Managing for the New Reality

We are clearly approaching a tipping point in attitudes and behaviors around the world toward the downturn. A huge amount of uncertainty remains about the extent of the recovery, and every day brings conflicting indicators. While equity markets across the globe continue to recover, and a sense persists that the markets are ahead of what is being felt on the ground. In many sectors, business is slow, and employment remains a concern.

And yet for all the uncertainty and volatility, the mindset of leadership has shifted. As I travel around the world, I find that corporate leaders have come to terms with the downturn. After a period of having been paralyzed and unsure about the next steps, they have internalized its impact on their businesses and have taken steps to manage their organizations in a world of lower capacity and demand. Now they are beginning to recognize the imperative of positioning for the new reality.

In general, the organizations with which I work have dealt with the downturn effectively, whether they were in sectors where the impact was deep and structural—such as financial services or automotive—or in markets where the effects were more collateral—such as in retail, telecommunications, and consumer industries. They have attacked their cost bases and used the opportunity to take tough actions that were in many cases overdue. They have had to look at their businesses and ensure that the basics were in place with regard to supply chain, customer service, and financial control. The crisis has also been a serious test of the leadership capabilities of management teams, and as a result we have witnessed a great deal of organizational realignment.

What I see now is organizations and leaders that are ready to use the foundations laid in the downturn out of necessity as a basis for developing their organizations. And they are looking toward the future largely within three contexts.

Context 1: The Multi-Polar World

The world of dynamic, multidirectional globalization that was so visible before the downturn remains a durable context for business strategies and investments. The burgeoning consumer markets of the east, the rise of urbanization, shifting workforce demographics, and battles over resource ownership and access are driving shifts in economic power and corporate competitiveness.

Emerging-market multinationals now make up 90 of the Global 500, and as the dominant emerging markets of China, India, and Brazil continue to bounce back fastest, the shifts are likely to accelerate. Capital access is still going to be key, and new global sources of capital and investment activism are already bubbling in China, India, Brazil, and the Middle East.

New tensions from protectionism and macropolitical volatility make competing in the global economy more complex than before. But the imperative is increasing to make strategic choices, embed your company in new markets, and develop the global mindsets and capabilities to navigate this faster environment.

I have spoken to global banking organizations that are again turning their attention to the new wealthy classes in developing markets, and I have spoken to emerging-market multinationals that are straining at the leash to bring the products and services they've developed for bottom-of-the pyramid markets to developed economies. What's different now? They are more sophisticated in their thinking and—learning from the exuberance of the pre-downturn period—are looking to place their bets with care.

Context 2: Positioning for the New Reality

As the economies across the globe unfreeze in the next 12 to 24 months, a new context is represented by the opportunity set. These economies are unfreezing at different rates and to different extents. This new reality is not a return to the world as we knew it. In many parts of the globe, imbalances of over- and undercapacity and demand levels have reset. These are realities to which organizations need to adapt.

On the other hand, opportunities have arisen from the stimulus programs that characterized government responses around the world to the downturn. In such diverse areas as health care, infrastructure, and green technologies, new market and investment opportunities have emerged. Operational excellence is increasingly important as organizations that by necessity became leaner in the downturn look to set a new, durable bar for their key business processes and define their competitive essence.

The next round of industry consolidation is already beginning in the pharmaceutical, consumer, and industrial sectors as a response to the collapse in capacity, and this presents opportunities and challenges for all players with regard to divestiture, M&A, and value-chain reshaping. It is also clear that new regulation, whether in particular sectors such as financial services or communications or more broadly across industries in the form of carbon regulation, brings both upsides and threats for organizations. Even though the outcome of Copenhagen was less than definitive in this respect, the medium-term direction remains clear, and the new rules of the game will force change and bets to be placed.

Context 3: The New Decade

Corporate agility is going to be key in the new decade as well as the ability of organizations to execute their strategies quickly. We can see new technologies such as cloud computing, pervasive leverage of the Web in core company processes, proliferation of products with embedded intelligence, social networks, and mobility, and new green technologies changing not only the way we work but also the way we live. Industries will converge and value chains will migrate, resulting in new competitive fields for organizations to pursue.

Innovation is going to be the watchword for the decade. It is interesting to see how many companies that I speak to are looking to innovate their way to a lower cost base as a precursor to more game-changing innovation of their products and services.

A corporate leader at this time needs to balance the pressures and drivers of these different contexts while still managing the tail end of the downturn. Positioning for the new reality is setting up some immediate options. Leading organizations know that they need to seize these, even while discretionary resources remain tight.

Talent is again becoming a critical issue as part of this balancing act. Existing talent is under pressure because of workforce reductions, and the issue of re-skilling is critical. Accessing new pools of talent both at home and abroad to undertake the long-term shifts in business models is a real challenge. Organizations are left wondering whether to build or buy the teams that they will require, with flexibility and agility being critical requirements.

Meanwhile the drumbeat of globalization is becoming louder, and a vision of the future is taking shape. Creating a set of agile organizational constructs to make progress against that vision is key.

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