2 Knowing when the winds are coming
‘I’ve been practising Japanese martial arts since university and one of the concepts you pick up is that you learn to read energy, people energy, body energy. You see the person, he’s going to move, you see a punch, you see a kick, you see everything, but there’s something else and by beginning to read that something else gives you a competitive advantage.’
Bijan Khosrowshahi, Fuji Fire and Marine
Cash up-front
K.V. Kamath is chairman of ICICI Bank, the biggest private sector financial services group in India, as well as being the country’s largest private equity player, the biggest life insurance and general insurance company, and the third largest asset management firm.
As we spoke, K.V. Kamath was preparing to become chairman of the company, having been CEO since 1996. It was a mark of his leadership style and achievement that he was handing over to a 47-year-old woman who had risen up through the bank. K.V. Kamath’s entire business philosophy is built around creating a meritocracy, encouraging young talent and promoting superior performers to powerful positions at an early age. His commercial insight can be neatly summed up as speed equals capital.
And he puts it to work. Back in July 2007 ICICI raised capital. Indeed, while other financial groups carried on with business as usual, it doubled its capital.
‘What really struck us at that point was things were getting hot in the commodity price cycle, with a proliferation of products, signals from the West on property prices and the situation on the property front’, K.V. explains. ‘Nobody thought there would be a crack in the whole setup. We thought we would be better off preparing ourselves with healthy levels of capital. So we shocked the market. It was a bold decision and, of course, some of my colleagues resisted it, but we had the support of the board. In hindsight, it was the right decision because through this crisis, we have not really had the need to look at equity at all.’
Forearmed is forewarned
While ICICI was making bold decisions, which set it apart from the competition, few other companies made adequate provisions for the fallout when it emerged. ‘The people who are moving through this with less angst and less damage are the ones that probably prepared better from the beginning. People didn’t recognise the magnitude of risk that was out there’, says Leo Burnett’s Linda Wolf.
Only a select few saw it coming. Among them was PricewaterhouseCoopers, the global auditing firm. Former Global Chief Executive Officer of PwC Sam DiPiazza told us: ‘Five years ago, we pulled back from sub-prime lenders because we were concerned. We’re auditors, we looked at that and said, do we want to audit sub-prime lenders? And we said, there’s too much risk, based on the way we saw the business going. We began reducing our high-risk areas two years ago, because you could see that there was a cycle coming, especially in the big developed countries.
‘When I look at some of the changes we made, they were painful for our people. We didn’t couch them in terms of a global recession coming, we simply said, we want to be very prudent in the way we spend money, in the way we grow our businesses, we’re not going to always be growing in double digits, no cycle lasts forever. So we’re just going to be a little bit more prudent. We’ve got 150,000 people round the world, and I’d say 145,000 of them had no clue that we were slowing the strategy down. We hired fewer people, we didn’t slow down our promotions, and we continued to admit people to partnership, but we went to the leaders and said, okay guys, ratchet it down a little bit, because we think somewhere out there this is going to slow down. In the big, hot markets like Eastern Europe and China, it was really hard to do, so they kept their pace going because the demand was so high, but in most of the markets we were able to just slow it down gradually and we didn’t disrupt or disturb the line people.’
The art of such subtle anticipatory shifts is barely understood. Professor Richard D’Aveni of the Tuck Business School in New Hampshire coined the phrase hypercompetition to describe the fast-paced nature of business as he saw it then. That was 1994 – before the Internet was widely known – and it has got a whole lot faster since. In fact, in his recent book Beating the Commodity Trap, D’Aveni describes today’s environment as ‘Hypercompetition on steroids!’ His book is all about how nimble leaders can take steps to outmanoeuvre their competitors in turbulent times.
As he explains: ‘Most executives I talk to are comfortable with the notion of seizing opportunities. They understand that a proactive stance is often far better than a reactive one. The problem is that they can’t necessarily see the window of opportunity in time to take advantage. Anticipating moves in their markets is what many able executives struggle with. Too many feel like deer caught in the headlights of oncoming traffic.
