McKinsey, Strategy in a structural break.
I can see this is going to be an all McKinsey month. McKinsey have undertaken a comprehensive revision of their website, and have now followed on with an increase in their sites content. This series appears to consist of 19 articles and I will be highlighting the pertinent ones in a series of blog posts this month. Our first document, as typical of McKinsey documents, is topical to the work that is being done in oil and gas, innovation, and People, Ideas & Objects. The subtitle or introduction begins within the context of our current economic situation;
During hard times, a structural break in the economy is an opportunity in disguise. To survive—and, eventually, to flourish—companies must learn to exploit it. p. 1The world is quickly realizing the depth of the current economic difficulties. Whether we are in a deep recession or depression is the debate currently taking place. We certainly have much to be concerned about and will need to be mindful of the economic difficulties. We also have a variety of opportunities. If we look at this time as a clean slate, our opportunities are magnified substantially. Now is the time to ask, "what can we do", with corporate accountability, organizational performance, innovation and a brighter future being what is possible. An opportunity that we can call ours, if we take the opportunity. That is what this McKinsey article is about.
By strategy, I mean a cohesive response to a challenge. A real strategy is neither a document nor a forecast but rather an overall approach based on a diagnosis of a challenge. The most important element of a strategy is a coherent viewpoint about the forces at work, not a plan. p. 1
A structural break.
A corporate crisis is often a sign that the company’s business model has petered out—that the industry’s underlying structure has changed dramatically, so old ways of doing business no longer work. In the 1990s, for instance, IBM’s basic model of layering options and peripherals atop an integrated line of mainframe computers began to fail. Demand for computing was up, but IBM’s way of providing it was down. Likewise, newspapers are now in crisis as the Internet grabs their readers and ads. Demand for information and analysis is increasing, but traditional publishing vehicles have difficulty making money from it. pp. 2 - 3I point to the fact that the production and reserves of the oil and gas companies are in steep decline. The transition from the banking mentality of managing 10% returns on oil and gas investments has failed. The new basis of the innovative oil and gas firms business model is science. Where the earth science and engineering disciplines are enabled to fully exploit the current understanding and move the science and understanding forward. We know that a structural break has affected the production profiles of the producers, but did not create the corporate crisis that McKinsey suggests. The management of the producer firms were enabled in their ability to report record profits from higher prices. Therefore the corporate crisis that is needed is not as a result of the production and reserves decline, sad as that may seem, but the temporary 12 - 18 month decline in energy prices that we are currently experiencing. As it turns out I am frankly surprised at the scope of the decline in energy prices. Since this software development project was not developing the traction necessary for the producers to act, maybe now the oil and gas investor, who has been affected the most, will.
The wrong way forward in a structural break during hard times is to try more of the same. The break and the hard times are sure indications that an old pattern has already been pushed to its limits and is destroying value. p. 5
Consider an analogy. When oil is cheap and plentiful, we create a vast infrastructure that works well if oil remains cheap and plentiful. When it becomes expensive, we wish we had a different infrastructure. Similarly, when economic opportunities abound, we invest in a management infrastructure that harvests them very well. When the field of opportunities becomes less verdant, we must change our management infrastructure. A system that requires companies to spend at least $300,000 a year in wages, benefits, support personnel, and systems to enable one educated person to do his or her job could be unsustainable in a less luxuriant world. p. 7
Doing things differently.
So during structural breaks in hard times, cutting costs isn’t enough. Things have to be done differently, and on two levels: reducing the complexity of corporate structures and transforming business models. At the corporate level, the first commandment is to simplify and simplify again. Since companies must become more modular and diverse, eliminate coordinating committees, review boards, and other mechanisms connecting businesses, products, or geographies. The aim of these cuts is to provide lean central and support services that don’t require business units to spend time and energy coordinating their activities. Break larger units into smaller ones to reveal cross-subsidies and to break political blockades. You may think that coordination costs will rise if you fragment the business, but you must do so to expose what ought to be streamlined. p. 7
In ordinary hard times, the traditional moves are reducing fixed costs, scope, and variety. But in hard times accompanied by structural breaks, you must rethink the way you manage. Companies that survive and go on to prosper look beyond costs to the detailed structure of managerial work. Several new issues come to the forefront:
- How much extra work results from the way incentive and evaluation systems relentlessly pressure managers to look busy and outperform one another?
- Which information flows can you omit? Information that doesn’t inform value-creating decisions is a wasteful distraction.
- Which decisions and judgments can you standardize as policy rather than make in costly meetings and communications?
- How can you work with customers, suppliers, and the government to simplify their processes so that you can simplify yours?
Recessions are neither good for the economy nor morally uplifting. But since we are diving into a period of neck-snapping change, we had better start the process of reformation before it’s too late. p. 8
Technorati Tags: People's Change Economics McKinsey Perez