This blog builds on studies conducted by researchers and principles at McKinsey and Company, and published as The Digital-led Recovery from COVID-19: Five Questions for CEOs in April 2020 [Fitzpatrick, Gill, Libarikian, Smaje, Zemmel].
The coronavirus pandemic is a humanitarian crisis that continues to take a tragic toll on people’s lives. There is no denying it is also acting as a catalyst for change – economic, societal, personal, and corporate – on a scale not seen since wartime. The scale of the change and the speed at which it’s happening is shining a bright light on the fact that companies are facing a once-in-a-generation shift. And for all the uncertainty about what the future will look like, it’s clear already that it will be digital. (Fitzpatrick, April 2020)
It is critical for us to recognize that COVID-19 is not just another flu. Despite herculean efforts and significant accomplishments at many levels in society and in businesses, the pandemic has brought into sharp relief how vulnerable we really are. This pandemic is worldwide in scope and has fundamentally shaken up the social, political, economic and business landscape.
Given how fast change is happening, waiting until we see signs of recovery will be too late. As businesses, we need to move from active experimentation to active scale up across two dimensions: at the core of the company and through the development of new businesses. Leaders need to develop a through-cycle mindset.
Before tackling the Five Questions, we should consider some core principles:
- Flexibility and Speed: the speed at which the change hit us caught everyone off guard. Entrenched systems that have supported businesses as well as societies at the root have been no match for the dynamic fluidity of the current crisis. Building in redundancies, modularized systems for quick switch-outs, and devolved decision making [based on clear guidelines] will need to be the norm.
- Bold Actions Backed By A Solid Understanding Of Risk. The scale of the crisis needs to be matched by the boldness of our response. Incremental change and half measures will not provide businesses and community structures with the economic and societal horsepower needed to ride out the storm and come out of the crisis in a strong position. Boldness of action should be tempered with a full appreciation of risk, which range from the impact of cyberattacks to the loss of crucial talent.
- Commitment To A Holistic Approach. The crisis has highlighted systemic and organizational weaknesses. These flaws highlight the need to ensure that any and all initiatives take into account the complete range of dependencies and build in cross-functional mechanisms that integrate systems, people and processes across societies and across businesses.
Q1 OF 5: DO YOU HAVE A CLEAR VISION OF WHERE THE VALUE IS GOING TO BE AND A ROAD MAP THAT WILL GET YOU THERE?
Despite noteworthy successes in adjusting to COVID-19, many leaders have been frustrated by how slowly necessary changes have moved, from serving a surge of customers migrating to digital channels to scaling back-end operations. One of the biggest reasons for these difficulties is that companies didn’t have a coherent and integrated digital engine to drive the business forward.
Accelerating transformation requires leaders to take a step back and reassess
- their road maps, which are the coordinated and detailed plans for what needs to be done, by whom and when, from the leadership level down to the front line;
- and the assumptions about the value and feasibility underlying them.
Those assumptions need to be based on emerging social, demographic and customer behaviors, supplier dynamics, and international, national, regional, and local regulations.
One of the most important tasks in operationalizing the road map is getting alignment with the leadership team and putting in place resources needed to deliver on it. Alignment is challenging in “normal times” but is now that much more difficult with dispersed leadership since people are working from home.
Before we continue, let’s take “two steps back” and ask the question: what do we mean by value? Looking at it solely from a customer’s point of view, John L. Mariotti defines value in his book The Shape Shifters as “the sum of all the parts of a decision to purchase one product or service over another (or to purchase anything at all)”.
Looking within, the business drivers of value are:
- Structure: how we are organized;
- Processes: how we manage money, product and information flows;
- Relationships: how we develop, manage and enhance supplier and customer expectations;
- Culture: how we build the level of engagement within the organization;
- Purpose: why we exist.
Considering the customer’s perspective, we identify the correlated attributes of value as:
- Quality – not just “conformance”, but performance and consistency to meet or exceed expectations.
- Service – not just on-time accuracy and efficiency needed just to compete, but the total experience: ease, accessibility, information, cordiality, personality, and intimacy.
- Cost – not just first cost or cash cost, but total cost: the money and effort required to obtain, incorporate, and use the product or service.
- Speed – not just on time or normal response time, but unusual, rapid, convenient, flexible, and changeable with “bonuses” such as special delivery without any added costs.
- Innovation – not just “new”, but the truly surprising, unique, creative, exciting and delightful, with a status that makes it desirable to own.
COVID-19 has taught us that the demand is not just to deliver value, but to generate value. That is the expectation of business and government and society in the new normal.