‘The questions I hear a lot are: How can we see the earthquake coming? When do we need to make the change? How can we tell what our competitors are going to do before they do it? The answers lie with anticipation.’1
Anticipation is a critical factor and one which has been notably lacking in recent times. In December 2007, David Owen, chief European economist at Dresdner Kleinwort Investment Bank, put the odds of a recession in the UK during 2008 at 50 per cent. By early 2009, Ed Balls (former chief economic adviser to the UK Treasury) commented: ‘The reality is that this is becoming the most serious global recession for, I’m sure, over 100 years, as it will turn out.’2
The point is that you have to be looking for the dips in the road, or the change in the direction of the wind. Some organisations and leaders are and were clearly better prepared for unprecedented turbulence. Some countries even fared better than others. While Iceland hit the banking buffers, nearby Norway was racking up a budget surplus of 11 per cent, saw its economy grow by 3 per cent in 2008 and upped its stock buying programme as shares plummeted around the world. ‘The strongest man is he who stands alone in the world’, said Ibsen.3 Elsewhere, Chile also boasted a fiscal surplus of 5.2 per cent of GDP in 2008. Few other nations can compete with these levels of foresight.
Horizon scanning
There are two levels to preparedness: organisational readiness and individual sensitivity to the changing context.
Michael Jarrett of London Business School has carried out extensive research into why some companies are more successful at change than others. Jarrett and his colleagues surveyed more than 5000 real managers and leaders in over 250 companies across different regions, from Australia to Zimbabwe. The sample included financial services organisations, pharmaceutical companies, manufacturers, and a host of others.
Using advanced statistical methods, they identified five critical internal capabilities that made the difference to organisations’ fortunes. In his book Changeability, Jarrett uses the metaphor of sailing to describe organisational readiness for change. He notes: ‘We identified the difference between those that succeeded and those that did not: their readiness to change. By this, I mean the managerial and organisational preconditions and internal capability to change. We find these in the organisation’s routines, processes, and implicit learning.’4
Two factors identified by Jarrett are especially resonant during turbulent times.
‘Scanning the horizon: Senior management teams that constantly scan their strategic environment tend to outperform their less eagle-eyed counterparts. They run constant radar sweeps of their surroundings, using a variety of data sources. Detecting new trends in the environment is often a stimulus for change, and it means that managers plan contingencies as the environment changes rather than waiting until the storm reaches their bows.
‘Making sense of the signs: You can tell a lot about the approaching weather by reading the clouds, changes in the wind, and the subtleties of the waves. This is also true in the corporate world. Trends and data from the external environment need to be absorbed and used in decision-making. Senior management teams that are able to draw accurate and incisive conclusions based on organisational routines and good judgement are more likely to achieve change. They are able to make sense of what is going on and interpret the implications of their environment.’
At an organisational level, many of the companies we talked to had elaborate planning and strategy calendars. Infosys, for example, runs scenario planning, three-year business plans, one-year budgets and quarterly revisions before budget.
Sometimes these processes have proved woefully incorrect, but to some extent this is missing the point. By their willingness to engage with the future these organisations were already better placed than their competitors fixated in the moment. It is worth remembering that complacency and arrogance are the two greatest barriers to forward-looking vigilance. Failing to listen to feedback from the troops is another related and repeated threat.
Looking to the future and exploring difficult and different scenarios is actually a thoroughly healthy sign in organisations. It is an antidote to hubris. Says Ed Dolman of Christie’s: ‘The art market has sharp ups and downs, so at no point did we ever think we were in some sort of gravity-defying journey upwards.’ Commercial gravity means companies and leaders can go down as well as up.
Healthy futures
Among the most far-sighted was the American healthcare group, Kaiser Permanente. It talks of a nuclear winter and a winter storm scenario. A winter storm is when the weather gets really bad and nuclear winter is when absolutely the worst thing that could happen turns into reality. Every year, Kaiser’s senior executives go away and consider the possibilities. What if that happened? How would they respond, how should they anticipate, how should they interact now to keep it from happening?
This is then translated into a risk flow chart capturing the things which could put Kaiser at risk. These might include Medicare cutting back on the amount of money it pays the company; new legislation; competitors doing certain things; adverse media events; and so on. Solid self-esteem gives a leader the confidence to resist hubris and grandiosity. As a result, they can be receptive to warning signs and be the trusted bearers of potentially bad news.
