How do companies navigate the current economic maelstrom? Part 2

Last week, we began the discussion on the economic maelstrom that companies are currently facing in Europe. We saw that European business leaders are under increasing pressure to relook at their operating models and building resilience into them.

Today, we take a further look at resilience and how it can be achieved in an economic maelstrom. 

The next frontier of resilience

The article points out that, faced with overlapping disruptions and a complex European situation, executives need to decide where to concentrate their forces now, over the next six months, and beyond. The key questions to answer are about response, foresight, and adaptation:

• Response: Do I have the right capabilities and am I acting on all resilience levers to respond adequately to the current situation?
• Foresight: Can I anticipate what is going to happen next?
• Adaptation: Am I able to adapt fast to a new situation?

To answer these questions, leaders must take a step back and apply a comprehensive resilience lens. Forward-looking companies have begun to structure their resilience agenda across the three activities—response, foresight, and adaptation. They are further differentiating their response, targeting actions in the six dimensions of the enterprise. Whether moving to defend or advance, companies may pull from a large range of resilience levers that are tailored to their specific profile, industry, and starting position. With fast adaptation, companies can meet their longer-term goals of sustainable and inclusive growth for customers, employees, investors, and the larger community.

Response

First things first. The article adds that, with severe challenges pressing, companies may have to address immediate gaps in their resilience profiles. They may face financial challenges such as liquidity constraints, or they may have to resolve disruptions in their supply chain, such as missing key inputs for their products. Before jumping into action mode, companies may take a step back and consider an initial resilience assessment to gain the needed perspectives on the six dimensions of institutional resilience.

How prepared is the company to withstand repeated shocks and disruptions? What short-term growth opportunities are within reach, and what will it take to capture them? What changes will enable the company to make that crucial pivot to accelerate into new realities? In domain after domain, and capability by capability, the assessment will discover where investment in resilience is needed and identify the actions that will close the gaps, defend value, and advance to new growth.

The article adds that each of the six resilience dimensions will have its own specific set of levers that allow a company to play offense or defence. For example, in digital resilience, a robust digital, analytics and cyber risk framework may on the defence help to safeguard the company against digital failures or cyberattacks while on the offense it may pay dividends in at-scale digital transformation by ensuring robust and scalable business application of data and analytics.

It is essential that companies understand the levers available to them across the dimensions, the offensive or defensive capabilities, and the time horizon for creating impact. The specific nature of resilience levers and their relative importance is also a function of the industry a company is operating in.

Foresight: Moving beyond targeted responses

The article points out that as companies weather the storms of today, they must also anticipate and prepare for larger and possibly stranger events to come. To anticipate and respond to crises and opportunities, scenario analysis has proven to be the most effective tool, as long as it is supported by the required data and state-of-the-art analytics. Scenario narratives should be accordingly developed, stress-tested in analytics-based simulations, and connected to early-warning systems based on key indicators.

Crucial variables must be factored into the scenarios, including, for example, the evolution of semiconductor prices, energy costs, and the availability of critical raw materials. Management decisions have to be based on more than purely qualitative discussions. To understand the impact of hypothesized scenario inputs on financial outcomes (such as EBITDA, for example), an analytics-based approach can produce a reasonably accurate data-driven fact base in a timely manner.

The article adds that that is the approach taken by financial institutions in response to the stringent regulation (such as stress-testing requirements) triggered by the financial crisis of the early 2000s. Companies can take the approach as a starting point, widening the scope of the scenarios, thinking outside the box on possible inputs, and increasing the depth of analytics engines across a large number of industries.

It is crucial to embed such an approach—data and analytics–based scenario and stress-testing—into the ongoing strategic-planning process and management dialogue. This process must also be revisited regularly and assumptions and scenarios adjusted to the changing environment. This will ensure that appropriate mitigation and management actions will be derived on a regular basis. A one-time analysis will simply not suffice.

Adaptation: Not just surviving but thriving

The article points out that foresight may help a company anticipate potential future outcomes through simulation and early-warning indicators. Only so much can be predicted and prepared for in advance, however. This is where adaptation, the third key activity of resilience, comes in. The resilient organization is flexible, able not only to react but capable also of adapting to new situations, especially the unforeseen ones.

Adaptation to the new environment requires deep investment in resilience. Adaptive companies are able to capture growth opportunities under adverse conditions. To confront the toughest times, leaders must possess a strong, resilient mindset, acting as role models, communicating an entrepreneurial spirit, and encouraging free thinking across an agile organization. Leaders send the right messages, providing strategic clarity and acting based on early-warning and foresight analytics.

They are creating institutional resilience in the following five areas:

• Speed of response. The organizational structure and operating model is set up in an agile and flexible way, to facilitate collaboration across teams, with a bias toward action over bureaucracy. Decision-making and escalation processes are fast, roles are clear, and decisions are effectively executed once made.
• “Owners” mindset. A strong sense of ownership pervades the organization. Curiosity and humility prevail; learning and adaptation are continual. Rather than avoiding challenges, people strive to innovate and explore new opportunities. The company pushes its own boundaries and questions the status quo and long-held beliefs. Individuals are empowered to think and develop in an entrepreneurial spirit, reskilling and upskilling as the business environment changes. Knowledge-sharing across the organization is encouraged, through cross-functional collaboration, mentorship, and open communication. Empowerment and decentralization are fostered, with only the most strategic decisions going to the senior leadership team.
• Workforce planning and skill set of the future. To execute new, adaptive strategies, the company will need to do some resource planning. Find the best people with the right skill sets and give them the resources they need to cope with present and future needs. Resilience strength resides in an organization’s people. Hear what they have to say and value their experience. Let them adapt to new realities, so that talent can be strategically reallocated as needs change. The positive feedback this creates will attract more top talent to the company.
• Capital redeployment. Resilient organizations can make investment decisions and reallocate capital quickly, based on changing scenarios. These decisions can be taken with a forward-looking perspective on expected scenarios; the decisions are then effectively communicated across the organization.
• Crisis response. Clear and effective responses need to be activated in crises. Resilient companies have a well defined and understood response tool kit; roles and responsibility are set. An effective, timely response is ensured by a fast-mobilizing organization. Leadership accountability is clearly defined and communicated, ensuring full alignment on delegation of authority and escalation mechanisms in the event of disruptions. Leaders ensure that risks are assessed at all stages of the value chain, and they instil resilience throughout business operations.

Clear and present danger

It is apparent that European companies are facing a clear and present danger when it comes to the current economic maelstrom. Operational models need to be adapted and this becomes tough when faced with financial distress.

Can these learnings be applied within the African context? Do global drivers have cross border applicability? What is required from turnaround professionals when discussing this topic with their clients?