Thriving in turbulent times

Thriving in turbulent times

A classic boxing match offers useful lessons for seizing opportunities during an economic downturn.

Uncertainty is the defining characteristic of any boxing match. It is also the defining characteristic of business competition today. As they fight their way through the current global turbulence, business leaders can learn much from two distinct approaches to mastering the uncertainty of the ring: Agility and absorption. Companies can employ agility to spot and exploit changes in the market. Alternatively, they can rely on their powers of absorption to withstand market shifts. In unstable times cultivating and using both capabilities in combination can help companies not only survive, but emerge as true market leaders.

Agility: Float like a butterfly, sting like a bee

In his prime, Muhammad Ali embodied agility. He could spot a fleeting opportunity and shoot off a well-placed blow before the moment passed. Similarly, organisational agility is a company’s ability to consistently identify and capture business opportunities more quickly than its rivals do. In a decade-long study of dozens of firms around the world that thrived in volatile markets, I have identified three distinct forms of agility: Operational, portfolio and strategic.

  • Operational agility. The first kind of agility is a company’s capacity, within a focused business model, to find and seize opportunities to improve operations and processes. These opportunities need not be sexy. Cost reductions, quality improvements or refinements to distribution processes can be just as valuable as introducing new products and services. The crucial factors here are speed and execution.

  • Portfolio agility. The second type of agility is the ability to quickly and effectively shift resources, including cash, talent and managerial attention, out of less-promising units and into more-attractive ones. A varied set of business units doesn’t guarantee portfolio agility, however. Portfolio agility requires disciplined processes for evaluating individual units and reallocating key resources.
Since those resources include talent, companies also must cultivate general managers who are versatile enough to move from business to business. It is equally critical that the corporate office control a central pool of resources to mastermind reallocation.

  • Strategic agility. Business opportunities are not distributed evenly over time. Rather, firms typically face a steady flow of small opportunities, intermittent midsize ones and periodic golden opportunities to create significant value quickly.
The ability to spot and decisively seize the last kind of opportunity, the game changers, is the essence of strategic agility. Such opportunities usually entail rapidly scaling up a new business, aggressively entering a new market, betting heavily on a new technology or making significant investments in capacity. While this does not guarantee that the gamble will pay off, companies that avoid big bets altogether risk falling behind more aggressive competitors.

Absorption: Take a licking and keep on ticking

Agility makes for good viewing — few heavyweights have matched the young Muhammad Ali for pure spectacle. But agility is not the only or surest way to win a bout. Boxers like George Foreman rely on absorption — compensating for their lack of ‘bob-and-weave’ dexterity with the toughness to withstand nearly any punishment opponents can mete out.

In a business context, firms can build absorption in several ways. The obvious levers include size, diversification and a war chest of cash. Other factors (high customer switching costs, low fixed costs and a powerful patron) can also buffer a firm against environmental changes, although in less evident ways.

Agile absorption: Strike the right balance

Whereas agility allows a company to stake out an early position, absorption permits the firm to secure an early lead and reinforce its position. Absorption and agility are not stark alternatives. Managers should view them as complements, with the balance shifting as circumstances change. Getting the mix right, instead of relying heavily on one or the other, increases the effectiveness of these two approaches during volatile times.

Striking the right balance isn’t necessarily easy. So how, in practice, can leaders help their firms achieve and maintain agile absorption?

More good fats, fewer bad fats. Sources of absorption vary in terms of their effect on agility. Low fixed costs, for example, are an outstanding source of absorption. They allow a firm to weather a wide range of threats without necessarily impeding its ability to seize golden opportunities.

At the other extreme are sources of absorption that bolster the company’s ability to weather uncertain times, but come at an unacceptably high cost in terms of lost agility. A prime example is excess staff. Excess workers, particularly those in staff positions, tend to generate work to justify their existence. Their efforts, however well-intentioned, introduce unnecessary layers of complexity and bureaucracy that sap an organisation’s agility.

Actively managing trade-offs. Consciously managing the trade-offs between agility and absorption is critical. Many managers believe that corporate bulk is the arch-enemy of agility. But it is not size per se that kills agility; it is complexity.

An alternative approach to combining scale and agility consists of breaking a large company into multiple, independent profit-and-loss units. Because these units continually probe different markets, looking for unfilled gaps, they are also more likely to see new opportunities before their rivals do. Note that this approach carries costs as well: Independent units often duplicate back-office functions, which increase fixed costs, and executives must invest heavily to promote cooperation among fiercely autonomous divisions.