We conclude this part with the Leader’s Digital Checklist. Digital technology is not the solution to our organizational problems; it is the engine of transformation from the old normal to the new normal. In the new normal, companies must become digital driven as well as digital smart. It is not just about the technology; it is about the culture that generates value. The McKinsey team developed a digital culture checklist, which we should keep in mind as we explore these 5 questions.
- Is your digital transformation powered by modern software-development methods and delivery capabilities like a tech company? How agile are you?
- Do you have robust and federated data governance to enable broad and continuous use of data by the front line and to enrich the data over time? How contextually clued in are you?
- Are you investing at least as much to build conviction and the ability to act as you are in technology? Are you developing contextual leadership in your organizational culture?
Q2 OF 5: WHAT ROLE SHOULD BUSINESS BUILDING HAVE IN HELPING YOU ACCELERATE YOUR ENTRANCE INTO NEW MARKETS OR ACCESS NEW CUSTOMERS?
To match the pace of the crisis, leaders not only need to rethink operations and how the business is run, but also need to build outside of the current business. COVID-19 has taught us that “business-building” is more than being able to deal effectively with the 5 forces challenging competitive advantage as identified by Michael Porter.
So what if you can handle the threats of substitute products/services, rivals and new entrants? So what if you can manage the bargaining powers of suppliers and customers? When COVID-19 shuts you down, your competitive advantage stops dead in its tracks. How do you recover? What is the starting point down the road of the new normal? A journey of a thousand miles starts with the first step.
We begin by establishing a resilient culture which is fully agile with micro-service architecture and entrepreneurial talent. A resilient culture involves a structured approach that includes a clear strategy, entrepreneurial talent, and the proper balance between corporate support and operational freedom. However, large enterprises in particular are not necessarily resilient – size does not matter when we need to be resilient, nor is it a guarantee of success.
Large enterprises that are financially well endowed provide a “safe harbor” during a crisis, allowing the company to thrive “in spite of” the broader social and economic concerns. We can call this the “survival mode”. However, to sustain and grow success, a company needs to venture outside its four walls. After all, we are all in this together, whether we like it or not. A company is not immune from the impacts of a crisis happening all around it, no matter how safe and secure it thinks it is. There is no immunity.
One lesson learned from COVID-19, among so many others, is that people can move with astonishing speed to build something new. For example, in China, engineers built two hospitals [2,600 beds in total] from scratch in just over a week.
Whatever our geo-political biases are with regard to China, how could we not admire the speed with which this was done? How many retailers, grocery stores and restaurants were agile enough to implement a full e-commerce system to meet increasing market demand for online services in the face of lockdown, isolation and hands-free deliveries?
Not everyone is a millennial or gen-xer or gen-zer. Not everyone chose online as their first buying option. But all of society was constrained and even forced into online because of lockdown and isolation. Going online was not just driven by desire; it was driven by necessity. Those who succeeded in this new online normal were those who could move at the speed of innovation and flexibility.
It is helpful to find the “archetypes for post-crisis business builders”, not so much to imitate them as to learn from their successes and failures. Leaders need to develop a business-building capability rather than simply imitating archetypes or launching a new business.
A business-building capability is a cultural factor because it necessitates the launching of multiple businesses over time to sustain new sources of growth and as a hedge against future uncertainties. The key to resilience is not expansion, but diversification so as to capture opportunities as they arise.
We often think that business is about delivering value, which indeed it is. However, in the face of COVID-19, we must recognize that the new normal is about generating value. The “old normal” focused on versatility – the ability to adapt. The new normal demands agility – the ability to move quickly and easily.
In reinventing ourselves as businesses, as government, and as society in general, we must consider developing a Resource-based Strategy that exploits internal resources and capabilities relative to external opportunities. We must take into account a complete range of dependencies and interdependencies:
- What resources do we have? All assets, structures, processes, attributes, information, knowledge, etc. available to and accessible by us that enable us to conceive of and implement strategies that improve our efficiency and effectiveness in generating value.
- What capabilities do we have? All organizationally embedded non-transferable resources, whose purpose is to improve the productivity of the other resources at our disposal.
We need to identify tangible resources, including such physical assets as financial resources, human resources, physical plant, organizational structures, decision hierarchies, real estate, raw materials, inventory, and cash.
We need to identify intangible resources that may be embedded in our organizational, government and societal routines and practices such as reputation [trust], culture, knowledge, know-how, and accumulated experience, as well as relationships with customers, suppliers or other key stakeholders.
