shows that a special type of leadership is required if organisations are going to successfully pick their way through a changed post-recession business landscape.  Notably:

• Leaders must be strong enough to sweep away the blockers of change – those that believe “that the old ways will win through”.
• Leaders must also be prepared to admit that even they do not have enough knowledge of the new landscape to craft a new competitive strategy.
• Experimentation and learning.  Leaders need to focus their organisations on a period of experimentation and learning to fill this knowledge vacuum.
• Short-termist stakeholders – leaders must be strong enough too to resist the demands of those with only a short-term agenda.  Giving the organisation a breathing space to learn is an essential task.

Barking orders, vision statements and grand plans from the top, based on a dated and flawed view of the new world will have disastrous consequences.

My response to the above article, in the form of a letter to the FT, is here.

Tags: chief executive, competitive strategy, leadership, recession, vision statements

03 Mar 10 Toyota and the Organizational Life-Cycle

The Concept
Hearing of the Toyota debacle reminded me of the organizational life-cycle, an often over-looked tool in the management armoury.

The reports of Toyota’s problems[1], [2] indicate that organizations do have problems when they grow and evolve. But are these problems predictable? Can research help us?

The answer to these questions is “yes”, in the form of a concept called the organizational life-cycle.

I am surprised that the organizational life-cycle concept is not more widely used. In my experience, it can act as an effective tool to forewarn managers of current and impending problems inside their organizations.

The concept that organizations, like human beings, progress through a predictable life-cycle, has been put forward by a range of academic researchers including Danny Miller[3] and Larry Greiner[4]. The only difference between organizations and human beings is that the former, if managed properly, do not have to die! It is however, a pity about the latter. We will have a wait for a breakthrough in the field of genetic research. But back to organizations.

The phases of the organizational life-cycle, as it is generally represented, are shown in Illustration 1 below.

The value of the tool is that each stage of the life-cycle presents managers and their organizations, with particular problems. Knowing which stage your organization is in, and what may be in store within the next life-cycle stage, can therefore be most helpful.

A Diagnostic Tool
The problems presented by each life-cycle stage (based upon my own experience and research) are as follows:

Stage #1: Birth.
Innovation flourishes but the potential causes of a premature organizational death are:

(I) Poor marketing. It is one thing developing a new, potentially winning product. A completely different skill set is needed to bring it successfully to market. Frequently new start-ups are great at innovation, but poor at marketing.

(II) Cash flow. The old chestnut. New ventures are strongly cash-flow negative. All too frequently managers are over-optimistic when it comes to the timing of sales and therefore inwards cash-flows.

(III) Leadership – can the innovator – now usually the CEO – lead as well as innovate?

Stage #2: Growth.
The focus is on developing market share and gaining a substantial foothold before any rival new entrants do. But real issues are:

(a) Formalizing systems, processes and roles.
(b) Maintaining service levels as the organization grows rapidly.
(b) Quality management.
(c) Delegation.

The challenge is to move from a fast moving small business to one that can rapidly absorb market share.

But if not tackled, these above challenges can lead to “the crisis of control”.

Stage #3: Maturity.
Market share has been built. Priorities change to maintaining stability and maximising returns before either (i) demand ebbs away or (ii) new entrants force prices and returns down. These pressures tend to encourage an inwards, as opposed to an outwards focus. Innovation moves away from major offering enhancements to cost control and process innovation.

The dangers are:

(a) Losing contact with developments in the real outside world, slowness of response to major changes.
(b) Increasing distance between top-level management and customer-facing staff.
(c) Over-reliance upon “the strategies that worked before”.

Stage #4: Decline.
Typically, the organization retreats to defend the market sector where it originally built its fortunes. It “returns to the womb”. Revenues fall. The organization reacts to changes in the outside world as opposed to predicting them.

The organization follows established industry “strategy recipes”. Anything more than incremental changes to products and processes is frowned upon.

Leaders see the outside world still as it was in the organization’s heyday.

