Boyden Leadership Series: Part 2 — The Challenges and Opportunities of Crisis
Volume 1 Issue 2«| Page 1 of 1 |»
“A time like this gives us the opportunity to make the changes we’ve needed to get done.”
Crisis is always about change. Leadership in crisis is about managing change. Leadership in extreme crisis ultimately is about changing your business.
Ram Charan believes that a new reality is created during extreme crisis, with new customer requirements. Charan says businesses must respond to those new requirements with new models, new products, and new styles of execution. This is not easy for leaders or for the boards that oversee them. But history suggests that having to change in response to crisis is not necessarily a bad thing.
“Crisis is a two way street,” says Joseph Daniel McCool, author of Deciding Who Leads. “Crisis is destructive and it is constructive.” Innovation often increases in times of crisis. The best new business models rise from the wreckage and bitter lessons of older, failed business models.
Nowhere is this process more visible than in the Silicon Valley. Bob Concannon, Manager Director for Boyden Chicago, and a veteran of boom, bubble and bust cycles in technology, says “What we’ve seen in California is that if you knock companies down enough times, it actually creates more creativity.”
A classic example is chip-maker Intel. When lower cost competitors from Asia destroyed the market for Intel’s memory chips, Intel in desperation shifted to programmable chips which could be adapted for a wider range of uses, including personal computers. Later when business didn’t buy the more powerful chips Intel continually developed, Intel discovered home-users needed the extra power for multi-media computers. And even though the global financial crisis has forced customers to cut back on buying products that depend on Intel chips, Intel is not cutting back on research and development. Instead it is investing heavily in R&D so it will be ready when demand inevitably goes back up in the future.
Despite Charan’s concern that leaders today lack the experience to manage organizations through a “100 year economic storm,” there are leaders who have significant exposure to extremely volatile economic environments. Companies in emerging markets such as Brazil and in isolated geographies such as South Africa have learned hard lessons in surviving economic disasters.
John deMarmon Murray, Boyden’s Managing Director for Brazil, says that country offers a successful model for leadership during economic crisis. Brazil went wild with hyperinflation from 1980 to 1994. Leaders had to find ways to operate businesses profitably even though inflation rates reached as high as 1,000 percent annually, and unannounced maxi devaluations plagued balance sheets and cash flows. Today, Brazil’s inflation rate is 6% a year.
“It took tough-minded and skillful leadership to bring Brazil’s economy under control,” Murray says. “They took the country back to the financial fundamentals and kept it there.” For example, in 1981 General Motors sent Rick Wagoner to help turn GM Brazil around. Wagoner understood currency markets and he shifted early to building small, highly efficient cars that used alternatives fuels like ethanol. (If General Motors had followed the same strategy in Detroit, General Motors might have avoided current financial issues.) Today Brazil is energy-independent. It enjoys the tenth largest economy in the world. And unlike the other developed giants, Brazil is not dependent on the U.S. for trade, because it opened up large export markets for soybeans and iron ore to countries such as China. Murray says, “Operations in Brazil still requires special knowledge. CEO’s and their Financial Directors must have extremely good cash management and hedging skills.”
South Africa has also had lots of wide swings and many crises. As a result, says Boyden’s Jules Kieser, “Leaders here manage with the memory of bad times in mind. They are more likely to reserve resources needed for survival and recovery later.” Companies in emerging markets have learned they must always be prepared to shift operations and strategies. “Here we lead through change all the time,” emphasizes Kieser.
“Crisis forces people to look at performance,” observes Brian Renwick, Managing Director of Boyden China. But that does not mean leadership will be changed when performance declines during trough economies, Renwick says Chinese companies are more likely to continue to stick with existing management.
Multinational and U.S. companies, of course, are deeply focused on quarterly results. As the current crisis deeply impacts business volume and profitability, and as unemployment soars, you’d assume turn-over of CEOs and other C-level executives would increase. But surprisingly, that didn’t happen in 2008, at least not in North America.
Richard Jacowitz is Senior Vice President of Liberum Research, a service used by investment bankers and others to track changes of C-level executives at public companies. Jacowitz says that since the United States economy officially went into recession in December of 2007, turnover of C-level executives has actually declined.
2008 CEO turnover fell nearly 10 percent against 2007 figures. CFO turnover fell 14 percent. Overall C-level turnover was down nearly 15%.
Even more surprising is that as the global financial crisis has deepened, executive turnover has continued to decrease. Q1 saw a drop of 4.74 percent in C-level turnover. Turnover in Q2 dropped to 8.5 percent, then dropped 23 percent in Q3 (against 2007 numbers). And in the most recent quarter, Q4 of 2008, C-level turnover was 34 percent less than it was in Q4 of 2007.
