Mar 09

The perfect storm

The concerns and the difficulties companies are currently grappling with, in fact, reflect not only the crushing repercussions of the sweeping liquidity crisis triggered off by the careless, disastrous behaviours of the multitude of financial players. This very first storm, which has driven the economic change, is very bad because the widespread mistrust and the growing concern about the future voiced by savers, financial brokers and investors, has triggered off a vicious circle largely affecting the economy. The population’s consumption propensity is shrinking, thereby producing a disastrous impact on the companies supposedly addressing them as their targets. Struggling to get access to credit, companies have to reappraise their short- and long-term plans, while their shrinking profits further reduce the generation of value that can no longer be shared out to the shareholders and to the staff for fostering consumption and investments.

Many opinion-leaders have voiced the hope that the intensity of this very first storm will begin to attenuate during the next 12 months and will definitely come to an end over the next 24 months, in other words in a two-year’s time. Nevertheless the challenge confronting companies will not be confined to the above timeframe because, at the same time, many of them will have to cope with the second storm, namely the one we have referred to as structural. The second storm embodies the most radical change that, instead, is under way in many markets and directly impacts on the critical factors of success and on the current configuration of the business model implemented by companies. Paradoxically, when comparing the two storms, the first one seems the most daunting to tackle because the financial crisis calls for responsive, effective measures that be able to produce visible, immediate results. Nearly simpler, instead, is facing the structural change that, with a view to straightening the accounts, requires stricter, more radical measures.

In order to cope with the perfect storm, it is advisable that businesses should manage the present and at the same time, instead of afterwards, should plan the future. In order to succeed, it is necessary developing two plans, one to face the “crisis”, the other one to deal with the “post-crisis” market.

The first plan must be outlined so as to tackle the dire straits we are struggling with today and which shall affect us in the months to come against which a reduction in consumption, the scanty availability of resources, most of all financial ones, are being witnessed. This plan must be approached in keeping with the assumption set forth by Vilfredo Pareto: 20/80. The principle formulated by Pareto proves that a minimum amount (20%) of causes, inputs, efforts generates the maximum amount (80%) of results, outputs and benefits.
Accordingly, “20/80” means pouring energies and resources with a view to monitoring and improving 20% of the drivers generating 80% of the value, 20% of the clients producing 80% of the proceeds and often also of the profits, 20% of the activities arising 80% of the problems and so on. 

Pareto’s assumption, therefore, above all in hard times, urges us to stay focused. It is not only a matter of cutting down on costs. Many companies, in fact, have already treasured up this lesson and the cost-saving programmes implemented have begun to reap the benefits as early as following 11th September 2001. However if you believe you are not clear-minded enough, do not hesitate to take action. Be that as it may, do not follow in the footsteps of the CEOs of three leading US car industries who, calling out for help to the Senate in Washington, were rebuked for having decided to fly to Washington each aboard their private jet. In this respect, Pareto is strict. It is imperative that 20% of the business generating 80% of the unnecessary costs, rather than core business, should be addressed. Staying focused means keeping a still closer eye on the clients. Clients are and will increasingly be the only truly scanty resource. Applying Pareto’s rule to clients means: 1) to identify 20% of the clients generating 80% of your proceeds, 2) to identify 20% of the clients contributing to 80% of your liquidity and to transform them into cash flows or more drastically, in case they are not strategic, to surrender them to the competition, 3) to focus, manage and improve 20% of the touch points that generate 80% of their customer experience.

Pareto further invites us to focus on 20% of the minor innovations that may turn out helpful to protect and improve 80% of our competitive edge. Also, in hard times it is key trying to steadily come up with minor innovations. Not only in terms of products and services but also vis-à-vis manufacturing processes, logistics, management of human resources, customer relationship. Lots of small things may mean a lot. Do you need any evidence? Simply line up all of your minor innovations and count them. If you can count them on one hand, for sure there is plenty of room for some creativity.

The second storm, namely the one arisen under the structural change, elicits, as you would do with a book, to jot down a draft of the post-crisis plan. The post-crisis plan is strategic because, in two years, many companies will be presented with a new world, with different needstates and clients as well as with reinvigorated competitors. We just cannot wait and see it all happen, it would be too late. By this plan you have to jot down all of the helpful intuitions to:

1) Reconfigure the business model. When economic-financial results are not brilliant and they are likely to be compromised once and for all, you must have the courage to redesign your business and get it ready to face the consequences of the structural change which, sooner or later, will affect each and every industry. The publisher of my article knows that the speed clock has begun to tick away time in the publishing world driven by the new needs and by the consumption behaviours put in place by its readers.

2) Designing paradox. Be always inspired by utmost value. The paradox is a statement featuring mutually exclusive contradictions and propositions, yet at the same time able to produce results (improving quality and reducing costs, making the most of “less is more”, personalising and standardising, developing development-free). Paradox does not urge you to go for one option to the detriment of the other, paradox invites you to adopt both. You will always find the unifying principle that settles opposites right in the middle. What paradox can be formulated in relation to your company, to your markets?

3) Innovating or shutting down. Success is subordinate to non-stop innovation. A research addressing 40 different industries has been carried out which has highlighted that only a bunch of companies have succeeded in outperforming competition for as long as over 10 years. The best performers, the successful companies have thriven by generating an on-going flow of innovations resulting into short-term advantages that are steadily fuelled. Rather than wondering about the role of technology, we should wonder in what way  successful companies use technology. The answer is easy: 1) they do not use pioneering but established technologies, 2) they pioneer, instead, the application of carefully selected technologies, 3) they use technology as change accelerator, 4) they are aware that innovation must generate value to the benefit of the client, 5) they are not merely focused on technological innovation, 6) they innovate and wisely make errors.

4) Developing dynamic strategies. In order for change to occur, it is necessary to dismiss conventions and tenets. In order to outperform competitors, you have to either bypass or move around them by creating new markets, finding new clients, entering new distribution channels, penetrating new international markets, making the most of the Internet potentials.

5) Avoiding ants’ imitation spiral. Imitation is an age-old, helpful practice and a survival mechanism. Like puppies in the animal kingdom which learn to play, fly, hunt, so do young human beings who learn to walk, speak, work and court each other by imitating their fellow people. When it comes to business, a similar process may be witnessed spread by successful examples, by benchmarking, by observing other companies’ best practice. When a company is successful, others usually try to follow suit. A great many companies, however, are likely to experience the same nightmare as ants when they move around in clusters: due to a mistake made by the leading ant, they end up in following their fellows at the rear. An amazing spiralling mechanism thus comes into being that feeds off itself. Ants keep on marching on relentlessly and untiringly until, continuing to imitate each other, they are so weak that they die.

In order to draw up the post-crisis plan, it is important that we should face even the starkest reality while shaping an organization climate against which truth be listened to and facts be compared. Which requires to put four things in place and to pursue the paradox of faith.
The four things urge to do the following a: 1) ask yourself as many questions as possible, instead of only providing answers, 2) foster dialogue and communication, 3) go through a  strict self-examination, without either seeking culprits or punishing innocents, 4) transform data and information into knowledge that cannot be ignored.
Instead, the paradox of faith reminds us that, no matter what it may be like, we have to confront reality and, at the same time, be convinced that eventually we shall make it in spite of the difficulties that might arise. Optimists are not the victors, nearly always victors are those who are able to be realistically optimistic. Confronting ourselves with reality makes us stronger, more responsive, more pro-active.