When an organization is this position there are only two routes that can be followed:

• Revival. A massive change effort, usually accompanied by a wholesale change in top management. Or

• Death: Failure to change brings the obvious consequences.

A Lesson
If there is one lesson to be learnt it is through answering the question:

“When is the best time to fundamentally challenge the assumptions that drive our business?”

Waiting until the organization is in the decline phase is, in reality, just too late. The scale of change required is difficult to comprehend. And, at best, the chances of success are 50:50.

It is far better to challenge the business’s key underlying assumptions at an earlier point. Challenging assumptions and beliefs is far better done in the first stages of Maturity. Leaving it any later means that values, beliefs, attitudes and perceptions become hard-wired into the organization’s fabric.

References
[1] Simon, B and Kirchgaessner, S Toyota ‘lost way’ in rapid expansion, Financial Times, February 24, 2010.
[2] Simon, B LaHood voices concerns over Toyota culture, Financial Times, February 24, 2010.
[3] D. Miller and P. Friesen, “A longitudinal study of the corporate life cycle,” Management Science, vol. 30, 1984, pp. 1164-1183.
[4] L. Grenier, “Evolution and Evolution as Organizations Grow,” Harvard Business Review, 1972.

Tags: life cycle, organizational life cycle

05 Aug 09 Creative Destruction: A special type of change management

The upside of a recession is that it brings with it a wave of creative destruction, generating new opportunities.  The sting in the tail however, is that this wave will also threaten established business strategies, making some obsolete.

Many businesses are in the vice-like grip of the recession – on one side there is the need to to stem losses – on the other is an awareness that past strategies and ways of doing business might not work in the future.  In this situation it can be difficult to decide what to do next.

My research from the last recession reveals that a special type of change management is needed – to read more about change and creative destructive just click here to go to my executive briefing Recession and Creative Destruction: Guidelines for change management.

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Tags: Change Management, creative destruction, recession, turnaround management

31 Jul 09 Recession: Understanding the business and psychological impact

Overview: Recession – Understanding the business and psychological impact

This briefing provides the results of a web-based survey conducted on this site between February and May 2009 to determine the real costs and impact of the recession – especially from the perspective of the psychological impact upon organizations’ human resources.

The key findings are:

• Respondents largely discount the possibility of a rapid economic recovery.

• Rather than just being an economic recession, severe misgivings were expressed regarding the values and culture that have developed in both the business world and society in general. These cultural attributes are seen as the real driving cause behind the economic downturn. We therefore face not just an economic recession, but a cultural recession.

• The psychological impact at the human level is worryingly high. Over 80% of respondents reported seeing multiple symptoms of stress amongst colleagues and over 70% self-reported experiencing multiple symptoms of stress.

In the light of these findings a range of coping and response actions for managers is introduced at the end of this briefing.

Introduction: Survey structure and objectives
When this survey was constructed, we were particularly interested to discover views of:

(a) How long the recession would last.
(b) What was its real cause.
(c) The perceived long-term business impact.

But, most importantly, we wanted to ascertain the human cost, not in financial terms, but in terms of the stress and anxiety that respondents saw around them and experienced on a day to day basis.

The survey was therefore structured to focus on these four key issues.

This briefing firstly analyses findings in respect of the economic dimensions – views on how long the recession could last and how deeply businesses’ products and services could be affected.

We then proceed to look at the perceived real cause of the recession – who or what really is to blame?

The penultimate section is arguably the most important and examines the human psychological costs.

Finally, pointers for the role of corporate leaders and managers in a recession are provided in the last section.

Recession: The economic impact
Two broad questions concerned us:

1. How long did respondents think that the recession would last?

2. What impact would the recession have on their business – in terms of what they offered to their customers?

1. How long did respondents think that the recession would last?
We firstly asked respondents to estimate the duration of the recession or “downturn”* in respect of the country in which they were based. In this study, 91.8% of respondents were located in the UK. Therefore, we report here views in respect of the outlook for the UK only as shown below in Exhibit 1:

* Note that “the downturn” was defined as “the period embracing either negative or sub 1% GDP growth”.

