How should leaders respond to the post-downturn market

Organisational effectiveness brought into focus

In both improving and declining markets, leaders are forced to review their investment priorities, and the recent economic downturn has brought into sharp focus the effectiveness – or lack thereof – of how people strategies are executed, starting with leadership.

Determinants of organisational effectiveness

The determinants of organisational effectiveness include market challenges, as well as leadership and organisational response to them. (see Figure 1 and Leadership capabilities of the future

Figure 1: Drivers of organisational effectiveness (based on Yukl, 2010)

Figure 2

Leadership response to market challenges

Organisational capabilities: new benchmark

The organisational response of individual companies will be complex and varied. Here, we have chosen to focus on several organisational capability implications that we believe will provide a common thread across countries and industries. This common organisational capability response will be captured in these key organisational components:

• Strategy and investment
• Structures, processes, systems and programmes
• Organisational values and culture
• Workforce management

The following inventory captures high-level characteristics of the common organisational capabilities, gives a brief justification of the importance of these organisational responses and links them back to the market challenges and leadership response. (see Figure 1).

3.1. Strategy and investment

• Participative strategy development. It is no longer feasible to conceive a strategy in an executive ivory tower and expect a docile workforce to implement it. Innovation and growth today requires creativity and engagement by employees at all levels.
• Innovation-centric. Productivity gains will come more from investment into information connectivity and other kinds of innovation. The NESTA Innovation Index shows that two-thirds of the productivity growth between 2000 and 2007 was driven by innovation rather than changes in labour or capital investment. The latter, although remaining important as ever, will become relatively less important.
• Duo-polar innovative capability. The conventional model of innovating ‘old world’ and adopting developing countries does not apply anymore: reverse innovation will continue gaining ground.
• Return as a driver of choice. Return on Investment (ROI) will be tracked and acted upon more consistently, and not only return on capital, but also return on labour employed (including leadership capital), as well as return on knowledge and innovation. ROI will also take into account wider social factors.

3.2. Structure, processes

Structure, processes, systems and programmes

• Globally dispersed, but centrally integrated

1. Sales, manufacturing, research and management are becoming increasingly globalised. Organisations are inevitably capitalising on the efficiencies to be gained from the low labour costs and high levels of workforce education associated with developing countries. Whole functions are being shifted to countries outside of their core operation with the majority of personnel people working overseas. According to the 2002-2003 Society for Human Resource Management (SHRM) Workplace Forecast, companies such as Ford, General Motors, and Nestle employ more people outside of their headquarters countries than within those countries.
2. The removal of global sourcing barriers has created flexibility in organisations' value chains, and outsourcing models will become a strategic means by which to fine-tune that value chain. With the new discipline of ‘capability sourcing’, more and more of that value chain will be outsourced.
3. There is a movement from direct exports to having sales offices in different countries to having manufacturing to all functions spread across the globe. This is no longer about moving jobs to low-wage countries. Increasingly, it is about creating a global network in which every location is put to its best use, independent of its labour cost or even if the company sells and produces in the country. Increasing levels of competition are driving organisations to meet and exceed customer expectations. No longer the exception but rather the rule, organisations are required to have a presence in the country or at least the same continent as their clients.

• Flexible and autonomous

1. Organisations increasingly need structure, systems, processes and programmes that can respond differently to different situations that occur with ever increasing frequency.
2. Fewer detailed rules and procedures and greater autonomy encourage initiative, innovation and agility in an unpredictable marketplace.

A note of caution about the need for and value of such fluidity. Many organisations are in danger of implementing excessive internal change where constant instability can be counter-productive. A consequence could be that employees have inadequate time for learning and training. Flexibility can be defined as ‘capable of being bent, usually without breaking’. Organisations must not lose sight of the continuing need to flex their operation while also paying regular attention to getting the fundamentals of good business management right.

• Flat and local. Centralised, scale-driven, product-focused structures and practices that underpin globalisation get in the way of reverse innovation. The new approach requires that resources be managed by local teams who understand local teams best, drawing on the company’s resources as necessary. This approach is underpinned by the following developments:

1. It has become widely accepted in the 21st century that organisations understand and respect the move away from traditional bureaucratic hierarchies to new, flatter, ‘de-layered’ structures. Such flattening of organisation structures improve the efficacy of decision making and with fewer levels of management, workers are empowered to make decisions for themselves. There are fewer differences in responsibility (though not in pay) across levels.
2. Decentralisation is gaining momentum again. This shift has created a dilemma, however, where there is ongoing ambivalence between the centralization and decentralisation of the operation. Centralized working is effective when lots of local decisions are getting in the way of economies of scope and scale or when time constraints require a short circuiting of more consensus-based decision-making. Whereby decentralisation causes organisations to be more resilient, more responsive, more flexible and more innovative.

