how to compete in tumultuous times and operate in complexity

Competing in tumultuous times.

tumultuousadjective

making an uproar or loud, confused noise.

Competing in tumultuous times 1

The Current Operating Environment

Operating in ComplexityThe current operating environment in which today’s leaders’ navigate is characterized by uncertainty and rapid change, with the growing influence of technology impacting business decision and organisational behaviour.

Despite improved global financial conditions and reduced short-term risks, the world economy continues to expand at a subdued pace. After a marked downturn over the past two years, global economic activity is expected to slowly gain momentum with a low-growth pattern expected to persist for at least several years. The macro environment in which senior leaders must learn to operate is no longer characterised by extraordinarily rapid growth punctuated by short and sharp V-shaped downturns and recoveries that affect only particular geographies,

Now senior leaders tasks will involve developing strategies to successfully steer companies through a rapidly changing, uncertain and complex environment. Furthermore executives will need to find ways to navigate this environment by taking advantage of the growing role and impact that technology has in influencing business trends.

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The rate of change is increasing. 87% of global CEOs are saying that they face deeper and faster cycles in their businesses than ever before with each subsequent revolution happening faster than those before. Shakeups like the European financial crises were felt worldwide and mature markets are grappling as high-growth economies are shifting their attention away from manufacturing for export and towards capturing domestic markets.

Contending with such a remarkable range of economic risks, executives are becoming increasingly accustomed to volatility with 86% of global CEOs saying that their business environments are to some extent, or a large extent, becoming more uncertain2.

The degree of complexity is also increasing. More variables are salient to business decisions than ever before, and the interrelations between them are increasingly non-linear. 88% of global CEOs say their business environments are to some extent, or a large extent, becoming more complex while less than 50% of them feel uncertain about how to cope with that change.

Above any other external factor (including the economy), technology is anticipated, by most global executives, to be the primary driver of change in organisations over the next 3-5 years. Technological advancements have driven a sudden convergence of digital, mobile and social spheres, resulting in a new dynamic in stakeholder relationships by connecting customers, employees and partners in new ways to organisations and to each other. Executives recognise that this newly connected era is fundamentally changing the way in which people engage and are looking for ways to take advantage of the multiple opportunities that have arisen for innovation and growth. Leaders have also begun to make changes in talent management strategies. Over 75% of global CEOs described collaboration as the number one trait in employees critical to organisational success and as a result are shifting their emphasis towards creating more open and collaborative cultures and encouraging employees to connect, learn from each other and thrive in a world of rapid change.

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GlobalSituation

A Global Economy in RecoveryEmerging markets, such as Africa and Asia offer significant growth in comparison to developed markets which are slowly recovering from recession. Despite the growth prospects in African markets, persistent regulatory and infrastructure challenges remain, which place a risk premium of doing business in the region.

South African companies are inevitably influenced by the rapid change, uncertainty and complexity of global developments, with macro-economic growth and international markets strongly influencing domestic companies’ profitability. Whilst global growth continues to be disappointing on the back of a slow and weak recovery, growth remains unevenly distributed with emerging and developing countries growing faster than advanced economies, steadily closing the income gap.


Important global economies such as the United States, Europe and China, are slowly recovering from the recession; however, there are mixed signals for future growth. While the United States, the world’s largest economy, has been recovering slowly driven by the continuing purchases of long-term securities by the Federal Reserve Bank and Congress’s agreement to permanently maintain lower income tax rates, Europe continues to face a sovereign debt crisis. In response to this, the European Union has undertaken deep structural reforms.

These have included various financial support mechanisms (such as bailouts and austerity programmes) for countries with troubled economies. While this may have temporarily appeased markets, the memory of the Eurozone crisis is likely to remain fresh in investors’ minds for years to come. And with limited post-recession growth prospects in the United States and Europe, companies have looked to Asia to drive global demand. China’s expected growth rate of 8.4% in 2013 falls short of its pre-recession growth rate (averaging 10.3% between 1999 and 20092); however, the year-on-year increase from 7.5% in 2012 is positive news for South African companies who rely on China’s continued appetite for resources (over 90% of Chinese imports from South Africa are resource-based ).

In today’s globalised world, technology is increasingly essential for companies to compete and prosper and the agility with which an economy adopts existing technologies to enhance the productivity of its industries can increase efficiency and enable innovation for competitiveness. As global mobile penetration and subscriptions continue to grow (subscriptions are expected to rise from 5.3bn in 2012 to 6.8bn in 2017, an average annual growth rate of 5.4% whilst the subscription penetration will grow from 100% to 125%3) the proliferation of mobile based industries such as mobile banking, especially in emerging markets, is expected to increase. Vodafone India and ICICI Bank introduced m-Pesa in India in April 2013.