In 2009, the executive team looked back at the 2003 version of the risk flow chart, which accurately predicted that in 2009 Medicare would significantly cut Kaiser’s reimbursement because of major funding problems. The Kaiser team also predicted that the stock market would collapse because the housing bubble would burst, that fuel prices would be too high, and that the US auto industry would sink into the dust. In fact – and uniquely among the executives and organisations we talked to – Kaiser accurately anticipated the recession. It realised that in a recession it needed a different product mix and required a price sensitive response because people wouldn’t have any money, and the low price is going to win. Out of that winter storm scenario, Kaiser began planning a product offering that, in fact, turned out to be 10 per cent of its business and may rise to be 25 per cent.
As Kaiser CEO George Halvorson puts it: ‘We’re constantly looking out, we’re constantly living in the mode of 3- to 10-year plans and the 3-year part of the agendas are really robust, robust and living.’ A truly visionary leader not only has the creativity to look forward for new opportunities, but also has the wisdom to be on guard for unforeseen perils and risks.
True north
‘I believe that remaining true to what I think and believe should be the stance to take in all that I do to perform my duties. Putting this into practice perhaps helps me avoid stress. I also manage to squeeze in time to spend with my family, however busy I may be’, Kazuyasu Kato of Kirin Holdings told us.
This was a common theme among the leaders we talked to. There was a sense among the leaders that they were firmly grounded. They knew their own true north, what they stood for, what mattered to them. This was important day to day in their decision making, but it also made them acutely sensitive to potential changes in the future.
‘I think the people who can fare very well through this kind of situation are those with a foundation of a strong culture, values and vision to rely on. That will always be true’, says Linda Wolf. ‘Strong leaders thrive in this kind of situation. It is interesting to see the people who take something like this and learn from it; and also, there are people who surprise you in that they’re up for the challenge. You really see the people who have that inner core of strength to deal with it. There’s some people who you might, in normal circumstances, think are strong and then when it comes down to something like this, it’s amazing how quickly they can fall apart.’ Without a true north you quickly become disoriented by changes in the weather and can’t anticipate where the next bout of turbulence is going to come from.
Customer radar
At an individual level, leaders can also do a lot to anticipate turbulence. Some of this is almost unconscious; other elements highly deliberate and conscious. The ability to sense different situations, to tune into shifting contexts is one of those skills leaders have to acquire. They tend to have their own individual tools and techniques for sensing the moment – and anticipating a change in the direction of the headwinds.
Some spend time with customers. ‘I’ve always spent a lot of time out with customers because to me that’s what makes companies exciting. I’m not a huge stay inside the office and do four week reviews of tonnes of spreadsheets’, says Tom Glocer of Thomson Reuters. ‘Companies for me come alive by seeing customers playing with our own products and getting out to see our employees around the world. So I’ve increased my time with customers.’
Asked about how he spent his time as the then CEO of Pitney Bowes, Michael Critelli estimated that around 5 per cent was spent on board and corporate governance matters; 25–30 per cent on meetings – individually with people who worked with him, staff meetings and around 150 one-to-one meetings every year with people from all levels of the organisation; 5–10 per cent meeting with industry officials, politicians and other regulators; and 10–15 per cent in some form of interaction with customers. In addition, he attributed around five days a year to talking to shareholders, analysts and rating agencies, and his remaining time was spent on a variety of outside activities which somehow relate to his job. Whatever the split, it is clear that communicating with people inside and outside the organisation lies at the heart of the job description.
As we will see, at the heart of situation sensing is communication – both incoming and outgoing. One of the most adept situation sensors we encountered was Bijan Khosrowshahi formerly CEO of Fuji Fire and Marine. ‘It’s like having your antennas up so you can also perceive what’s happening so you can adjust your message or how you are communicating if something is not working.’
In the next chapter we look at making the leap from anticipating change to communicating what needs to happen now as you encounter the realities of turbulence.
Resources
Richard D’Aveni, Beating the Commodity Trap, Harvard Press, 2009
Michael Jarrett, Changeability!, FT Prentice Hall, 2009
Nirmalya Kumar et al, India’s Global Powerhouses, Harvard Press, 2009