Are You Ready for Global Turmoil?

Are You Ready for Global Turmoil?

Posted by Paul J. H. Schoemaker on April 25, 2008 11:36 AM

Recent headlines -- Citigroup’s layoffs, Iceland’s sudden downturn, worldwide food shortages, etc. -- suggest serious global turmoil is ahead. All companies, and multinationals in particular, should be prepared to withstand it.

Unfortunately, many are not. Traditional forecasting and budgeting systems produce linear projections insufficient for risky, uncertain times. What’s needed is scenario planning, where companies stress-test their strategies and processes against a wide range of future scenarios to identify their vulnerabilities. Thus informed, the companies can adjust them to be more responsive and resilient.

But scenario planning often takes a backseat to more immediate concerns: developing new products, fighting an aggressive competitor, meeting earnings targets. So when large-scale external events hit, their impact is seismic.

If your company hasn’t engaged in scenario planning, can you do anything to increase your resilience in the near term?

Yes. Flexibility is the key to dealing with turmoil. You don’t want to be overcommitted to one strategy or one supplier. If your company has stuck its neck way out, as some financial firms did by overbetting on subprime mortgages, then unwind your commitments or hedge your bets. If your company is highly reliant on suppliers into whose operations you have little visibility, get some solid backup options in place. Otherwise, your company could find itself in the unhappy company of Baxter International, Mattel, and numerous pet food companies.

If you have engaged in scenario planning, should recent events cause you to back and revise some of your assumptions?

Yes, but constant revision is standard best practice, even when the external changes are positive. After the Berlin Wall came down, Royal Dutch/Shell’s scenario experts recognized that their strategies would need to account for the emerging geo-political world order: a single superpower, the rise of China, and the opening of former Soviet countries for exploration.

Building resilience and adaptability is a multipronged effort:

• Use scenario planning to improve your organization’s insight and foresight about the future (Shell, Sprint and the World Bank excel at this).
• Devise adaptive strategies with sufficient flexibility to deal with the unexpected, including future-proofing your plans using real options thinking, which views strategic investments such as building a plant or investing in R&D as a test rather than a commitment. How future uncertainties play out determines whether scaling up or withdrawing is called for. BP has been strong at such optionality thinking, as has Google, which seeks to develop a broad portfolio of “Googlettes” that they view as call options on the future.
• Implement a dynamic monitoring system to track the external world in real time, as well as to gauge internal progress on executing strategies and plans. Such a system compensates for the human tendency to overreact to surface features, such as a spike in sales revenue or a drop in interest rates, and under-react to signs of deeper, more fundamental changes (P&G, IBM, and NASA have systems that do this well).
• Improve your organization’s agility in terms of structure, processes, and rewards to cope better with the unknown. For example, fabric maker WL Gore dispenses with formal titles to minimize bureaucracy and hierarchy. As a result, information flows freely and quickly across organizational boundaries to allow fast action. Microsoft’s structure in the mid-1990s allowed it to turn on a dime in response to Netscape’s download threat.
• Enhance your information and decision making procedures to remain vigilant, through external networks and by properly balancing traditional tools. Apple’s forays into music and telephony via its iPod and iPhone are the result of savvy market intelligence and decisive leadership by Steve Jobs and others that balances analytical tools with seasoned intuition. Eli Lilly and Deutsche Bank use internal prediction markets to ensure that all information, especially what is discussed informally around the water cooler, reaches senior leaders.
• Foster strong leadership at multiple levels in the organization to deal better with crises and other unexpected circumstances (GE and McKinsey excel here).

As Darwin observed, it is not the strongest or smartest who survive but those who are most adaptive to change.