Maintaining a culture of agility. During the start-up phase firms generally are agile, but incredibly short on absorptive capabilities. As firms enter corporate adolescence they maintain some agility, but also accumulate absorption as they launch new products, expand geographically, bolster brand value or firm up customer relationships. Over time absorption stabilises, while agility will deteriorate.

The decline of a company’s culture of agility is common, but not inevitable. Managers who want to maintain (or rekindle) a culture of agility need to maintain a strict focus on the handful of values they deem critical to agility. As executives set out to increase their organisation’s capacity for agile absorption, they should keep in mind that what works in one industry, may prove totally inappropriate in other sectors.

No matter what the situation is, however, managers need to take inventory of the sources of agility and absorption within their organisations. Specifically, they can ask themselves a series of questions: How agile are we? How absorptive are we? Where does our absorption currently come from? Are these the best sources? Are there alternative ways to boost our absorption that would enhance our agility?

By understanding the sources of agility and absorption and their combined power as a one-two punch, and by actively balancing them over time, leaders can increase their organisation’s ability to go the distance in an uncertain world.

Sidebar: Idea in practice

Managers should view organisational agility and absorption as complements, not substitutes. Getting the right mix of the two approaches, rather than relying heavily on one or the other, increases their effectiveness. Here are some principles for achieving and maintaining that balance — an approach the author calls agile absorption.

Not all sources of absorption are created equal. Low fixed costs are good; they don’t prevent companies from seizing opportunities as they emerge. But excess staff is bad; top-heavy management teams create more work to justify their existence and introduce unnecessary layers of bureaucracy.

Example: The low fixed costs of Brazilian brewer Brahma allowed the company to outlast its long-time rival Antarctica in the face of price competition, flattening demand and macroeconomic shocks. The brewer’s cost savings generated the cash required to launch a second brand and ultimately acquire Antarctica and start the ascent to global leadership.

Actively manage trade-offs. Don’t sacrifice good sources of absorption (or agility) without being sure of the benefits you’ll receive in return.

Example: GM typically doesn’t lay-off workers when demand slips, which translates its labour from a variable to a fixed cost — thereby decreasing the carmaker’s absorption. Meanwhile, Toyota also guarantees its employees lifetime employment, but has proactively instituted flexible work rules, variable job assignments, and employee involvement — which collectively enhance the company’s agility.

Maintain a culture of agility. Firms follow a fairly standard trajectory over time. They slowly develop absorptive strengths, which can erode the culture of agility that once enlivened them as start-ups. This decline is common, but not inevitable.

Example: The CEO of Brahma and his team maintained a strict focus on the handful of values they deemed critical to agility — performance, transparency, informality and teamwork. For instance, they eliminated executive dining rooms and reserved parking spaces to send a clear signal that performance trumped titles or tenure. Data on individual and team objectives and performance were posted publicly to stimulate healthy rivalry, put pressure on underperformers, as well as helping managers come to a shared understanding of what everyone was doing and how it all hung together.

Sidebar: Ten ways to build absorption

To create a buffer against inevitable hard times, executives should focus on strengthening the following sources of organisational absorption. They must remember, however, that some sources of absorption tend to kill agility, while others allow a firm to weather a wide range of threats without necessarily impeding its ability to seize opportunities. Low costs, for instance, can keep a company in the game long enough to ride out market shifts, but excess staff can depress profitability and create work for others.

• Low fixed costs. To weather a wide range of changes — for instance, price wars, rising raw-material costs, declining demand.

• War chest of cash. To deploy for unexpected opportunities and to counter threats.

• Diversified cash flows. To withstand downturns in specific units; diverse units can serve as a store of potential wealth that can be sold later.

• Vast size. To enable downsizing of operations during crises.

• Tangible resources. To generate profits in the future; these resources might include raw-materials deposits and real estate.

• Intangible resources. To insulate the firm against short and mid-term market shifts; these resources might include brand, expertise or technologies.

• Customer lock-in. To buy time when competitive dynamics and markets shift; high switching costs, for instance, can prevent customers from jumping ship.

• Protected core market. To provide a safe stream of cash to weather financial storms.

• Powerful patron. To provide extra resources or a buffer from market shifts during times of change; such patrons may include a powerful government, regulator, investor, or customer vested in the firm’s success.

• Excess staff. To be shed in hard times.Harvard Business Review

Donald Sull is a professor of strategic and international management at London Business School in England, and the author of the upcoming book The Upside of Turbulence.

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Tags innovationstrategyeconomic crisis

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