When the winds of circumstance changes, businesses must bend with them. Whether it’s a terrorist attack or a dip in demand, firms need to show foresight and flexibility to make the most of whatever is thrown at them
When Harold Macmillan was asked what was most likely to blow his government off course, he replied: “Events, dear boy, events.” The same is true for businesses – carefully laid plans can lie in tatters when circumstances change.
And change they surely will. It could be through a sudden, unexpected crisis – fire, flood, terrorist attack or earthquake. Or it could be the result of an inexorable, longer-term trend – the ongoing financial crisis, perhaps, leading to a sustained fall in consumer demand, or the relentless march of technology that renders previously robust products and processes obsolete.
Leeds-based Turner & Townsend, now a global construction consultancy, didn’t wait for things to get tough before adjusting its strategy. Chief executive Vince Clancy says that ten years ago, the company’s revenues came largely from private sector contracts in the UK, “so we spent a long time developing a more flexible business model that would be resilient in good times and bad”.
The group achieved it by balancing private and public sector work in the UK, while also tackling new overseas markets. The recession in 2009 led to a sharp decline in business from debt-funded developers as they strove to conserve cash, but Turner & Townsend offset this with buoyant revenues from the public sector and regulated industries where investment was maintained.
It prioritised projects that were either long term (such as the 2012 Olympics), led by underlying demand (such as in the energy sector), or necessary to meet regulatory requirements (such as in the rail industry).
The group has since further reduced its exposure to the domestic market by accelerating overseas expansion with acquisitions. International operations now account for half its £236m turnover, up from 10 per cent ten years ago. “We’re in diverse markets and we’re channelling resources into the better-performing sectors where we can see a good return,” says Clancy. The company has had to be bold and agile for the strategy to succeed, swiftly moving people around the world to staff new offices.
Executive coach Jean Pousson, director of Board Evaluation, agrees that people are key to strategic flexibility. “Executives not only need to learn, they also need to unlearn tools, techniques and practices that may have served them well historically, but may no longer work,” he says.
And now customers have found a new voice, with levels of engagement that can force businesses to do U-turns. “Remember Gap abandoning its plan to rebrand after a revolt on social network sites?” Pousson says.
“Never has success been so fragile. The process of strategy formulation needs to be 24/7 and no longer this once-a-year thing. The process needs to be democratised.”
According to Freek Vermeulen, associate professor of strategy at London Business School and author of a recent book, Business Exposed, many companies are not well-equipped to adapt to changes in circumstance.
“It is in the nature of organisations to be rigid. Just about everything they do, from grouping people into departments to their communications processes, makes them inflexible.”
Vermeulen draws a key distinction between how companies react to sudden change or crisis, and longer- term trends that require a shift in strategic thinking. He argues that a short-term crisis, typically leading to a sharp but temporary fall in demand for products, or a hiatus in the supply chain demands an immediate operational response.
One example was 9/11, which led to a huge drop in passengers for airlines, while aircraft manufacturers were stuck with scores of planes on their inventory. Then there’s the aftermath of this year’s earthquake and tsunami in Japan, when global car-makers struggled to source components..
In such dire circumstances, plans must already be in place – it is a corporate governance requirement for every listed UK company to conduct a structured process of systematic risk analysis, with a formal report going to the board. This routine identifies and quantifies every risk, in terms of likelihood and consequence, names the key manager who owns each one, and sets out ways of mitigating it.
Vermeulen argues that with risk management and business continuity plans in place, responding to a crisis is relatively easy from a strategic perspective. “If survival is threatened, the typical response is to cut the cost base, although it can pay to be brave and look for new sources of revenue,” he says.
Of course, suddenly changing circumstances aren’t always for the worse. Unseasonably cold weather, for example, could mean a spike in demand for energy producers, while the latest toy might unexpectedly benefit makers and sellers.
Neville Bain, who has served on the boards of some of the UK’s best-known businesses including Royal Mail and Cadbury-Schweppes, and now chairs the Institute of Directors, suggests the immediate response to such short-term success should be to “reorganise production and supply to make the most of it, but then take a longer view as to whether this is a permanent change that should be risk-assessed, leading to a strategic overview” (see box).
Ajaz Ahmed, a retail veteran who founded internet service provider Freeserve in 1998, urges businesses to learn from the retail sector. “I preach to people all the time to go shopping, but don’t buy, just look at what retailers are doing, as you’ll learn so much about psychology, adaptability and speed of response,” he says.
“Supermarkets adjust staffing every day, always have the right level of stock and even employ meteorologists to predict the weather.”
While sudden changes in demand don’t necessarily require strategic flexibility, subtler, longer-term developments are more likely to. LBS’s Vermeulen says that it’s vital for companies to try to anticipate: “Once you’re confronted with a problem, it’s a lot more difficult. Animals put on body fat in the summer, they don’t wait until the winter or they’ll starve.”
Focus on flexibility
Steps to success Neville Bain sets out the key stages for boards in creating an adaptable business strategy
A strategy process doesn’t always follow the same path, but here are some areas that most organisations need to consider.
- State the current strategy being implemented. This will typically include company’s vision, mission and values
- Has the past strategy implementation delivered the milestones agreed in the document?
- Review the broader environment for changes that may affect the strategy or the pace of delivery of the objectives
- What are the key issues for the organisation regarding those changes?
- If the strategy needs change, what are the alternatives and the risk profile of these?
- Select the new strategy, considering the above points
- Lay out the broad financials and the key milestones
- Put to the board for approval.
The board will be involved part-way through this process, probably at the point where alternative strategies are being considered.
The risk process starts with the strategy – well-managed firms will see risk assessment and management as a part of the ongoing business. In the event of an unexpected and unpredicted risk (which would be unusual in a company with a robust risk-management system), management will need to propose changes and the strategy will automatically be reviewed.
- Strategy is a key process, not an annual event to be filed and forgotten. It needs to be updated and reported on through the year, especially in conditions of significant change
- Risk assessment and management is rooted in the strategy and the high-level risks will be reviewed regularly by the board
- Changes in the environment or the appearance of new, significant risks need to be dealt with speedily and the company must consider whether its processes will allow speed of reaction.
Neville Bain is chairman of the Institute of Directors and author of The Effective Board.
Tom Nash is a business writer and editor who has specialised in boardroom issues for more than 25 years. He is a former editor of Director magazine and publishing director of the Institute of Directors (IoD). Now freelance, he currently edits titles for the IoD, the Forum of Private Business and the Institute of Sales & Marketing Management.