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The service which was originally launched in 2007 in Kenya, is an example of how technological advancements in mobile technology can help to deliver services to an untapped portion of the population (currently 41% of Indians do not use banking services). Juniper Research predicts that more than 1bn people worldwide will use their mobile phones for banking by 2017, up from about 500m today. In light of recent trends policy makers in emerging markets like China and Mexico have begun enacting measures to make their telecoms markets more competitive, whilst the trend in developed markets such as the US and Europe is more geared towards consolidation.

Despite a particularly uncertain regulatory environment in Africa, companies cannot ignore the substantial growth prospects that the continent offers. Africa is expected to grow by 4.8% this year and 5.3% per cent in 2014, driven by increased output in the natural resources sector, underpinning rising fiscal expenditure, especially in infrastructure projects and expected increases in Africa’s trade and investment ties with emerging and developing economies. Rising incomes and urbanisation are supporting growth in domestic demand which is helping to decrease the exposure to external economic shocks and increase diversification into service sectors such as construction, financial services and telecommunications, which will create a more solid growth profile and contribute to continued economic expansion.

Companies looking to operate on the African continent cannot be guaranteed long-term certainty or a high degree of predictability as the continent offers unique challenges. These markets are characterised by several challenges that contribute to the perception of Africa as a risky destination for business. Poor governance, the prevalence or perception of corruption, tenuous legislative frameworks, fragile security of tenure and unclear royalty and tax regimes make strategic decisions difficult on the continent. Furthermore, long-standing issues such as civil unrest, insurgency and a history of ethnic conflict pose additional operational risks in certain countries.


Infrastructure also remains a significant barrier for African operations. Beyond socio-economic and political complexities, the lack of appropriate infrastructure across the continent is a further barrier for companies operating in industrial and service sectors. The required infrastructure capital is far more than the current infrastructure spend, leaving a substantial spending shortfall. This development constraint leaves investors with little confidence that public-sector infrastructure development will improve sufficiently to facilitate easier operations. African governments are turning to companies in individual sectors, such as mining companies to accelerate infrastructure development and these multi-billion dollar foreign investments are likely to have a far greater impact on African infrastructure development than public-sector spending.

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The Promise and Challenge of South AfricaSouth Africa is the largest economy in Africa with significant market opportunities owing to the emergence of a black middle class, and fiscal and monetary prudence and investments in infrastructure designed to facilitate and support business. However, the country’s business environment faces several challenges, including widespread skills shortages and labour unrest, high crime rates, rising electricity prices, stricter consumer protection laws and a lack of regulatory consistency and clarity. In 2012, economic growth in South Africa was adversely affected by strikes in the mining sector and the recession in the euro area. However with improved global demand and supportive macroeconomic policies a gradual recovery is expected for 2013 and 20148.

The labour environment presents significant challenges for South African companies and potential investors as it is characterised by an expensive and unproductive labour force coupled with social unrest, the inflexibility of employers to manage labour expense inflation and a shortage of indigenous skills. Labour costs remain higher than many other developing countries and it is evident that increases in salary do not equate to a similar increases in productivity which contributes to poor labour–employer relations, which is labelled as confrontational and ranked the lowest in the world.

South AfricanSituation


The majority of the country’s social unrest challenges are concentrated in the mining industry, which has battled with increasingly violent strikes and unreasonable wage demands from the labour force in recent years, with unrest further fuelled by opposing unions that fight to be recognised by employers. Exacerbating labour challenges is the significant skills shortage in South Africa that has been a problem for several years. Although various attempts have been advocated to improve the problem it is still evident that South Africa is ranked as one of the worst globally in the area of primary and general education. In addition, the availability of scientists and engineers in South Africa is also a concern which means that skills are typically imported at a premium.

The current outlook in electricity tariff escalation coupled with the uncertainty of supply is threatening the profitability of existing companies and deterring potential investors away from otherwise attractive market opportunities. It can be argued that South Africa is still one of the cheapest suppliers of electricity globally however this is not the case when compared to similar developing countries.

A lack in the clarity and consistency of regulatory messaging, with topics over recent years such as nationalisation, carbon and super taxes, has further impeded the momentum of the local operating environment and the flow of foreign direct investment. Nationalisation may not become official policy despite being supported by some factions in the ruling alliance, but that does not rule out other mechanisms available to the state for greater participation in mining rents. New draft land laws calling for expropriation in some circumstances will continue to dent investor confidence.