The scale of the crisis needs to be matched by the boldness of our response. Incremental change and half measures will not provide us with the economic and societal horsepower needed to ride out the storm and come out of the crisis in a strong position. Boldness of action should be tempered with a full appreciation of risk, which ranges from the impact of cyberattacks to the loss of crucial talent.
Q3 OF 5. HOW CAN YOU LOCK IN THE BENEFITS OF A MORE AGILE OPERATING MODEL TO INCREASE THE METABOLIC RATE OF YOUR BUSINESS?
Agile…agile…agile. Once the darling of IT product development, agile now permeates almost every part of the business world. The lesson learned from COVID-19 is that agile also needs to be embedded in our social cultures, as well as in our business and corporate cultures. COVID-19 is a humanitarian crisis; co-relatively, agility is a humanitarian value.
We need to be able to act quickly and at unprecedented speed, and almost exclusively remotely. Even more critically, the lessons of COVID-19 go beyond just the speed to act: we must act quickly in the midst of uncertainty. We must make decisions with limited oversight. We must react to fast-changing situations, for which plans can hardly keep up.
We limit ourselves by thinking that agility is a plan; planning is a process with too narrow a focus, especially when faced with ubiquitous uncertainty. Uncertainty is reality – when was the last time any of us could predict the future with certainty? Can we safely say what tomorrow will be like?
COVID-19 brought uncertainty front and center in our everyday lives, and not just in our businesses. We could not ignore it; we had to live it on a daily basis. The best laid plans of mice and men oft go awry [Robbie Burns], and indeed, COVID-19 threw all our expectations, projections, plans and processes out the window.
Agility is a way of thinking, a way of acting, a way of decision-making that is not limited to our ability to develop, implement and monitor plans. But agility is not just about “luck”. But “luck” can be seen as a dimension of agility, so long as we understand “luck” properly.
Many years ago a mentor once told me that everyone can be lucky. However, the difference between the lucky ones and the unlucky ones is how they embrace opportunity. The prerequisite to luck is opportunity and opportunity is somewhat free-floating – opportunity is everywhere and for everyone. The lucky ones are those who can seize opportunity and do something with and about it. The unlucky ones are those who cannot see or seize opportunity and are left behind. Luck is not magic; it is opportunity embraced – no matter what.
Agility requires the organizational capacity and the personal capability to deal with uncertainty, to handle limited direction, and to react with immediacy in the face of constant change. You cannot plan for uncertainty. Nor can you expect immediacy in a hierarchical command culture. And you cannot handle constant change where one or a few decision-makers command, while the majority execute and follow.
An agile culture is a collective and collaborative response that allows us to “take advantage of thousands of brains”. As leaders look to accelerate the metabolic rate of their business, whether that business is commercially competitive or societally service minded, they will need to be deliberate in protecting what has worked well and guard against the “legacy ways of working” creeping back.
Central command is effective at managing a crisis head-on, but it should not be mistaken as a model for growth. That is the most critical limitation of a central command business architecture. The new normal is about harnessing the vitality and effectiveness of extended agile teams and networks working on objectives, not simply doing tasks.
Agility is about embedding a culture of experimentation, learning and “iterating” in business, in the economy, in society. It involves
- empowered ways of working [collective brainpower]
- clarity of purpose [answering the value-laden question “why do we exist in the first place”]
- focus on what can be done [immediate wins]
- animating the organization [building hope]
- allowing people to “figure things out on the fly” [innovation]
- enabling people to learn and adapt [flexibility]
We must accept the brutal facts: there is no playbook and there are no experts to follow. There are lots of experts and many opinions, but in the end we have to invent and innovate. People are on their own to try and figure out the best ways to handle reality as it unfolds. The key to success is found in harnessing that energy, creativity and innovation.
The archetypes for post-crisis builders are models of behavior, which we can admire and/or learn from. Agility, however, is not modeled behavior. Borrowing from sports, agility is the key component of fitness, the capacity to enhance performance and succeed.
An agile company, and an agile society, like an agile athlete is able to move, change direction and re-position quickly and effectively while in control of its actions. It requires quick reflexes, coordination, balance, speed, and correct responses to the changing situation.
To be agile, businesses and societies, as well as individuals, need to respond to what is going on around them, taking in that information and translating it into new positions and opportunities that will maintain balance and control. It involves moving to the best position to take the next action, no matter what the situation. Agility is the heart of resilience.
Q4 OF 5. HOW SHOULD YOU RETHINK YOUR TALENT STRATEGY SO THAT YOU HAVE THE PEOPLE YOU NEED WHEN THE RECOVERY STARTS?