Only just over 8% of respondents thought that we faced a quick “V” shaped recovery.  Most saw a longer period of effectively, economic stagnation.

Respondents thought that the UK would fare comparatively well when contrasted with the global economy.  Respondents’ views on the global outlook are shown in Exhibit 2:

Here, respondents expect a lingering recovery globally.

In terms of returning to normal levels of profitability after the downturn ends, respondents were divided broadly 50/50 with just under 50% thinking that recovery of profitability would just take a year – of the remainder just over 20% were looking at three or more years to recover profitability:

2. What impact would the recession have on their business – in terms of what they offered to their customers?

Just under 10% thought that there would be no impact on offerings – the majority acknowledging that some adjustments would have to be made.  13.9% however felt that deeper changes would have to be considered in terms of the products and services that their businesses offered:

Recession: The real causes

Next, we wanted to understand what, in respondents’ minds, were the real causes of the downturn.  We gave respondents a range of suggested causes to choose from plus a free format option.  Respondents could choose more than one cause and the result is shown in Exhibit 5:

The results surprised us and point to more deep-rooted and widespread problems than we first envisaged. The survey results indicate that far from facing a conventional economic recession, society and business in general are both facing a cultural recession.

The findings point to the values that are perceived now to be a deeply ingrained part of government, the business world and even social behaviour as being the real instigators of the economic meltdown. In terms of the underlying cause of the downturn, over 75% of respondents pointed towards a “short-term profit focused culture”, but an analysis of supporting comments from respondents showed us that cultural shortcomings were seen to exist within most, if not all, elements of our society.

Recession:  The human cost

The last section of the survey introduced the need to look beyond the financial cost that the downturn is imposing on business and society. In this section we try to look at the human cost – particularly in terms of anxiety and stress.

There were two perspectives that we wanted to examine. The first was the degree to which respondents were seeing symptoms of stress amongst their colleagues. The second asked if respondents themselves felt under pressure.

Exhibit 6 looks at the question of stress amongst respondents’ colleagues:

If any of these symptoms were experienced in isolation they may cause mild to moderate concern, but when experienced in combination they can make for worrying reading. For example, over 80% of respondents noted multiple symptoms of workplace stress amongst their colleagues. Only 2.5% of respondents did not see any of these symptoms amongst their colleagues.

We asked respondents how well equipped they felt do deal with these issues. Encouragingly, just over 31% felt that they could handle this challenge on their own. A further 48% thought they could help with access to some specialist support. Finally, just over 7% thought that they either could not help or would need access to significant levels of specialist support.

In Exhibit 7 below we can see that a similar picture emerges when looking at respondents’ personal reaction to the downturn:

These results show respondents’ own, personal reactions, to the downturn.

Again the results give cause for concern – 70% noted multiple symptoms ranging from “lack of focus” through to “depression”. A small number, only just over 8%, had not experienced any symptoms.

Taking Action:  More than waiting for green shoots

Obviously, more needs to be done than waiting for “green shoots”.

Leaders must now consider how they are going to face the strategic, cultural and the psychological implications of this downturn.

Whilst many of the issues being observed and experienced by people in the workplace stem from pressures both personal and professional, business leaders must play a critical role in supporting their employees through this difficult time.

This research points to at least three inter-linked key tasks for business leaders.

The first is the management of businesses through a potentially protracted period of either negative or negligible economic growth that we refer to as “the downturn” in this report.

Businesses now need to strongly consider the competitive strategy that they need to operate in such an environment.

The second task is to respond to the major cultural concerns that this exploratory study has surfaced. As we have already mentioned, there are opportunities for leaders to ensure that their businesses’ culture and values are clearly separated from “the root causes” described in this report.

The final task is of course helping employees to deal with the psychological implications of the recession and the uncertainty it brings. Without attention to this dimension, there could be considerable costs both in terms of individual anxiety and loss of business efficiency.