• Supportive of innovation is an organisational capability that allow both intensive generation and implementation ability:

1. ‘Ideas infrastructure’, a formalised process by which ideas can be can be captured, analyzed and transformed into innovations.
2. Capability to introduce highly customised and differentiated products more rapidly.

• Lean and process-optimised

1. Over the last decade, business process reengineering, business process out-sourcing, job redesign, and other approaches to optimize business processes have been implemented to increase operational and process efficiency while reducing the costs of doing business. Tight management of the bottom-line will remain post-crisis in the form of lean processes. In general there is the cyclical nature/requirement for downsizing as a necessary streamlining exercise to cull/strip the excess ‘fat’ as a natural reaction to the economic downturn.
2. Industrialisation of some strategic processes that are central for value creation will take place. For example acquisitions and divestitures will become more rapid and numerous as a way to gain market in a slow-growing environment, and therefore can be turned into an ‘en-masse’ process.

• Rigorously governed

1. The failure of a large part of the banking system was largely due to serious failures in risk management, control, executive oversight, and independent scrutiny. Going forward, boards in and beyond banking will become much more familiar with the strategies and risks of their enterprises, able to withstand public scrutiny, and strengthened with industry knowledge and networks. This is the time for transforming the traditional governance mindset from compliance to value creation.
2. This requisite shift in style and substance of governance present an important opportunity to address the specific risks associated with information and asset security. As businesses become more elegant and complex, they also become more fragile and susceptible to failure from unmitigated risks. Risk adverse organisations will need to consider investing in products or services with embedded security features to protect themselves against fraud, identity theft and computer viruses for example. In general, organisations need to conduct themselves in accordance with emerging national and global standards.

• Networked & collaborated

1. Permanent information connectivity is fundamentally changing the way employees, teams and businesses communicate, collaborate and interact with one another. Organisations will become more proactive about designing work tasks and flows to increase productivity and to enhance the kinds of collaboration that more frequently result in innovation.
2. Creation of cross unit team structures, improved knowledge sharing between functions and increased understanding between central and frontline functions is required as a minimum. Initiatives such as ‘hot houses’ are proving popular. The pooling of information and resources for a specific piece of work for a predetermined period of time requires flexibility from the organisation.
3. Direct communication across unit and firm boundaries, ignoring the chain of command, is becoming more popular. Efficacy in time as well as cost is paramount for today's organisations to succeed. This means streamlined communication channels, the abolition of silos and metaphorical (as well as literal) open plan offices. 
4. Strategic alliances with competitors, suppliers and customers are emerging. Close coordination among firms (e.g., JIT systems) and information sharing (open computer systems) are increasingly commonplace. Close ties among a set of companies enables them to work with each other in ways that are faster than arms-length contracts would permit, with social mechanisms of coordination replacing legal mechanisms. Networked organizations are particularly important in industries with complex products where technologies and customer needs change rapidly. For such networked organizations to work, high trust and social capital between organizations are key elements.
5. Companies are also responding by communication and information sharing occurring across the globe in multiple languages and multiple cultures. 
6. Ultimately by increasing their geographical dispersal, organisations are creating their own individual global networks. Every location on the organisation's coverage map is being put to optimal use considering client demand, labour costs and greater mobility of international capital. International economies of scale are identified by the regular review and refinement of their global network.

3.3 Organisational values & culture

The psychological contract between companies and employees is changing. As generational differences – between Gen X, Gen Y and Baby Boomers – lead to misunderstanding and resentment in the workplace, companies must create new employment and value proposition and leadership culture, which in turn requires different people capabilities and tools. In the face of turbulence and change, culture and values become the major source of continuity and coherence, of renewal and sustainability. The following capabilities should be captured in the organisational cultures:

