How to Adapt to Economic Uncertainties

Today, only 40% of world leading executive business leaders around the globe are confident of their revenue growth prospects (Source: PWC). In today’s economic environment, many global companies must adapt to a new situation where:

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Supply chain risks are higher
Competition within existing markets increases yet more
The lean spheres widen to areas outside the production

This shift of paradigm has been called by some the “decade of growth disruption”. What it means is that most companies designed entirely for growth, must now quickly transform, with lean (and its customer focus) as a true main module, into a new business model better suited for the future.

In fact, this is a favorable situation for those who grasp the initiative, if they undertake the right decisions and actions – decisively and not too late. Making the next big move the right way will result in a true lead over competition. The more tardy players will face true risks of drastic declines or even bankruptcies. This is especially true in competitive environments. Recent data of bankruptcies and lay-offs, even at stable countries in northern Europe, shows disturbingly increasing levels.

As always, making the choice of doing nothing is also a fateful decision, perhaps even more so when volatility hits business life with alarmingly high levels. The stakes are high, either way. There are still companies out there who become victims of their own design when the self-playing piano has stopped its music. Topics like tackling current challenges of business life should always be placed on top of the agenda.

But the question is; how do you actually adapt to uncertainty? First, it is important to understand the underlying drivers and trends of today’s macro- and microeconomic dimensions.

The local risks in global Supply Chains are increasingly higher, because of two drivers: economic volatility and complexity in Supply Chains.
Productivity focus increases as a result of further cost pressure at tougher markets, paired with targeted new emerging markets and demands for more efficiency in operations.
Talent management becomes a strategic issue when increased process flexibility and Business Transformation skills become crucial enablers for remedies.

In attractive, but competitive businesses –for instance automotive – bankruptcies since 2009 are no longer big headlines. Indeed, a global survey conducted by a major audit firm last year shows that as much as 80% of all Automotive CEO’s are worried about the prospects of volatile economic growth. The automotive tends to tell us a lot about the world economy. However, not only car makers are facing big changes.

This macroeconomic cocktail creates groundbreaking impacts on the micro economy upstream in the Supply Chains. Because challenges in new markets, paired with increased rivalry in existing markets demands for new innovations – and not just product innovations, but also innovations in process. For instance, “built-in-productivity operating models” – modularization or increased business agility modeling aimed to speed up tactical capacity in order to support more efficient operating models.

Process Innovation is also opening up to suppliers and customers for example. In competitive environments, cross functional collaborations and Cross Value Chain interactions along the Supply Chain must be embraced from a Values Driven Culture perspective. These new challenges often need to be accompanied by Strategic Change Management. Far too many examples are showing devastating results when Transformation skills are overlooked.

The macroeconomic drivers of uncertainties that these times bring with regards to the changes needed in management – not least for suppliers to global players – might actually come as a surprise for those who are not proactively taking care of the risks and opportunities. But with increased complexity, risks are also multiplying and becoming more interconnected. A local risk can affect disruptions on a scale of a global supply chain. The challenge in this new mixture of macroeconomic crisis and complex interfaces between functions along multiple Value Chains (at the microeconomic level) will be to understand loss or lack of critical capabilities of local suppliers as a result of high impact risks. Why? Because CEO’s of global players must rely on their Supply Chains. In other words; Global companies must balance global capabilities with local risks and opportunities. And conversely, a local risk may actually cause global disruptions! Like Leif Johansson, president and CEO AB Volvo, once said: “Companies who completely eschew risk become sluggish and uncompetitive.”

It’s not just that competitive lines of businesses should focus on cost efficiency alone. Automotive companies, for instance, are keeping up the pressure on costs even to become more efficient in delivering value. About 4 out of 5 CEO’s worldwide have been implementing a cost reduction initiative over the past year and nearly as many plans to cut costs further in the next 12 months. It is important to note that this is not always a simple saving in head-counts, but it rather tends to be a long term productivity increase: More than two thirds of global players intend to focus more heavily on innovating and improve existing processes.

So what does this mean for supply chains?

Even if OEMs theoretically can’t afford to rely too heavily on just a few suppliers, volumes will still continue to be consolidated with platform technologies, etc. For suppliers, this equals both risk and opportunity. On top of that, companies of big brands must certainly meet increased volatility and local risks with strategic consequences in at least two ways:

Reconfiguration of the operating model to better meet local market needs. This means that there is a shift in innovation where value for local customers is put in the center, and re-developing process capabilities to become even more competitive. Increased flexibility is (again) becoming a key word. Local Suppliers becomes strategic assets in new ways.
Resilience against local risks in the Supply Chain. Suppliers who are unable to cope with further productivity or flexibility demands, or who are unable to work in innovative cross border Value Chain structures, may need management changes drastically, today and tomorrow.