There are at least two broad courses of action for business leaders to consider at this stage. The first concerns the issue of business strategy itself. The second focuses upon the human impact of the recession.

Looking firstly at business strategy, there is great uncertainty regarding the recovery path that the advanced economies will follow. The newspapers are full of reports of “U”, “L” and “W” shaped outlooks. Additionally, it is held that recessions are times of change and “creative destruction” – new opportunities will eventually rise from the ashes.

From a strategy perspective there are two actions that businesses can undertake to help manage this period of transition and ambiguity.

Firstly, businesses should consider the impact of two alternative scenarios – the first a relatively rapid “U” shaped recovery, the second an extended “L” shaped outlook. Both will require different responses. Having a thought out plan for each now will help businesses respond rapidly.

Secondly, new opportunities will appear as we move out of recession. Some of the respondents have echoed this view in their responses to this survey. It is important now to set up projects to sense how customers’ needs are changing so that this new knowledge can be brought back inside the organisation. This early capture of knowledge and experiences will form a vital foundation for the crafting of new strategies going forward.

Both these exercises provide an opportunity for staff engagement and act to demonstrate that the organisation is constructively tackling the challenges of recession.

The second broad course of action focuses more directly on the human costs revealed in this survey.

There is now obviously the need for managers to actively look for the symptoms of anxiety and stress. Once symptoms are identified, if they are tackled appropriately it can have a direct and positive impact on issues such as employee mental health, productivity, staff recruitment, retention and customer relations.

Managers who have been coached in how to identify the signs can often tackle it at source. Research consistently demonstrates that managers with an ‘open door’ policy and those who ‘walk the floor’ and get to know their team will have lower instances of stress and related issues in their teams. Managers need to be aware of their role in managing and influencing their teams. Coaching managers to understand the significance of stress and its impact and how to create a ‘culture of communication’ is critical.

In conclusion, in the current economic climate, stress and related symptoms are on the increase. It is vital for the health of both the individual and the organization that managers are trained to be aware of the signs and are supported to act swiftly and appropriately to reduce the triggers to the stress that they have control over.

If you would like to talk about the actions that businesses can take to mitigate the impact of the downturn please do contact me.

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Tags: economic downturn, economic recession, human resources, psychological impact, symptoms of stress

14 May 09 Time to test some axioms

Download pdf

Or, how to avoid the blindfolded bus driver’s syndrome.

Overview
This briefing takes the position that the current crisis is at least partially due to the acceptance of certain assumptions or rules about the way that the world works.  The problem is that these assumptions may have passed into common usage as they sound plausible.  However, they have not been subject to rigorous testing and may be be misleading in a future, post recession, world.

An approach to start this process of testing is introduced here.

Avoiding the Blindfolded Bus Driver’s Syndrome
Before going any further, I should warn you that this post is rather longer than normal, but there is a pdf version to download for you to read at your leisure. This post also includes a small, but I think informative, exercise that you might like to try with your business colleagues to ensure that you avoid the blindfolded bus driver syndrome.

On the 7th April Nassim Taleb (the author of the Black Swan) published a range of pointers in the Financial Times[1] in an endeavour to help the world avoid another meltdown.

The problem is that I feel he missed one out – the need to bust some paradigms – or stress test some axioms.

But possibly it’s unfair to say he missed something out as (a) he was writing in the context of preventing another financial or banking sector meltdown – I’m going to be focusing on the broader issues of strategic meltdowns here – and (2) he did mention “blindfolded bus drivers”.  By blindfolded bus drivers, Taleb means the “experts” who were responsible for getting the financial sector into its current state.

I am going to borrow this term and use it in a slightly different way to refer to a culture in business and arguably in broader society whereby our actions are driven by a commonly and almost universally accepted series of “new rules” or “axioms”.

I will argue that these “new rules” that I will now call “doubtful axioms” are applied widely to guide behaviour in business.

The problem is that the doubtful axioms may lack any real foundation.  I would propose that they have received common acceptance as:

(a) They sound plausible.

