Adapting to Change
THE TWIN CONCEPTS of change and risk are usually associated with uncertainty; they create in most people the fear of negative future outcomes. For many companies, this leads to excessively risk-averse behavior, where managers try to avoid danger at all costs. In fact, adapting to change and accepting reasonable risks are necessary to operating a successful business.
The fundamental job of a good executive is to anticipate change and manage or even take advantage of attendant risks. That means planning for contingencies and thinking ahead. Not all companies understand the need to adopt these practices. According to a 2008 survey of senior managers conducted by the Chartered Institute of Management, 53 percent of those surveyed said that their organizations had no specific business continuity plans. In a separate 2008 survey by Marsh, Inc., 66 percent of executives reported that they do not look for opportunities to turn risk to their company’s competitive advantage.
To foster a new attitude toward risk that enhances rather than stymies the organization, managers must embrace change, be proactive, focus on value, and operate holistically.
Managers can either embrace change or have change thrust upon them. Not only will increasing market and managerial competitiveness demand change, but there are also bigger drivers at work that are forcing the issue to the top of the business agenda.
For example, while globalization has brought tremendous economic benefits to many, it has also had unintended consequences. These have introduced entirely new levels of risk. Markets are more interdependent and interconnected, for instance, and they are also more volatile, as the global credit crunch has demonstrated.
Outsourcing, offshoring, and just-in-time systems have all helped to create savings, but they have also made businesses more vulnerable to disruption. Correspondingly, no national government or international organization can deal with these new challenges as it might have done in the past. Issues like terrorism and climate change do not fit conventional forecasting parameters. In just eight years in the United Kingdom, for instance, we have witnessed two 25-year flooding events and one 50-year event.
The speed at which changes in globalization and governance are occurring means that both product and industry life cycles are contracting sharply. At the same time, instant communications, based particularly around the Internet and mobile phones equipped with digital cameras, have also taken away the ability of any one group or authority to control the plethora of information. All this has created an information blizzard around major events. For example, in the hours following the four explosions in London in July 2005, the BBC received more than 1,000 images, 3,000 texts, 20,000 e-mails, and 20 video clips. As a result of this rapid pace of events and the flow of information, executives must be equally quick in sorting through masses of data and making astute assessments of dynamic situations.
This time compression means that managers must be proactive in thinking about how to respond before challenges materialize. In the case of business continuity during pandemic influenza, for example, smart companies are already drawing up new protocols for long-term absences, strategies for buying and distributing anti-viral medication and masks, and campaigns for enhanced hygiene regimes and social distancing.
In the same way, companies should prepare for demographic changes, such as the expectation that there will be more older workers. That may mean that they should be ready to offer more flexible rules and to accommodate more part-time employees in the workplace.
Managers must peer even further into the future to anticipate the trends and identify the pitfalls well before they strike home. This is the notion of horizon scanning, an imprecise art of forecasting based on indicators and warnings. If one is able to scan the medium- and long-term horizons using a set of clearly defined metrics, often called key risk indicators, then it may be possible to anticipate broad patterns and shifts in market direction that will allow suitable, prescient responses. This skill has been deployed by the military over many years in an effort to forecast impending conflict. It is now appropriate for the business world in the face of uncertainty and instability in the marketplace.
One good example of this principle in action comes from the conflicts in Georgia last year. The warning signs of impending action came from months of belligerent actions—Russian military over-flights, bombs in Abkhazia, skirmishes in South Ossetia, and hard-line talk by both sides. While the precise flashpoint could not have been pinpointed, security managers of some businesses in Georgia had evacuation plans ready and invoked them as soon as Russian forces crossed the border. These companies took action even before some embassies issued advisories.
Focus on Value
Anticipating change is only one-half of the risk-management equation; the other has to do with knowing what the company values.
Value can be identified through those mission-critical processes in a key business that relate to strategy, operations, governance, or reputation. All key resources—people, assets, systems, and relationships— depend on the mission-critical processes of an organization. When these resources are interrupted or thwarted, value is decreased. The challenge for managers is to determine both value and dependency objectively, whether that is in terms of operational effectiveness, market reputation, or strategic alignment.
Management should assess how risks could affect those mission-critical processes and plans. It can then attempt to mitigate those exposures.
Each risk will need individual treatment, but managers must ensure that the solutions also work holistically together with the company. To rush in with one solution prematurely is, at worst, to invite failure and, at a minimum, to incur unnecessary costs.
A holistic approach maximizes the positive while minimizing the negative. This is the essence of the upside of risk. To strive for this will reveal opportunities that would otherwise be missed. This can, in turn, lead to increased market share and innovation.
There is no better example of realizing the upside than the case of the fire at the Philips semiconductor plant in Albuquerque, New Mexico, in 2000. By waiting to see what the damage was for the wider market, Philips’s customer Ericsson delayed remedial action by two weeks and so lost $400 million in potential revenue and suffered a 14 percent drop in share price when it was unable to acquire the microchips it needed to produce its phones. It was eventually forced to exit phone manufacturing and was acquired by Sony. Ericsson’s competitor, Nokia, on the other hand, was proactive and anticipated the downturn in the supply of microchips. It made provisions from other suppliers before the market became tight. As a result, Nokia’s supply chain was unaffected, and it prospered. Clearly, the upside for Nokia was the insight to see risk others didn’t and unlock the opportunities others could not.
Robert Hall is an independent consultant specializing in risk and security issues.