As volatility and growth disruption in emerging economies are driving process innovations further, this in its turn implies for a trend-break in Talent Management where a much stronger focus now must arise. Innovative skills and LEAN management are increasingly becoming strategic assets since they are at the heartland of business process improvement.

Adapters are hence shifting their talent management to a more strategic level. For example: Instead of first working out the strategy and then trying to fill the gap of skills needed, Talent Management is integrated already at the Business planning stage. This alone is a giant leap for most organizations.

Effective innovators also have structures and practices in place to make both the product and process innovation more systematic. Such structures also include a grassroots approach – empowering employees to even act like entrepreneurs within their own organizations.

But the reality is also showing that talent shortages and mismatches in these areas indeed are impacting profitability across all lines of businesses! CEO’s keep saying it’s becoming more and more difficult to hire skilled people, and that the challenges are acute in knowledge industries such as Technology and LEAN industrial management. Companies who want to survive volatility must by themselves consider being more open-minded about attracting talent with broad skills in operational excellence. The critical need for Lean Talents can be of two kinds; first, the skills in technology and methodology to manage and drive the ongoing manufacturing process sophistication; but second, and perhaps most importantly, Transformations management. True shifts in customer value, productivity and flexibility will not happen if the interconnected core fields of Operations, Strategy alignment and Change management are not thoroughly considered. The need for this kind of talent is growing steadily at almost 10% annually since 2006, even during the financial crisis. Today, companies worldwide are spending $53.7 billion on these three areas (Source: IDC: Analyst Relations Report Summary 2006-2012). As a comparison, the Coca-Cola Company worldwide reported net revenue in 2010 of US $35.1 billion. These needs are – because of their nature – steadily growing in importance during volatile and uncertain eras in the world economy.

Some companies are lured to believe they already have the latter competences in house. But in fact, a normal company of today is focused in business planning, budgeting, controlling and problem solving. But the Transformation, for instance, from one current operating model to one future targeted operating model is not covered by the classical company functions. A business is normally not working on new directions or changes of their organization, but rather they are executing it. Hence, business leaders must also consider more untraditional ways of finding and adding on these competences to their organizations. The real challenge is actually understanding what skills are needed and finding the right balance when, where, and how much (regardless if they are external forces or internal).

When the economic environment changes on a global scale, the impact on local levels can come swiftly and sometimes violently, because of the complexity in the global supply chains and financial structures. The adapters that overcome are always working proactively to be prepared for growth in the future, whether times are prosperous or uncertain. Therefore, companies must shift their top priorities into the following management:

Embrace a Values Driven and interconnected Supply Chain
Widen the spheres of manufacturing productivity into Lean Enterprises…
Increase (Truly) flexible and agile business processes and lean
Make top priority use of knowledge of Lean Transformation skills and guidance
Clarify the need to proactively anticipate major shifts in markets and economy, taking corrective actions to prevent failure, using best practices of Change Management
Make Costs more transparent
Take the alignment of joint Lean Enterprise objectives very serious between companies and suppliers, differentiating the organization together with suppliers from competition
Take care of interconnected business risks of volatility and complexity in Supply Chains and complete it by setting out a local presence of strategic Supply Chain Change Management
Accept that Business Transformation skills are the only certain need in times of uncertainties
Finally, adopt the view that Lean and Process Management at all levels yet again is a key enabler of better flexibility and agile behavior, both externally and internally. Those who can couple that with productivity and customer focus become a strategic talent. Those who can act as leaders and change agents in this process might be worth the future value of your company…

In conclusion, when competitiveness and demands for results are increasingly tougher; when “strategic positioning”, at best, can serve as a status quo alignment, and when most players are trying to find pockets of opportunities within existing markets, you can gain significant operational strategic risk mitigation at times of volatility likeliness in supply chains by widening the sphere of lean into administrative functions (especially within SCM and sourcing). This would result in making interconnected processes along value streams (from raw material to finished goods) more robust, reliable and agile. This will give you an edge to make the difference and to be the winner in today’s volatile economic environment.

The strongest rivers will always overcome and define the landscape. The difference is that a river of a value stream can be invented as an enterprise where the big fishes of talent can flourish given the right conditions. This is a counter measure against business risks with dimensions of R&D innovation, but it is one process innovation which is vastly more economic than product innovation when economic growth has been disrupted. It could grasp a new dimension of competitive advantage, which in fact is unknown to most practitioners of the Porter dogma.

Have you tried a risk management session with special emphasis on interconnected operational process dimensions?

By Anders Penker

Photo of Anders Penker Anders’ insights comes from own experiences of Lean Thinking perfection (Womack/Jones), paired with insights from the Management Consultancy Industry in general. Anders offers a remedy to the gap between strategy and operational Excellence, which he calls the level of “Tactical Excellence”. When making the Lean Transformation, this level is mostly overlooked. Anders’ efforts is meant to overbridge that gap.