We all know how this is going to devolve as we recover from COVID-19. We will engage in collective amnesia and try to restore the old normal. Remedial actions that companies undertake to recover from COVID-19 will include such usual things as cutting costs, improving processes, stockpiling inventory [just in case], reducing staff but retaining the minimum needed to recover in anticipation of the future “once we get up and running again”.
At the corporate, societal and even political levels, we will accuse globalization of being the root of our unpreparedness. So we will seek to relocate locally, on-shore, near-shore, and so on, imposing greater and more direct control on the company, on the economy and on society. We will aim to make things less complicated, or at least less beyond our control.
At the operating level, we will plan for the return of robust processes by creating shorter supply chains, increasing inventory and expanding warehouses and distribution centers so that we are closer to the end user customer and consumer.
At best, these are bridging actions, which under the right circumstances are a reasonable approach and can result in much lower pain. At worst, however, they are delusional. They fail to recognize that control is an illusion, and that complexities are not synonymous with complications or problems that can be solved, because the future is unpredictable and aggressively ambiguous. The pervasiveness and severity of COVID-19 demand transformative strategies that command and control actions cannot provide.
As Jim Thompkins says, companies will revert to optimality [such as redesigning networks in order to optimize inventory], and thereby fail to achieve optionality. Optionality requires that companies create “numerous scenarios and be able to pivot among them as circumstances dictate”.
Optionality is the transformative strategy needed to deal effectively with the VUCA of the new normal:
- Volatility, which is not just about change, but is about the speed and frequency of change [do we panic or are we resilient enough to deal with the issues?];
- Uncertainty, which is not just about being unaware of what is happening, but is about the total lack of predictability, making it impossible to define requirements [If you cannot define requirements, then you cannot optimize operations (Thompkins)];
- Complexity, which is not the same as complications, but is about the multitude of variables, the confounding of issues, and the blurring of roles and responsibilities [what do we need to do? who is going to do it? When? Where? How?];
- Ambiguity, which is not about confusion, but is about situational flux, the lack of clarity, and the inability to get a good read on what is happening [how can we control what is constantly morphing in front of us even as we plan to act?]
Where do we begin? With people. Whatever the strategy [expressed succinctly in the question: where do we want to go?], and whatever the process [expressed succinctly in the question: how will we get there?], people are the fulcrum of success [expressed succinctly in the question: who is driving the bus?]. Talent is of prime importance for a successful transformative strategy.
It is critical for business, political and societal leaders to adopt a through-cycle mindset about people. A through-cycle mindset is not just a retention strategy to keep the right talent; it is also competency-building strategy focused on people you already have. We need to develop a talent-building road map to sustain the business-building road map so we can deal effectively with the new normal.
A talent-building road map is not simply about developing employee training plans. Talent-building is a cultural factor. Any and all training must build on a learning culture [Senge, The Fifth Discipline] –whether corporate or societal. In the face of COVID-19, a learning culture must enable individuals to have a through-cycle mindset so that they handle the VUCA new normal faced by businesses and by society at large. So what is a through-cycle mindset?
A through-cycle mindset (a) considers stressful scenarios, (b) models survival and success drivers, (c) prioritizes actions and (d) engages in long-term thinking that strategically positions the organization and society not only for post-crisis success [recovery] but to handle VUCA.
Given the uncertainty about how the future will unfold, and recognizing that we cannot avoid crises in the first place, three principles should be the foundation of a learning culture aimed at developing and implementing a through-cycle roadmap:
- Flexibility calls for developing and testing scenarios that previously would have been unthinkable, and applying high-level stress tests. When typical five and ten-year plans are not possible anymore, strategy must shift to a more dynamic and opportunistic mode.
- Awareness means increasing business intelligence: identify the signs and early indicators that would suggest in which direction events are unfolding, and then use pre-determined trigger points to set into motion a set of actions. Become intuitive, not just statistical.
- Increasing resilience enables organizations to respond better to uncertainties. Resilience requires reducing fixed costs [how many warehouses do you need?] and creating options.
How do we develop talent that is flexible, aware and resilient? We begin at home:
- Who among our current employees demonstrated the talent, resolve, and capabilities to deal with the crisis as it affected them, society in general and the company in particular?
- What groups or pools of talent emerged in the face of the pandemic as reliable, useful, self-motivated and entrepreneurial?
- What competencies emerged as the most significant and useful to meet the challenges as they emerged, to initiate recovery, and to sustain resilience for the future?
- What competencies and skills were missing during this time, but are identified as necessary for the future?