(b) The doubtful axioms reflect our desired outcomes.

(c) The doubtful axioms are widely applied. Group behaviour is naturally attractive.   It makes one feel secure to be “one of the crowd” using the same rules or assumptions.

(d) In some cases they reflect an all too comfortable world.

(e) They, that is the doubtful axioms, appear to have been “tested”.

But, dealing with the last point, the “tests”, if they were applied, were conducted over a relatively short period of time. A period when, in hindsight, the world was going through an uncharacteristically stable period. Too short and too unrepresentative a period to now bet the company’s future on.

There is an emerging proposition that the doubtful axioms are largely responsible for the mess that we’re in. Doubtful axiom followers apparently range from the London G20 protesters[2] to the banks themselves[3]. The latter reference holds that, in effect, sophisticated models designed to guide decisions actually were based upon a false reality[4].

A false reality that encouraged false confidence.

Let us take one doubtful axiom as an example. This is the assumption that globalization will lead to the benefit of all – those in both the emerging and developed economies alike. It sounds sensible and reflects the desires of any decent thinking person. But is globalization really feasible? Some think that it may not be[5], [6].

The true reality may have been that we have created a vast inter-connected world that is far far too complex and irrational to either predict or to manage. Which is probably why no one knows how the global economy will react as new emergency measures, including quantitative easing, are applied.

It may also be a world too that is all too easy to disrupt.

Another example of a doubtful axiom is decoupling.

About 12 months ago many held that the emerging economies could stand on their own two feet. If the established economies of the developed world went into recession, the emerging economies would not be overly troubled. In other words, the emerging economies were decoupled from the developed economies. This “rule” now looks as if it will be consigned to the bin[7], [8], [9].

We don’t know which of the many doubtful axioms that underpin our business plans hold water and which don’t.

If you were to talk to academics (like me) who study why organizations fail they would tell you that success is potentially a fatal enemy for an organization as it can breed the development of an “enacted world”. The term “enacted world” means an artificial world that does not reflect reality but the shape of the world that we would like to see. Because we were successful we like to protect and return to the formula or strategy, that created this success. In time this affects the way that we choose to see the outside world. Over time therefore we could end up looking at a false reality. I have dealt with this issue in an earlier briefing – Success – Your Biggest Problem? – it is a very common trap – one that without certain safeguards we are all capable of becoming ensnared in.

The Priority
The immediate priority appears therefore to be to check that we are not exposed to “doubtful axioms”.

I will suggest that you question the broad assumptions that you may have used in strategy making over the last few years. Some may be “true rules” others may prove to be either “doubtful axioms” or axioms that are too fragile to bet the company’s future on.

An exercise
So how do we check our assumptions for exposure to “false rules”?

Try running through this exercise with your team and business colleagues:

Activity Step 1: Rule Identification
Individually, as preparation work, list out all the assumptions made when preparing your business plan. Remember that such assumptions can be both both written and “subliminal”. By subliminal I mean “rules” that we and our colleagues just take for granted. A good example is the view that globalization is unstoppable.

I looked at a good few business plans that were prepared around 6-12 months before the meltdown of 2008 and here are examples of common “rules” or axioms:

(a) “Globalization is good for all – and is an unstoppable force.”
(b) “What gets measured gets done”.
(c) “If we have an economic slowdown – it will be short – a year or less.”
(d) “Our primary quest is to maximize shareholder value”.
(e) “The boom bust cycle is dead.”
(f) “All the BRICs will win through.”
(g) “China will overtake the US economically but US-led definitions of capitalism will prevail.”
(h) “Service based economies are a sustainable platform for developed economies”.

I’m sure that you will find more.

Activity Step 2: Axiom Testing
Readers will now be familiar with my set of four scenarios from 2009 – Signposts to Where? reproduced below:

Let’s now take two of the more challenging scenarios, Capitalism II and The Jigsaw.

In Capitalism II, the following extreme picture could unfold:

• The global recession continues into early 2010.

