The year 2020 has been exhausting in so many ways, but it has also been an excellent stress test of an organisation's resilience and adaptability. We have seen distillers move from producing vodka to hand sanitiser, restaurants initiate takeaway and delivery services in days, and governments deploy unprecedented economic stimulus to try to mitigate the economic impact of the COVID-19 pandemic.
As 2021 draws near, there are powerful lessons that can help organisations navigate the uncertainty ahead by understanding and building strategic resilience. Organisations that excel at this have strategies that remain relevant in uncertain and volatile markets, and tactical plans, budgets, and operational actions that can rapidly adapt to changing circumstances. This article explores some attributes of strategic resilience and how we as finance professionals can apply them.
Hallmarks of strategic resilience
Companies that thrive in difficult environments often are ones that exhibit a high level of strategic resilience. Here are three main attributes of strategically resilient companies:
1. Strategic clarity
Clearly define the mission and vision
In times of uncertainty, clarity of mission and vision provides a clear focus for what is truly important. For example, Netflix describes itself to investors as "a global streaming entertainment service offering movies and TV series commercial-free, with unlimited viewing on any internet-connected screen for an affordable, no-commitment monthly fee. Netflix is a focused passion brand, not a do-everything brand: Starbucks, not 7-Eleven; Southwest, not United; HBO, not Dish". Lego's mission is to "inspire the builders of tomorrow" and its vision is to be "a global force for establishing and innovating learning through play". Both descriptions make it clear what business the companies are in and, perhaps more important, what businesses they are not in — essential guidance when looking at how best to respond to unforeseen events.
Demonstrate customer value proposition
Few customers read company websites before making purchase decisions. A key element of strategic resilience is that a company's current and prospective customers have a clear understanding of the value a company provides and can see evidence of that value being delivered. Marketing and communications can help with the former, but the latter is delivered through repeatable execution over time. For example, Walmart has invested heavily in storm preparedness and is frequently seen as a reliable destination before and after major weather events. The company is clear about its role: "We aim to use our internal resources to identify emerging risks, help facilities and associates prepare for disasters, respond when disasters strike, and serve as a triage point for emergencies in our stores or offices around the world."
2. Business model agility
Maintain supply chain flexibility
Companies should design supply chains that balance the cost efficiencies of low-cost single sourcing with the ability to mitigate disruptions due to overreliance on sole suppliers. The Economist Intelligence Unit in a May 2020 report concluded that companies are likely to move to more regional supply chain networks that allow production to be shifted from one region to another in response to virus-related lockdowns, trade wars, or other geopolitical events.
Seamlessly conduct business across different channels
Many retailers have been able to mitigate the impact of reduced foot traffic through stores by seamlessly blending online ordering, home delivery, and kerbside pick-up options for customers.
Connect with customers in multiple ways
The ability to keep customers engaged is crucial, and organisations can no longer rely on a single channel or medium. Trends such as virtual doctor consultations illustrate that alternative methods can work and, in some cases, may be preferable to traditional mechanisms.
Support a location-independent workforce
Not all jobs are suitable for remote working, but many are. An August 2020 World Economic Forum study estimated that approximately 40% of all urban jobs in Western Europe can be performed remotely. Having the flexibility to accommodate different working locations can be an advantage in recruiting staff and, according to some recent studies, can increase employee productivity.
3. Financial flexibility
Create sufficient financial flexibility to mitigate unexpected downturns
Effective working capital and cash flow management that is reflected in commercial terms, inventory management, and financing facilities can provide a cushion against unforeseen risks and opportunities. According to EuroFinance, the top 30 companies in the US S&P 500 increased their cash holdings by a collective $81 billion during the first quarter of 2020. The increase was not solely driven by large technology companies. Procter & Gamble, General Motors, and Coca-Cola all increased their cash holdings by more than 100% from the fourth quarter of 2019. Chevron, Pfizer, Ford, and Humana logged 50% increases. The ability to rapidly increase cash holdings should be a key element of any organisation's strategic finance plan.