- How do we enhance the talent and skills already there and develop new talent and skills to ensure we have a resilient workforce and a through-cycle learning culture?
Q5 OF 5. WHAT INVESTMENTS ARE THE MOST NECESSARY TO CREATE THE ENVIRONMENT THAT WILL ALLOW YOUR COMPANY TO THRIVE IN THE NEXT NORMAL?
COVID-19 revealed that digitization is critical to both recovery and sustainable resilience. One of the systemic weaknesses inherent in how companies and other institutions, including governments, run their operations is how they digitize. The critical error is to see technology only as a support function to deliver products and services, with an overriding concern for costs. However, technology needs to be positioned strategically as the generator of value, and not simply relegated operationally as the deliverer of value.
As stated previously, organizations will succeed in the new normal by generating value, not just by delivering value. Value creation, however, must also account for flexibility, security and resiliency. Digitization enables us to shape the business strategy, enables us to design and develop the business-building road map, and enables us to sustain the learning culture characterized by a through-cycle mindset.
We fear technology, and in particular digital technology, and limit its use to support efficient processes. We fear that IoT will replace us as human assets. We fear that more efficient IT systems will outpace our ability to function, decide and act. We fear the algorithm, because we fear our own obsolescence.
Our fears ring true only if we narrow our perspective on self-preservation. It’s not about surviving; it’s about succeeding. Widening our scope, we must recognize that digitizing technologies highlight the reality that businesses are ecosystems. We must develop a through-cycle mindset and a resilient culture to achieve the full potential of our own capabilities.
Let’s not just think outside the box; let’s reinvent the box. A business ecosystem, and society at large, is a community of living organisms interacting as a system to achieve individual and collective objectives and goals. Interconnectedness is not just about being linked together, as analogously denoted in the term “supply chain”. It is about thriving through dynamic relationships, shared responsibilities, and multi-faceted roles.
In reinventing the box, let’s learn from biological and environmental ecosystems as a new way to think about business in particular and society at large. Ecosystems are dynamic entities, subject to cycles of crisis and recovery. These fluctuations are normal, and the new normal is recognizing that flux [crisis by any other name] – detailed as volatility, uncertainty, complexity and ambiguity – is reality. We cannot avoid crisis; we have to learn and build from crisis.
When a crisis occurs, an ecosystem responds by moving away from its initial state [status quo]. The tendency of an ecosystem to remain close to its original state [that is, go back to the old normal], “in spite of” that crisis, is termed resistance. The speed with which the ecosystem handles the new normal “in the face of” crisis is called resilience.
A digital ecosystem is a particular kind of ecosystem characterized as a distributed, adaptive, open socio-technical system with properties of self-organisation, scalability and sustainability. Digital systems do not simply connect different parts in a network; they are the complex nervous systems that energize the sensory, integration, and motor functions of the ecosystem [thereby generating value]:
- Sensory: collecting information that monitor internal and external conditions.
- Integration: processing, analyzing, evaluating information leading to decisions.
- Motor: deciding and acting.
When considering a digital transformative strategy, we must distinguish between a heuristic mindset and an algorithm mindset. Algorithm is a methodical, logical procedure that thrives in a business management environment. “Heuristic” is a hands-on approach to discovery that thrives in a business-building environment. Where algorithm fosters optimality, heuristics fosters optionality. The one [algorithm] characterizes a command-control culture; the other [heuristic] characterizes an agile culture that “takes advantage of thousands of brains”.
COVID-19 revealed that command and control business models cannot handle uncertainty, cannot support flexibility, and cannot deliver options in the face of “what if” scenarios. If we invest in digitization technology as a more effective means to deal with all these issues, then we must also rethink our approach to digitization. Digitization is not simply about the ability to handle information or process ever increasing amounts of data more efficiently. Digitization is transformative: It is about a business-building capacity.
Leadership Imperative: As companies and society at large move down the road to the new normal, the necessity for leaders to become contextually intelligent increases. Contextual intelligence is a set of skills and competencies that involve the ability to recognize and diagnose the multi-dimensional complexity of contextual factors inherent in a situation, such as a global pandemic, and to adjust, both intentionally and intuitively, our behavior and capability to influence, as well as make decisions in, that context.
Contextual leadership is an ethos, not a model. It is personally complex – real and perceived, psychological and social, physical and metaphysical. It is contextually complex – including such things as: geography, genders, industries, job roles or titles, attitudes, beliefs, values, politics, cultures, symbols, organizational climate, the past, the preferred future, and personal ethics. It is interpersonally complex – needing to recognize these contextual variables in self as well as in external and internal stake holders.