30 MARCH 2020
Business must adapt to manage through the pandemic
by Julian Birkinshaw: Professor of Strategic and International Management, Senior Fellow of the Advanced Institute of Management Research and Deputy Dean for Programmes in London Business School.
The global outbreak of coronavirus is highlighting how poorly equipped firms are to deal with one-off shocks, but many large firms were falling behind the curve even before this crisis.
Many established businesses are unable to keep up with shifts in demand and customer expectations. Few it seems heed the warning of the late Jack Welch that “If the rate of change on the outside is greater than the rate of change on the inside, the end is near”.
And while the rate of change in the outside world has been increasing, have we seen a comparable increase in response within firms? For the most part, the answer is no, they have not developed the capacity to adapt and increase their ‘clock speed’. What has been holding them back?
It is not all slow
There are bright spots: IT systems are increasingly configured in a way that allows real-time responsiveness; airlines and hotels use dynamic pricing systems to adjust according to changes in supply and demand; logistics companies provide real-time tracking and real-time accounting systems can keep your financial statements updated daily.
Some companies are experimenting with ‘smart contracts’ that are implemented automatically when certain conditions are met, rather than waiting for human intervention.
In these cases, computer systems are adapting far more rapidly than high-touch human systems.
While small start-ups are generally good at hustling and responding quickly, most large firms have organisational structures and internal processes that are anything but agile. Consider budgeting processes, which likely operate on a quarterly or annual basis.
Or think about individual performance evaluations, again usually done once a year. If you run an operating unit, chances are you have a weekly management meeting to update one another on what’s happening, and to address any emerging issues.
The clock speed in large organisations is measured in weeks, months and years. But your customers are operating on a clock speed measured in hours and days.
So what’s the solution?
There is value in pausing and human intervention can slow things down for a good reason. Some of the early experiments in smart contracts were disastrous precisely because there were no checks and balances in the system; contracts were executed automatically, resulting in opportunities for fraud.
If we take the response to the Coronavirus, most organisations were ill-prepared and moved too slowly. But equally, it is inconceivable that something as unprecedented as this could have been dealt with automatically.
In a fast-changing world, we need our decision makers to make good judgments, and this involves giving them the time to pause and reflect. But it also means giving them rapid access to the relevant information, and this is where things go awry.
In most organisations, decision makers receive information at different speeds: they might get fast information quickly from their IT systems, but slow information on others, like customer feedback and employee engagement, so the decision-making goes at the speed of the weakest link.
There are two models to consider and it is useful to work with both.
A dual clock-speed organisation
First, build a dual clock-speed organisation, and match the internal decision-making cycle to the business need. You may have heard of this using the metaphor of a fleet of speedboats operating alongside a large ship.
This is how the the Italian utility, Enel, which provides electricity to 70 million customers around the world, works. It has a core infrastructure business – a large ship – that provides essential power services through a finely-tuned operation that seeks to be 100% reliable. It uses high-tech sensors, smart meters, and AI-based analytic tools, all of which operate in real time, but it avoids ad hoc human intervention as much as possible.
At the same time, Enel is moving into emerging areas such as e-mobility (servicing electric vehicles) where user needs are evolving quickly, so it operates these businesses as speedboats: they are housed in a separate unit, Enel X; its managers are given much greater freedom; and the management systems are more fluid and freewheeling.
Using the dual-clock speed model, creating a CEO-led taskforce to monitor the situation is a good first step. But this taskforce also needs to have the authority to act quickly – so that the organisation can keep up with what is happening outside its boundaries.
Avoid creating taskforces that then report to committees of well-meaning but ill-informed managers that slow down the whole response plan.
Develop real-time organisational intelligence
Second, work on increasing your real-time organisational intelligence. This means building the systems and capabilities that give people across the organisation the information to make good calls.
This information should be multifaceted – it is about market conditions and competitor offerings, but it is also about internal things, for example who is doing what, how are people responding to various internal initiatives, where are the hotspots (and the coldspots) in terms of energy and engagement.
An example of what real-time responsiveness looks like is an agile team. They have stand-up meetings every morning, they work in an open-plan setting, they have a board visible for all to see, showing who is working on what and where the priorities are.
A fully functioning agile team is dramatically more productive than a traditional one, and this is made possible by the amount of intelligence-sharing that goes on within it.
This logic of real-time feedback has been applied in many successful companies. For example, Carlos Brito, CEO of Anheuser Busch Inbev has spoken about the importance of open-plan offices for sharing information quickly and gaining alignment through impromptu two-to-three-minute meetings when issues arise. At Bridgewater Capital, the world’s largest hedge fund, people are encouraged to provide feedback to their colleagues in real time through a simple app.
In most companies you get feedback on your performance quarterly or annually; at Bridgewater you get it every day. It’s part of founder Ray Dalio’s philosophy of radical transparency: an accurate understanding of reality, he argues, is the essential foundation for producing good outcomes.
These examples are the exception, not the rule, and it’s no mystery why.
People in large firms are comfortable with the slow-and-steady internal rhythm of the business, the weekly or monthly cycle of updates, and the annual budgeting process, and they don’t really know what else might be possible.
Slow may be comfortable for some but that isn’t a reason to leave things as they are and this crisis may make it untenable.
There is always scope for experimenting with better ways of working, to help your firm stay responsive and relevant. A shock like the Coronavirus should push companies to take steps they may not have previously considered to help them weather the crisis and adapt to a new environment beyond it.
Source: Leading business thinkers from around the world, both academic and managerial, come together in Think to debate current issues and present cutting-edge research and ideas. Visit our web-site at: http://www.london.edu/bsr.