Even as business picks up in many places, the “new normal” will be dogged by uncertainty. Leaders are torn between the urge to act and the need for prudence in the face of uncertainty. How can businesses overcome their understandable reticence and reorient themselves for the future? The question is particularly acute as the old, tried-and-tested management frameworks that served them well in a more predictable world — scale, division of labor, focusing on the best use of internal resources, and so on — are inherently unsuited for a world of unexpected twists and turns. At the end of the day, you can’t forecast the unforecastable. So how can companies grow amid such uncertainty? The author presents five questions to help business leaders identify what actions they need to take to prepare themselves for a return to growth.
While the world is still deep in the throes of the Covid-19 pandemic, business leaders are busy repairing their operations, looking forward to a post-pandemic world. They frequently find themselves torn between two opposite poles: the urge to act and the need for prudence in the face of uncertainty.
Even as business picks up in many places, the “new normal” is one dogged by uncertainty. Poisoning the mix further is the fact that many businesses now find themselves strapped for cash following nearly two years of crisis management. Many companies slashed costs during the pandemic because it was one of the few tools they had at their disposal. But there’s a limit to how far you can shrink your way to greatness. If they have any spare money at all, most believe that it should be reserved for big-bet transformations, to get the business back on its feet. But a period of sustained uncertainty is hardly the best time for making bets.
How can businesses overcome their understandable reticence and reorient themselves for the future? The question is particularly acute as the old, tried-and-tested management frameworks that served them well in a more predictable world — scale, division of labor, focusing on the best use of internal resources, and so on — are inherently unsuited for a world of unexpected twists and turns. At the end of the day, you can’t forecast the unforecastable. So how can companies grow amid such uncertainty?
From Organizations to Ecosystems
My belief, based on my work supporting businesses through the pandemic, is that companies now need to re-think and re-gear before they can start to re-grow.
The re-think I have in mind is essentially a change of mindset from “economies of scale” to “economies of networking,” a distinction drawn back in 1998 by the economists Carl Shapiro and Hal R. Varian. In brief, this means that rather than fixating on how you manage your internal resources, you turn your attention to how you manage your networks and the full range of transactions that take place within them. Your focus turns outward rather than inward. The idea is that success is determined not by how well you leverage your existing capabilities, but how effectively you shape the surrounding ecosystem.
This re-think should be followed by a process of re-gearing by companies. That will mean taking action in a number of different areas. The five questions below can help business leaders identify where those areas lie and what actions they need to take to prepare themselves for a return to growth.
How can we harness the power of networks?
The networks I’m talking about here are what we might call “dynamic networks” given that they evolve rapidly over time. Dynamic networks operate in a similar way to the types of networks we find in nature, like when ants work together to build “living bridges” or bees swarm to form a new colony. Complexity science seeks to understand how these networks function and what makes their underlying designs distinct. With its help, businesses can learn to apply the lessons of nature to their business practices.
For businesses, harnessing the power of networks means building dynamic partnerships — living bridges, if you will — with players across traditional industry boundaries, and potentially even with former competitors. For instance, one major airline I worked with recently ended up radically re-thinking the way it viewed its B2B partnerships and re-gearing the way it interacted with its ecosystem. Achieving this first required creating transparency within the company into which internal business units and external partners were responsible for each area of value creation at the airline, from scheduling and pricing to data aggregation and payment, across 10 different channels.
My team and I then helped the company develop various market scenarios. We ran a strategy game in which members of the leadership were divided into five teams representing different players in the market, from other airlines to travel distribution companies. The game consisted of three rounds, each exploring different possibilities or market parameters. In each round, the teams had to decide on strategic moves, such as adapting their prices, changing the products and services they offered, or investing in new sales technology. They could then negotiate with other players and potentially form alliances with them.
As a result of this exercise, the airline decided to form a strategic partnership with a previous rival: a pricing forecaster that had been undermining its profits for some time. The new partner took over and improved most of the airline’s yield-management function.
How can we prepare for an uncertain future?
Over the course of the pandemic, our yearning for certainty has grown almost unbearable. Working with companies, I’ve seen time and again how otherwise competent leaders have focused too much on getting the forecasts right, rather than searching out ways to deal with uncertainty. It took almost a year for that focus to start to shift. The fact is, companies need to move away from a forecast–plan–execute approach toward a more systematic exploration of the system and the opportunities it offers, turning uncertainties into possibilities.
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What business leaders should be asking themselves is which scenarios, however unlikely, could disrupt today’s system of value creation? What could conceivably happen in the future that will affect their key commercial parameters, like how they operate, how they achieve profits, and how they finance their undertakings? Working with scenarios is a great way to broaden your horizons. Scenarios are a type of thought experiment, a way of anchoring possible futures in your thinking. The company should take these scenarios and identify “no-regret” actions that they’ll initiate if the scenarios arise. They should also define tipping points for each scenario — for example, a specific competitor dropping out of the market. This approach helps business leaders avoid the extremes of doing nothing, waiting for certainty, overreacting, or giving in to despair.