The Strategy of Decision-Making

Strategy is about making choices. Companies choose to do certain things and choose not to do other things (as opposed to tactics, which are about how to execute on the choices made). The complex operating environment in which South African companies operate results in difficult choices. This necessitates a deep understanding of the factors that influence profitability, as well as the factors affecting the company’s reputation and relationship with stakeholders.

Adopting a structured approach to making choices at a corporate and business unit level is necessary. Strategy is an iterative process and involves an integrated set of choices that includes both strategic positioning choices and strategic activation choices. A clear and powerful framework for thinking about those set of choices can provide a helpful foundation for leaders looking at improving their business strategy.


Winning Strategies

Winning strategies require conscious choices. Poor strategy is often characterised by the failure to make choices. Asking the right questions allows companies to successively focus on key aspects of their high-level and operational strategies which collectively form the basis for long-term strategic planning and short-term prioritisation. Monitor Deloitte assists companies to make difficult decisions based on a series of cascading choices, as shown. Companies should be able to answer each question successively, working down the cascade. Where a question leads executives to re-evaluate their initial propositions, executives can track back up the cascade to redefine aspects until the strategy is cohesive.


What are our aspirations? Companies should be able to clearly define both their financial and non-financial objectives. Winning strategies define their goals and aspirations in terms of customers. The most important choice is about which customers to win, and who to win them from. These objectives should form the basis of the company’s overall vision, as they will guide investment decisions.

Where will we play?Companies must choose the playing field on which they plan to compete. This includes customer segments, product portfolios, and the geographies in which they will compete. Companies must also choose which parts of the value chain they will target, and where in the business life cycle they should enter or exit.

How will we win in chosen markets?To win on their chosen playing field, companies need to define their distinctive value proposition that will enable them to win their target customers from their competitors. They should identify sources of sustainable advantage, and use these as the basis for business model development. These choices are necessary to achieve the goals and aspirations within the confines of where they have chosen to play.

How will we configure?Companies should ensure that they are properly configured with their core competencies focused on their winning value proposition. They need to ensure that they have the capabilities and skills in place and that they are configured appropriately to successfully implement these strategies.


Survival Strategies to Avoid when Facing Tough Choices

These choices are difficult to make given the pace of change and the levels of uncertainty and complexity described above. So how can executives make choices that are relevant and useful, whilst navigating this environment?

Adopting a survival strategy runs the risk of increasing the likelihood of emerging from a recession in a weakened competitive position. Knee-jerk reactions such as cost cutting and the adoption of risk averse strategies and a defence of core businesses, can have unintended long term consequences.

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Cutting of costs is unlikely to result in a long term competitive advantage. 60% of Monitor Deloitte clients found that traditional cost reduction approaches fail, 50% of companies allow costs which they ‘eliminate’ to bounce back, and 30% of cost reduction initiatives weaken the company by diminishing critical assets, or slowing down critical development programs.

Adopting a risk averse strategy diminishes the potential for long term rewards. Companies that are averse to taking on any form of risk are unlikely to remain competitive in a complex and uncertain environment dictated by change, as reductions in investment, postponing of big decisions, halting recruitment, retrenching staff and cutting back on innovation are likely to diminish the potential for future growth.

Defence of a company’s core business by competing within the confines of their existing industry or retaining existing market share is unlikely to ensure survival. Instead these companies are likely to fall behind innovative companies that create uncontested market space and make the competition irrelevant by pulling in a whole new group of customers who were traditionally not customers of the industry or by adapting its product offering to service ever evolving customer needs.


Tool 1: Take a long-view Companies can benefit from thinking about the long-term future using tools such as scenario planning. Scenario planning allows companies to organise critical uncertainties about the future, along with pre-determined elements into a manageable set of scenarios that vividly describe potential future states of the world in which stakeholders live. Scenario planning was developed at Royal Dutch Shell in the 1970s as a tool to aid executives in making high stakes decisions involving large investments and volatile situations, and can be applied to a wide range of industries.

The foundational proposition of scenario planning is that no one can predict the future. However, companies can choose to adopt a disciplined and imaginative point of view about possible futures by focussing on key interactions among critical uncertainties and how these interactions could reasonably play out. Strategies can then be tested for robustness against each scenario. Choices can then be made more confidently with an informed view on how each strategy could play out in different scenarios.

As a further tool, scenario planning also generates early indications which can act as warning signs of danger, or even more valuable early indicators of high value opportunities, some of which are barely visible or unlikely at the point.

