How do companies navigate the current economic maelstrom? Part 1

The past two years have proven that companies need to consider taking whatever lesson books they have about weathering an economic crisis and throwing them out of the window. It is clear that the economic crisis that many companies are facing is threatening to turn into an economic maelstrom.

The Oxford Learners Dictionaries website points out that the literary definition of a maelstrom is a  a situation full of strong emotions or confusing events, that is hard to control and makes you feel frightened. In addition to the Covid-19 Pandemic – which forced companies to rethink their operating models – they have been forced to deal with digitisation and a European conflict that is showing no signs of ending.

So how do we address this? If we cannot apply previous learnings, what steps can we take to move forward? I recently read an opinion piece by McKinsey which looks at the situation from a European perspective and what interventions can be taken.

A defining leadership moment

The article points out that no crisis is ever the same as the previous one; neither can it be managed in the same way. Likewise, no industry is affected the same way in different crises. With the exception of pharma, no sector showed positive returns throughout the pandemic and the more recent period of geopolitical turmoil. Moreover, in the current confluence of crises the vast majority of companies have produced negative returns.

Executives have reacted to each disruption separately but with all-consuming responses; they’re fighting fires. But before they can recover from one, the next crisis is at the door. This approach is not sustainable in a context of continuous disruptions. Leaders are now discussing resilience as the essential condition. How can organizations arrive at a resilient stance, alert to what is over the horizon and ready to withstand shocks and accelerate into the next reality?

The article adds that Some think of resilience as the ability to recover quickly, but it is more than that. Resilience is the ability to deal with adversity and shocks and to continuously adapt and accelerate for growth. Consequently, truly resilient organizations bounce back better than before and go on to thrive in a hostile environment. They play defense well, and they also go on offense.

This is indeed a defining leadership moment. The last remotely comparable moment was the energy crisis of the early 1970s, an event that no CEO of today experienced as a leader. Here are a few of the practices that we’ve seen leading executives use recently:

• Don’t follow the old rules. Setting up a crisis task force, for example, the go-to move in past years, is a waste of time; it will be outmoded before it is up and running. Leaders need to find a more flexible and consequently durable stance, engaging the whole organization by embedding a crisis-resistant DNA over time;
• Prepare for the recession, but at the same time, prepare to exit it. Recessions may be shallow and brief; companies can accelerate through the downturn. This is essential: resilient organizations open an early lead, however small, in comparison with peers. This lead can be significantly widened during the following recovery and growth period. The early advantage can help companies succeed in the long run;
• Use scenarios rather than forecasting. Forecasting has failed to adequately capture many key events of recent decades, including slowing globalization, the COVID-19 pandemic, the supply chain disruption, and the return of inflation. Learn to plan with scenarios and triggers, regularly revisiting and adjusting them;
• Develop a resilience agenda that addresses burning short-term issues (for example, financial flows, supply chain disruptions) as well as longer-term challenges (for example, geopolitical shifts or the speed of organizational adaptations). Ensure that resilience is measured, so progress can be tracked and return on resilience investments can be maximized; and
• Focus on resilient growth by reviewing your competitive position and finding strategic opportunities in the current environment (such as acquisitions or new business-building ideas).

Exemplary moves

The article points out that leading companies are already making resilience a reality, defending their franchise while also accelerating growth through the disrupted environment.

Here’s what they’ve done in the recent past:

• Restructuring the balance sheet. An automotive supplier wanted to achieve a particular credit rating, a target that required an increase in the amount of debt it could service under stress. Presenting the new capital structure to investors, equity analysts, and the rating agencies, the company was able to make an additional €3 billion in investable assets available to implement a five-year strategy;
• Reconfiguring the supply chain. To achieve operational resilience, a global electronics manufacturer with a global production footprint (more than ten plants) and a large multitier supply base assessed the relative vulnerability of 5,000 unique supplier and plant combinations. The company identified around 100 high-risk suppliers and then discovered that 25% of its spending was concentrated in this segment. By reconfiguring the supplier network, the company reduced the higher-risk spending by more than 40%;
• Decarbonizing core assets. A global mining company with dozens of mines worldwide sought to embed ESG along its value chain into the core business. The company defined targets and adopted strategic initiatives to create a pathway to net-zero emissions across the enterprise. Detailed decarbonization plans were developed for each site, with steps to reduce greenhouse-gas emissions by 30 percent by 2030. Once implemented, the plan will lead to large reductions in both operating and capital expenditures;
• De-risking manufacturing analytics. A global agriculture products leader wanted to deploy advanced analytics within its supply chain and manufacturing operations. Aware of the potential data and analytics risks this entailed, the company made de-risking and safeguarding critical data and analytics through data governance and model risk management an integral part of the effort. The move built enterprise-wide confidence in analytics resilience and allowed the company to capture the full potential of the effort;
• Next-generation scenario planning. A leading automotive company created two hypothetical scenarios (a technological disruption and market breakdown), then assessed the potential impact on the business and the resilience levers that would best mitigate that impact. The analysis suggested that up to 60 percent of sales losses could be mitigated. This led to a decision to diversify geographically and reduce the risk of dependence on single sites, set up some anticipatory information mechanisms, and reduce the fixed-costs intensity in some production locations;
• Anticipating the future. A utility with annual costs of $5 billion was facing rising prices from suppliers, in particular for basic materials. To address cost pressures strategically, the utility created an “inflation nerve center,” using tech-enabled analytics. The center identified spending priorities, anticipated and quantified inflationary risks, created live dashboards showing inflationary impact, and established a proactive process and set of levers to manage inflationary pressures. This helped the company understand the magnitude of inflationary risks across its cost base using an analytics-driven approach;
• Turning a crisis into a growth opportunity. A global pharma company addressed the recent disruptions in healthcare supply chains, services, and access to healthcare professionals. The company designed a home-delivery system to help patients with rare diseases continue receiving treatment in the safety of their own homes. They further created a partnership with a start-up company to provide patients with physical therapy programs through virtual channels. These innovations allocate and deploy resources more effectively; they also inspired the company to undertake a groupwide agile and lean organizational transformation.

Why resilience matters: What still works and what doesn’t

The article points out that companies cannot effectively respond to the current economic crisis in precisely the same way as they did in earlier crises. But some basic lessons can be drawn from past experience. McKinsey research on the financial crisis of 2007–08 shows that resilient companies not only perform better than their peers through a downturn and recovery—they also accelerate into the new reality, leaving peers further behind. 

The research indicated that companies that win through resilience do three things well in a disrupted environment:

• They make faster and harder moves in productivity, preserving growth capacity.
• They create more operational and financial optionality in their balance sheets, adjusting leverage or cleaning legacies.
• They act swiftly on divestments in the downturn phase of disruption and on acquisitions at the inflection point of recovery.

Not only do leading companies do these three things well, they also do them at the most decisive time for their future well-being. They react in the downturn when it matters most and are therefore able to open an early lead in comparison with peers, which can be widened significantly during the recovery and growth period. Recovery and growth periods following downturns are often longer than the actual downturn, so leading companies are well positioned to outperform the others in the long run. A turn in the cycle is a moment that requires true leadership to embark on either offense or defense. But the best-performing companies don’t wait for that turn to finally reveal itself—or not: they act with intentionality and courage in the face of profound uncertainty about the macroeconomy.