My team and I worked closely with two European airports on precisely this question, developing potential post-pandemic scenarios for air travel and translating them into volume and margin terms. We challenged these scenarios with potential structural developments, including some that until recently would have seemed unlikely, such as on-demand flights. We then developed strategic and commercial options for each scenario, involving different organizational units in the process to ensure engagement on the part of the organization and increase the robustness of the solutions.
How can we put commercial experiments center stage?
I believe that today’s companies should proceed via trial and error, rather than pursuing a predefined roadmap. After all, what good is a roadmap if the roads have all been washed away?
The key? Don’t guess, test. Predefine your strategic rules and then move forward step by step, interaction by interaction. For example, companies may wish to establish their “rules for experimentation,” such as what their risk appetite is when it comes to conducting commercial experiments before launching into a phase of experimentation.
Over the years, I’ve helped a number of travel agencies and intermediaries introduce this trial and error-based approach. The first step is always to break down the business into various areas: customer payments, product merchandizing, customer service via chat, and so on. Then, starting with one area and gradually moving onto the others, we specify the minimum number of experimental routines that should be run alongside the established procedure, and the minimum and maximum failure rate for these experiments. This represents the risk appetite for experimentation in each area.
The trick here is to make sure you apply the same set of rules for all experiments and business areas. Define up front what success means for that area, such as specific key performance indicators (KPIs) for customer satisfaction. Devise proper experiments, drawing on the expertise of data scientists. And when the experiment is over, act on the results: If the experiment was successful, replace the old routine with the new one. If it wasn’t, leave well enough alone.
How can we anchor our commercial strategy in our operations?
Commercial strategy needs to be hands on: a set of rules that lead to a common goal and are fully consistent with the company’s rules for experimentation. Critically, the commercial strategy also needs to continuously adapt to learnings from operations. This approach to strategy is thus more operations-based than older approaches based on roadmaps and master plans, and it needs to be anchored in operations. Without these rules, any attempt to explore can end up in chaos and action for the sake of action.
For example, instead of putting “Form a partnership with Company A” in a roadmap for your company, define the set of rules for engaging in partnerships — for example, potential partners must have no more than 1,000 employees, or the founders must still own the majority of shares in the company. The rules can also include a description of what a successful partnership should look like — for example, it should save the company at least 10% on the cost of handling accounts receivable by outsourcing this task to the partner. These rules form the basis for exploring the various options for partnerships with Companies A, B, and C — and maybe also Competitors X, Y and Z.
My experience confirms the value of defining commercial strategy both from the top down and the bottom up. The top-down part should involve specifying what success should look like, what the key choices are, and what the rules are, as discussed above. This information is then passed on to cross-functional “commercial squads”: small teams with end-to-end responsibilities, capable of designing and carrying out business exploration. The role of the commercial squads is to determine how to implement the top-down instructions in terms of operations.
This top-down, bottom-up process can be repeated: Guidelines come down from the top, ideas are passed back up from the bottom, more guidance comes down from the top, and detailed actions go up from the bottom. Usually, an external team will need to model this two-way process for the company, but with a little practice, organizations soon become experts in doing it for themselves.
Where can we build commercial squads?
Up to now, most organizations have responded to the challenges of the pandemic by trying to improve their efficiency, optimizing wherever possible. I believe that a better ploy is to become a dynamic, adaptable organization.
Businesses need to spot any barriers to adaptability within their organization and act swiftly to remove them. They should remember that the design of their organization has more impact on their performance than the quality of its individual parts. Of course, having the right skills in the right place still matters, but the interactions between different individual nodes are significantly more important than the nodes themselves.
The dynamic, cross-functional commercial squads I mentioned above can form a key element in what makes an organization adaptable. Using commercial squads is preferable to sticking with traditional, rigidly structured, separate commercial units — sales, pricing, distribution, promotion, and so on — each with its own budget target. The squads should have shared business goals, such as increasing gross profits or the firm’s share of specific segments.
Most organizations are surprised to find that improving performance is more of a design challenge than a challenge with the skills of individual employees. That may even come as something of a relief to companies that feel they’re losing the war for talent (although it should not be an excuse for them to let up on that battlefront, either).
At this point, CEOs may be feeling somewhat overwhelmed. How many fronts do we have to fight on at once? After all the shifts we made in response to Covid-19, are you now seriously asking us to implement yet more changes in order to return to growth?
Again, I believe that the answer lies in the ability to adapt. This needs to be written into the company’s DNA. And that places an even greater focus on the role of leadership, as reshaping an organization’s culture or mindset is the work of its leaders. This is particularly true of network structures, as opposed to hierarchies: Rather than relying on their power and position, leaders in network-based organizations need to propagate the new culture of adaptability by modeling it in their own day-to-day interactions and decisions.
To go back to where we started from: Re-thinking and re-gearing will put you in the best possible position to re-grow. The good news is that in these times of limited resources, the big bets aren’t necessarily the best bets. Having the right mindset anchored in your organization and the right structures and networks to back it up is a surer way to not only survive tomorrow’s challenges, but to prosper. The five questions above can help you identify where you need to take action and ensure that you rise to the challenges of the new normal.