Create elastic cost structures that can flex with revenue volatility
All companies carry some fixed costs, but there are numerous ways to increase cost elasticity to reduce the impact of and increase the speed of response to sales volatility (see the table, "Cost Flexibility"). Each choice does carry a different risk profile, so careful analysis should be done before making decisions.
Building resilience into strategy can have a cost. However, the economic case for resilience is not evaluated by a straightforward investment analysis. Judging the value of resilience is akin to deciding whether to buy insurance — does the size and probability of loss outweigh the expected cost of mitigating the loss? Actuarial science can play a role, but as a starting point it can be helpful to evaluate potential events on two axes: probability and materiality of impact (see the graph, "Materiality v Probability").
Some question the value of planning for relatively low-probability but high-materiality events. However, looking back over the last 20 years, there have been numerous events that have had a major impact on business: the dot-com crash; 9/11 and the ensuing war on terror; the SARS epidemic; Hurricane Katrina, the 2004 Indian Ocean tsunami, and other devastating weather events; the Great Recession; the European debt crisis; the rise of the Islamic State; and the COVID-19 pandemic.
Not all events affect all businesses or locations to the same degree, but it certainly looks as if many material events are no longer low-probability or low-impact. As the world becomes more interconnected, effects of such events will only increase. The graph "A Scenario-Planning Matrix" shows a simple probability/materiality matrix for a US-based consumer products company.
Testing strategic resilience
Finance and accounting professionals have a key role to play in helping an organisation test the resilience of strategy. From developing financial models to support strategic and investment planning to managing the annual budget process, finance staffs combine the analytic expertise and business insight to help management through the process. The biggest change I am seeing in response to continued market volatility and uncertainty is increased use of scenario planning and sensitivity analysis in both the strategic and operational planning processes.
Looking to 2021 and beyond, here are some scenarios that could help in testing strategic and operational resilience:
Scenario A: Channel disruption
Your company's primary channel to its customers is unavailable for 90 days. How quickly can you switch to a viable alternative? How much of your planned sales can you still capture?
Scenario B: Supply chain interruption
Your two largest suppliers are unable to ship materials or provide services for up to six months. Can alternate suppliers meet your needs in 30 days or less?
Scenario C: Global catastrophe
A major global event (eg, a pandemic, a severe economic downturn, or an ecological disaster) results in a loss of 60% of your business. By how much can you reduce normal operating expenses within the first 30 days? How many months can you sustain the critical elements of your business with cash on hand, credit lines, or liquid investments?
Scenario D: Competitive opportunity
Your largest competitor suffers a 50% reduction in market value as a result of an internal ethics scandal, but its core business is sound. Can you mobilise to execute a deal — a merger, acquisition, or joint venture — within 14 days?
A key point to remember is that the scenarios don't have to be perfect. The value is in discussing the likely impact of such a scenario and then envisioning what actions can be taken to mitigate the downside impact or accentuate the upside. When the unexpected inevitably does occur, the organisation will be far better positioned to react with speed and confidence, much like golfers when faced with tricky bunker shots if they have practised such shots previously.
The best will thrive
Strategic resilience combines the best of strategy, decision-making, and execution. No organisation is going to have absolute clarity about the future, but those that anticipate volatility and are able to identify the need for action, define the actions to be taken, and then execute those actions will thrive in good times as well as bad. As finance professionals we have an incredibly valuable and tremendously fulfilling role to play in initiating, fuelling, and sustaining a culture that doesn't just tolerate ambiguity but thrives on it.
Consultant and author David A. J. Axson is a retired partner from Accenture, a co-founder of The Hackett Group, and former head of corporate planning at Bank of America. To comment on this article or to suggest an idea for another article, contact Neil Amato, an FM magazine senior editor, at Neil.Amato@aicpa-cima.com.
More from David A. J. Axson related to strategy during COVID-19
- "Strategic Implications of COVID-19 and Its Aftermath", FM magazine, June 2020
- "Making Strategic Planning Relevant in an Uncertain World", FM magazine, October 2020