• Aligning. The most difficult task is to align people around the organisation’s mission and shared values. Traditionally, it has been done with rulebooks, training programmes and compliance systems. This is unlikely to work going forward. Among other things, people are looking for more meaning and purpose in their work lives and expect to be able to co-author their organisational purpose.
• Empowering. Best-practice organisations will empower leaders at all levels, combined with sophisticated accountability systems to ensure commitments are met. Front-line leaders without direct reports are especially needed.
• Serving. The organisation’s first obligation will become serving customers rather than shareholders. Serving customers gives meaning of higher order to employees. Satisfied customers and motivated employees are key to sustaining revenue growth and ultimately shareholder value.
• Collaborated. The challenges businesses face are too complex to be solved by individuals or a single organisation. Collaboration – within the organisation and with customers, suppliers and even competitors – will be required to achieve lasting solutions.
• Embracing risk. The crisis mode reinforces normal obstacles to growth. A risk-averse culture increases in parallel with the increasing cost of individual failure: decision making slows down as managers seeks extra reassurance about direction and focus before taking action, and leaders become more reluctant to empower their management teams and workers. A climate in which the risk of failure does not overwhelm real opportunities will help.
• Socially-orientated. As politicians and workers grow in influence, this will cause the executives to reassess managing for shareholder value. They will need to find a better balance among shareholders, customers, and employees. That will lead to a relative loss of influence by investors and a broader shift in management priorities away from short-term P&L.

3.4 Workforce management

• Diversity management is an inevitability due to a number of factors:

1. Workforce getting more heterogeneous sexually, racially, culturally, individually, etc.
2. Diversity is a source of innovation, but also of conflict and communication problems.
3. Three is a need to cope with different styles of interaction, dress, presentation, physical appearance.

• Strategically managed workforce

As the number of skilled workers declines in some industries, companies must focus on getting the most out of those who remain by integrating the elements such as leadership and strategy, people management and performance management. That will allow them to become ‘talent multipliers’, able to increase the productivity and impact of every employee. In most industries, several HR processes will stand out as the most critical:

1. Identifying, attracting, and retaining scarce resources will remain high on the agenda.
2. Strategic workforce planning will help to get the best out of talent by providing an accurate picture of the availability, composition, age structure and capabilities of leadership and the workforce, including advanced analytics, scenario stimulation, and other sophisticated workforce-planning levers. Plans will be backed up with performance KPIs which will be measured and acted on more consistently. This will add up to a capability to comprehensively view and act on business performance in real time.
3. Compensation schemes will emphasise the long-term, reward relative performance, measure the performance that manages can influence directly, focus on value creation, not just earnings on the P&L statement, and minimise the asymmetries of risk.
4. Leadership development will need to address a critical gap for senior managers’ successors.
5. Employee engagement will need to restore the sense of pride, meaning and trust post-downturn via approaches like job mobility, flexible work arrangements and development of middle managers. To retain their best workers, companies must ensure that they are supported by the organisation’s best knowledge and experience. Companies are increasingly tailoring benefits – for example, allowing employees to choose not only individualised retirement and medical plans, but also more wide-ranging and important components of their jobs, such as work hours, location and vacation days.

• Renegotiated work relations

As globalisation weakened the labour movement, the newly re-discovered protectionism may push this trend into reverse. If so, the pressures on companies to redefine the social contract with workers may grow. New approaches to risk sharing and workforce relations like job flexibility, telecommuting, job sharing, mummy tracks and pay for skills could become a decisive source of competitive advantage, as the workforce shrinks in much of the developed world. New relationships between the workforce and employers will be based on lifetime employability, not lifetime employment.

London Business School Human Capital Network

The Human Capital Network was established by the London Business School Alumni Human Capital Club as a discussion forum that promotes open debate on the cutting-edge issues in strategic organisational change and talent management.

We publish the cutting-edge research on organisational development and change, provide an online discussion platform on our blog and run the Organisational Development Speaker Series at London Business School.
 
The past events of the Organisational Development Speaker Series covered such topics as employee engagement strategies for the downturn and beyond and building change-ready organisational cultures. We are hosting a panel on Customer Experience on June 14th, 2011 and a panel on Leadership Effectiveness in October 2011. Please, check our blog for registration details.

Our distinguished speakers provide perspectives from industry, management consultancy, academia, and trade bodies. Through the presentation of best practice case studies, new research and group discussion, our three interactive panels will help you identify and tackle the key challenges of organisational change.  

The Human Capital Network’s events are designed for senior OD and change practitioners and attract LBS alumni and external guests alike. Attendees of our past events represent a varied mix of industries and organisations, ranging from small entrepreneurial innovators to FTSE 250 blue chips, greatly contributing to the quality of panel interaction and the after-panel networking.