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Tool 2: Innovate aggressively Innovation is no longer optional as the rate of structural change in all industries is occurring rapidly and optimising current models is no longer sufficient. Whilst most companies are challenging existing models, innovation efforts are often unsuccessful with a “normal” failure rate of 96%. What is commonly found is that most firms generate an abundance of ideas but tend to execute on innovation efforts poorly. This is because firms do not have a number of key success factors that are essential to successful innovation, namely:

Key success factors to innovation• Strong senior leadership of

innovation efforts or leaders that have a clear innovation intent

• Management of the balance between continuous improvement and breakthrough innovation

• Systematic tracking or measurement of innovation efforts

• Effective rewards and incentives for innovation

• Discipline for innovation, including methodology, tools, protocols and metrics

Case Study: Innovate Aggressively P&G’s innovation “revolution” has been hailed as both a huge success and an exemplar on how to reconfigure innovation to connect with a broad set of experts outside the firm. P&G’s CEO issued a mandate that 50% of all innovations would need to come from outside P&G whilst the rest of innovation would come from the use of existing network in addition to investing a significant amount in order to reconfigure R&D. This resulted in an annual sales growth of 10% from 2000 to 2008 and the launch of successful products such as Crest Spinbrus, Mr. Clean Magic Eraser and Pringles Prints.


Typical companies react, in times like these by becoming more risk averse and focusing on defending core business, aiming to survive the recession rather than lead out of it. The attitudes of successful companies are rather to go on the offensive and look to innovate differently by focusing efforts on the most critical projects and shut down the rest—make a few big bets and put the rest of the good stuff on ‘slow burn.’ Leaders should also focus on finding new ways to improve performance, take advantage of low cost innovation resources— move quickly to get new ideas into the market, and share their secrets— invite others to innovate with them to share cost and risk.

Driving higher returns, leap-frogging the competition and inspiring employees, partners and suppliers demand a focus on the right innovations by re-thinking innovation goals and strategy, using different metrics and criteria to prioritize projects, and taking fast action to realign resources. Leaders should also bear in mind that right execution is pivotal and should uncover new insights, think beyond the technology, speed time to implement through quick and inexpensive concept testing and use open innovation to tap into new resources.

Innovation is often associated with products or technology. While this is often the case, there are many different ways in which a company can innovate including exploring new business models, channel partners and customer experiences as shown in Figure 1.

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Figure 1: 10 Distinct Types of Innovation

There is no lack of innovative ideas in any business. The challenge is turning these ideas into a step change in results. Good ideas often fall foul to resistance to change, and a failure to understand the whole system of innovations required to make the idea successful. For example, a new technology for the company of the future will inevitably require innovative thinking in skills provision, operational planning and performance measures. Companies should focus their innovation efforts on the critical few projects that will achieve a step change in performance and then move fast. It is also not necessary to reinvent the wheel. Many of the most successful innovations started with an idea from outside the company.


Tool 3: Manage costs adaptively Companies should make conscious decisions about their overhead ratios. Some companies manage their overhead ratios according to economic cycles, cutting overheads during recessionary periods with either less focus on cost optimisation during periods of growth, or actively allowing for increased costs to fuel capabilities that drive growth. Rather than allowing for cyclical cost fluctuations, companies should manage their overhead ratio consistently over time. Research has shown that companies that consistently manage their overheads fare better than those with more volatile overheads, as shown in Figure 2 below.

Figure 2: Managing costs consistently can lead to better returns

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Companies can approach adaptive cost management by mapping their costs against four main groups to gain a deeper understanding of where to create value. The return of each overhead class can then be calculated, allowing firms to prioritise and optimise costs, focusing on value creating activities through the cycle, as shown in Figure 3.

Figure 3: Analysing return on overheads


Tool 4: Engage proactively with stakeholdersStakeholder engagement is difficult but is ever more crucial as social unrest and strike action increasingly threaten the operability and profitability of South African companies, and as government intervention increases and regulations tighten. Failure to effectively pre-empt and address stakeholder concerns will continue to negatively affect the already tough operating conditions that aggrieved individuals face.

Creating shared value for stakeholders and companies is the most effective way to approach stakeholder engagement. It is less about influencing or manipulating the viewpoints of stakeholders, and more about developing a deep understanding of stakeholders’ issues and needs. Such an understanding enables companies to identify areas of overlap between their needs and those of their stakeholders and allows for the establishment of relationships in which all parties benefit, and trade-offs are made effectively and with minimal detriment to those involved.

An in-depth assessment of the stakeholder landscape is required to identify the various stakeholders to be engaged, what their key issues are, and what it is that they value most. Stakeholders should be grouped according to their similarities where possible. Examples of such groupings are by industry, by government departments, or based on identified needs.