• Further toxic debt and derivative based losses are largely avoided.

• The US government bails out GM, but the recovery plan heralds a slow dwindling death for western car makers.

• The US and most EU economies emerge from recession in early 2010 but a period of low economic growth – between 1% to 1.5% of GDP – follows for these economies over the next 2 years. The world enters a period of low, but stable growth. The UK in particular faces difficulties. Employment in financial services slowly declines as a result of a mix of continued offshoring and contraction in investment banking.

• The G20 establishes itself as a powerful body for economic reform, but the roles of the US and the UK in particular diminish. France and Germany initially become the architects of regulation in the financial services sector, but India and China steer the long-term shape of capitalism.

• The “57 state” initiative[10] is successful and heralds a period of conciliation in the Middle East and Asia.

• In summary, a new, arguably more mature and aligned world emerges. The ravages of protectionism and conflict are largely avoided. The migration of economic and political influence shifts more quickly that previously envisaged from west to east. Capitalism is redefined over a 10 – 15 year period.

The Jigsaw is more demanding and, illustratively, could unfold as follows:

• Further write-downs appear in the banking sector. Total write-downs exceed the $4.7trn estimated by the IMF in April 2009[11].

• Economic contraction in the developed countries continues through 2010. A slow recovery period emerges with GDP growth not exceeding 1.5% over a 4 year period.

• Eastern Europe suffers. Political instability ensues. One or more of the so called PIIGS (Portugal, Ireland, Italy, Greece, Spain) defaults on  sovereign debt.

• The US government bails out GM, but the recovery plan heralds a progressive death for western car makers. Further employment cut backs are made beyond the scale estimated in the current GM recovery plan.

• Despite their best efforts, the NATO intervention reaches stalemate in Afghanistan. Politicians lack the stomach (and the funding and public support) for the continuance of this venture. A withdrawal is negotiated. The Afghan government falls and instability progresses through Afghanistan, Pakistan and into India and Southern Russia.

• US attempts to “reset” relationships with Russia falter.

• The world starts to divide. Globalization dies. History shows in this scenario that a globally inter-connected world is just too unstable and too vulnerable to survive in the long-term.

Both these scenarios challenge established views.

But they can help you to “stress test” the axioms that guide your business.

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References
[1] N. Taleb, “Ten principles for a Black Swan-proof world,” FT.com, Apr. 2009.
[2] M. Livermore, “The age of stupid or the age of gullible?,” Adam Smith Institute, Apr. 2009.
[3] D. Brooks, “Greed and Stupidity,” The New York Times, Apr. 2009.
[4] J. Muller, “Our Epistemological Depression,” The American, Jan. 2009.
[5] R. Florida, “The World is Spiky,” The Atlantic Monthly, Oct. 2005, pp. 48-51.
[6] J. Bivens, “Everybody wins, except for most of us,” Economic Policy Institute, Nov. 2008.
[7] J. Bajoria, “Financial Crisis May Worsen Poverty in China, India – Council on Foreign Relations,” Council on Foreign Relations, Nov. 2008.
[8] S. Johnson, “Testimony: The Economic Outlook and Options for Stimulus,” Peterson Institute, Nov. 2008.
[9] M. Wolf, “The world wakes from the wish-dream of decoupling,” FT.com, Oct. 2008.
[10] R. Beeston and M. Binyon, “King’s Ultimatum: peace now or it’s war next year,” The Times, May. 2009, p. 1.
[11] “IMF Global Financial Stability Report — Responding to the Financial Crisis and Measuring Systemic Risks,” International Monetary Fund, Apr. 2009.

Tags: capitalism, globalisation, meltdown, recession, stress test

23 Apr 09 Overcoming change barriers

Summary

The latest Executive Briefing on my main website focuses upon the question of how to predict where change barriers might be in an organization, particularly at the level of the individual.

From my personal experience, understanding the power bases that an individual possess within an organization is key to this process of discovery.  You can the full article here.

Tags: barriers to change, Change Management, organizational change