Richard Jacowitz co-writes a blog for Liberum called Management As Change Agent (http://managementaschangeagent.blogspot.com). He recently wrote that despite a decline in executive mobility, 2008 still saw “a large number of high profile and significant executive changes…that often impacted their [companies’] overall performance.” Jacowitz suggests that corporate management had saved their own jobs by cutting corporate expenses and head count, but that Liberum expected executive turnover to begin increasing as the crisis continued to worsen in 2009.
Why are boards not necessarily in a hurry to change out existing management? One answer may lie in a recent study that compared the length of CEO tenure with company performance explains why. The longer CEOs stayed in place, the better their companies perform – at least up to ten years. The paper by Professor Anthony Williams of Cass Business School in London suggests that after CEO tenure passes a decade, company results may begin to suffer. (Another interesting observation is that the research data shows internally appointed CEOs may generate slightly better results for companies than externally appointed CEOs.)
In terms of strategy, regardless of who is leading, survival often dictates that leaders and teams focus on reducing costs and trimming activities that don’t support the most core business and brand. But at the same time operations are optimized, leadership must also focus on core business strategies that will be need to succeed when things turn around.
The opportunity of tomorrow is almost always nascent in the organizational crisis of today. The bad times are the best time to get ready for the better times that will follow. Boyden’s Brian Renwick thinks, “Leadership may actually be easier in bad times. People know times are bad. People know that changes must be made.”
“A time like this gives us the opportunity to make the changes we’ve needed to get done.” says Dinesh Mirchandani, Managing Director, Boyden India. “The terrorist attacks in Mumbai have shaken everything up. Meanwhile with global economic conditions now being felt, everything has just come to a grinding halt. People are fed up with a lack of leadership. They are finally willing to do something about it.”
Turning Crisis into a Leadership Opportunity
A paper written by five military officers who attended Harvard’s Kennedy School of Government provides a blueprint for how to lead through a crisis.
Is there a specific blueprint for leading through a crisis after the unthinkable has happened? A 2005 paper written at Harvard’s John F. Kennedy School of Government provides a pragmatic and easy-to-understand set of best practices for leading through a crisis.
Five members of the U.S. military researched three different crises in
order to document successful strategies for leadership in the worst of times.
The three incidents included the Johnson & Johnson Tylenol poisonings in 1982, the Malden Mills Fire in 1995, and the 9/11 terrorist attacks in 2001. These were basis for seven strategies described in their paper called “Crisis –
A Leadership Opportunity.”
The seven strategies include:
- Lead from the Front
- Focus on the Core Purpose
- Build the Team
- Conduct Continuous Planning
- Mitigate the Threat
- Tell the Story
- Profit from the Crisis
Leading from the front means immediately taking responsibility, being visible, and staying accessible. Many Boyden clients, regardless of geography, mention “leading from the front” as something leaders must do when times are tough.
Focus on the Core Purpose is about establishing the importance of the mission, aligning it with reality, and giving meaning to the effort. Getting a crisis under control is hard and sometimes terrifying work. Controlling a crisis requires turning a company around, and replacing old business models with new. The paper quotes Friedrich Nietzsche as saying “He who has a ‘why’ can bear almost any ‘how’.”
Build the Team is the central task for any leader, but building and maintaining teams is even more important in a crisis. What leaders can do individually is never as important as what leaders can inspire others to do. Building and maintaining teams involves inspiring trust and assuring transparency and fairness.
Conduct Continuous Planning because situations don’t stop changing. Churchill said “In war everything is on the move everywhere continuously.” Leaders must continuously re-evaluate and plan for worse case scenarios. Ram Charan says this is how Dupont, one of his clients, was able to completely reshape itself around the new economic reality between October of 2008 and January of 2009.
Mitigate the Threat involves taking action quickly. Taking action (along with continuous planning) requires gathering the best data from the best sources available at the time, listening deeply, and then acting decisively.
Tell the Story emphasizes the importance of communications in leadership. Everybody involved wants to understand what is happening and why. Telling the story in a simple, understandable, and true way will be effective in focusing and integrating the support of internal teams, external teams and the community. Leaders should be trained to talk with media and use multiple communications media, including the Internet. Look at how Al Jazeera used Twitter on the Internet to out-communicate Israel among influential groups of Americans.
Profit from the Crisis means moving quickly to seize any opportunity that emerges after the threat is mitigated. It emphasizes the leaders in crisis situations must continually “prepare for, respond to, and learn from crises.”
While every crisis and every organization may be unique, success in dealing with a crisis almost always leaves an organization and its leadership stronger and better positioned for future success.
(Crisis—A Leadership Opportunity is available for downloading from the Internet through most search engines.)