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This aids in efficiently engaging a larger set of stakeholders with a single message and approach. However, while efficiency is important it is necessary to customise the message for interactions with individual stakeholders. Such customisation will be informed by the stakeholder assessment and knowledge gained through it. Determining the degree of influence that each stakeholder has with regards to the overall stakeholder landscape is important to allow the company to prioritise its available resources on the most influential players.

Analytics can be used to segment stakeholders into meaningful and actionable segments based on the issues that they care most about and how they can be reached. Figure 4 shows how analytics can be used to make sense of the landscape, whilst Figure 5 is an example framework for how generic strategies can be developed based on the outcomes of the analytics.


Figure 4: Stakeholder Landscape Map

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Figure 5: Stakeholder Assessment Matrix


Developing specific and focused engagement plans and identifying the most appropriate points for intervention with each stakeholder is imperative to ensuring that the communication is effective and reaches the correct audience. Doing this requires an understanding of what motivates each stakeholder and drives their individual behaviour patterns. This will enable the company to find common ground with stakeholders and to identify ‘win-win’ situations, whereby the needs of the company and those of the stakeholder can both be met.

Throughout the process of stakeholder engagement the effective tracking of results is crucial to understanding the efficacy of the company’s strategy and to providing insight into where improvements can be made. This is of particular importance as stakeholder engagement is a long-term process and the methods of engagement used, as well as the needs of the stakeholders themselves, will change over time, requiring the evolution of stakeholder engagement processes.


Companies face tough choices around their profitability in a tumultuous and increasingly connected world as well as challenges relating to attracting and developing key skills, capital allocation and stakeholder engagement. Executives need to think strategically about these issues and integrate them into a sustainable long-term strategy.

The rising pressure on companies to grow profits despite a sub-optimal macro-economic environment and rising costs requires in-depth understanding. Executives can use scenario planning to understand possible futures as the basis for informed decision-making in an uncertain environment, and then optimise their portfolio accordingly. Seizing opportunities to innovate, from new customer propositions and technological breakthroughs to internal process changes, offers companies a further opportunity to control their future.

Companies should also welcome innovation to address skills shortages affecting the country at large and their specific industries. Scenario planning may also be useful to structure thinking around the kinds of skills that will be required in the future. This will provide the basis for developing strategies to attract, develop and retain these skills to secure future capabilities. Furthermore, executives face difficult capital allocation decisions. By integrating lessons learnt from scenario planning to create an understanding of which business units and geographies will develop the company’s sustainable advantage in future, executives can adopt aspects of modern portfolio theory to analyse and select appropriate business units and geographies to deliver shareholder value.

Conclusion

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Finally, companies must take cognisance of their operational context, especially in South Africa and must understand and anticipate the needs of various stakeholders. Executives can use an analytical approach to understand the stakeholder landscape, ensuring that an effective stakeholder engagement strategy is in place. This strategy should seek to create shared value for stakeholders, resulting in mutually beneficial and productive relationships between the company, government, labour and the community.

Even in tough times, companies can use strategic thinking and analytical tools to face their tough choices.

Andrew LaneDirector Monitor Deloitte Africa [email protected]+27833262849

Nthabiseng MosiaConsultantMonitor Deloitte [email protected] +27846472110


1 Kelly, E. & Weber, S. 2012, ‘Growth in a low growth economy’2 IBM, 2013. ‘Leading Through Connections: Insights from the Global Chief

Executive Officer Study’ Retrieved from IBM (www.ibm.com) on 31 July 20133 African Development Bank Group, ‘Africa Economic Outlook Report 2013’

Retrieved from African Economic Outlook (http://www.africaneconomicoutlook.org/en/) on 31 July 2013

4 International Trade Centre, Trade Map Database, Retrieved from ITC (http://www.trademap.org/) on 29 July 2013

5 The Economist Group, 30 April 2013. “World: Telecoms outlook” Retrieved from the Economist Intelligence Group (http://viewswire.eiu.com) on 1 August 2013

6 African Development Bank Group, ‘Africa Economic Outlook Report 2013’ Retrieved from African Economic Outlook (http://www.africaneconomicoutlook.org/en/) on 31 July 2013

7 McNitt, L, 25 June 2013. ‘A new type of colonialism?’ Retrieved from AgWeb (www.agweb.com) on 26 June 2013

8 World Economic Forum, June 2013. ‘World Economic Situation and Prospects 2013’ Retrieved from WEF (www.weforum.org) on 31 July 2013

References

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