Leadership in crisis: If it ain’t broken, break it creatively!
Nandu Nandkishore, Professor, Indian School of Business, provides invaluable learnings from business literature and his experiences at Nestle, on how CEOs should manage and thrive in black swan events like COVID-19. He also discusses ways in which the organisation can remain well-tuned to handling such crises, to the extent that it becomes second nature to employees.
IBT: How do you view the role of crisis management in the life of the CEO today, and how it has transformed over the years?
Prof Nandu Nandkishore: Crisis and change management have got more and more important in the skill repertoire of a CEO today. If you step back to around 1920, the average expected life of a Fortune 500 company was 90 years. In 1960, it had already dropped to 60 years and today it has dropped further to an estimated 15 years.
So, why is this happening? The early part of the 19th century had giant conglomerates, several large corporations who are no longer on anybody’s radar today. And then you had people who had invented photography like Kodak, or photo copying machines like Xerox. And these companies have disappeared or significantly altered their business DNA. Look at the famous “three Generals” of United States – General Foods, General Motors & General Electric. General Foods doesn’t exist anymore. General Electric has dropped off the S&P 500 and is in big trouble and General Motors likewise will be disrupted by the trend towards electric vehicles as well as self-driving cars.
If you look at the top 10 companies in the world today, be it Amazon, Apple, Alphabet or Facebook, all in the top 10 stocks in the S&P index – these are all relatively new companies. With the exception of Microsoft and Apple, that have been around 10-15 years longer than the others, most of these companies have come into existence in the last 20 years and created incredible wealth for societies.
So, the core learning is that we live in an era of incredible and disruptive change.
This change has been happening for the last 150 years and is accelerating. So, the 20th century probably saw more technological change than 50,000 years of human history before that. And the first 20 years of the 21st century have seen more technological change than the entire 100 years of the 20th century. We cannot imagine life today without social media, smart phones, Google, movie streaming, etc. Life has changed so fundamentally and dramatically.
IBT: When sudden disruptive changes transform the entire business landscape, what separates the winners from the also rans, and even those who go extinct?
Prof Nandu Nandkishore: So how does one survive in times of dramatic change? It is useful to look at the world of natural history and why dinosaurs became extinct. Charles Darwin’s theory is named Survival of the fittest, but it’s kind of a misnomer. He actually said that in times of dramatic change, it is not the strongest, most intelligent or fittest who survive. Instead, in the times of great disruptive change, the species which survive are the ones who are the most adaptable to change.
In a similar vein, for corporates and business leaders today, one of the main tasks or leadership challenges is “How to prepare the organization for change”.
So, successful organisations are those who adapt their business models and core competencies to change business paradigms, in order to deal with technological and societal changes. Organisations which are unable to change become the dinosaurs. So, the whole question is how to actively reinvent your organisation and deliberately reinvent your previous business model/product into obsolescence faster than anyone else can.
One very good example of this is Apple. Previously, when the iPod was launched, it was not a technological breakthrough as much as business model breakthrough because it took an existing technology (MP3) and put an innovative business model, enabled cloud sharing of music combined with great design and marketing. Similarly, when they found new smartphone technology (in fact invented by Nokia), Apple was able to leverage that technology and add on to it the business model for iPod. In the process they actually destroyed the iPod business. So, today nobody is buying iPods anymore, because iPhone has the same functionality.
So, in the 1980s, the corporate mantra was “If it ain’t broken don’t fix it.” Today the mantra is, “If it ain’t broken, you better find a way to break it creatively and capture the new value otherwise somebody else is going to do it!”
So, in a way, in business, there is always this tension in the S-curve, where you start with value creation and then you eventually you move to value capture. So, what happens in a company’s life cycle is that a founding team creates the value and then subsequently a different set of competencies is required to scale it up and capture value, roll it out internationally and scale up.
But, in the process, the original competency of creative disruption/value creation often tends to either retire or leave the company or get undervalued, because there is more financial reward in the ‘value capture’ phase of the company. So, the challenge for leaders is how to balance the tension between these two phases and lose retain those capabilities for reinvention.
IBT: What are the most typical approaches of leaders to such situations and what works best?
Prof Nandu Nandkishore: When disruptive change happens, the first reaction of a human, or a company or a leader is to deny the change; to stick your head in the sand and pretend that the change will go away if you just wait for a month or two. Normally that is not a successful reaction, because if you don’t even acknowledge the crisis, chances are that sooner or later the crisis will overwhelm you. So, step one is to acknowledge the change and then focus on what you can do about it.
Thereafter the first response is to see the crisis as if it were a threat and the second is to view it as an opportunity. Research shows us that the ‘threat response’ typically is characterised by actions such as cutting costs, focusing on comfort zone, giving up on experimentation and new ideas. The ‘opportunity response’ is categorized by embracing the opportunity and trying new things. So, what the research seems to show is that neither of these responses is successful by itself.
A good example is Kodak. They invented the digital camera and digital photography in the late 1970s. In 1998, Kodak decided that there was no way to make money from digital photography. So they closed down the division and decided to go back to their comfort zone and be the leanest, meanest player in the paper photography printing business, thereby following the ‘threat response’ strategy.
Ten years later, Kodak had disappeared as a company.
At the same time, one of Kodak’s competitors, Fuji Films decided that they will also follow the same strategy in part. So, they too, focussed on paper, cut costs, and decided to compete fiercely with Kodak. But they also looked for opportunities to leverage technologies and core competencies they had.
Today Kodak has disappeared, and Fuji Film is successful; a US$ 20 billion multinational. They are in the paper photography business, but they are also leaders in digital imaging, thin film technology etc, which are technologies coming out of the photography business. So, what the theory tells us is that a successful response to a crisis, looks at a crisis as a threat as well as an opportunity.
IBT: How would you apply past literature and learnings on leadership in crisis to the current COVID-19 crisis?
Prof Nandu Nandkishore: So, if we apply this to leadership post-COVID, the first thing you would acknowledge is that consumer behaviour has changed dramatically. The threat response is to first of all make sure how you can cut costs and keep cash flow going to survive in the short term. This is particularly relevant to start-ups or any business that has a lot of “out-of-home” consumption like travel, malls, real estate, hotels etc. You see, Hertz has gone bankrupt so that is the kind of business that is affected. If you look at he options available to you in a threat response, it is things like, “Can I renegotiate my rent? Can I cut my fixed costs to focus on those that I absolutely need to survive the next six months?”
This may include having to reduce salary cost. And here the best practice is to start cost cutting at the very top rather than putting the pain on the lower levels. Companies also benefit if they can change the package away from the cash component, and replace it with some form of equity which has a longer term pay-off. So that reduces your cash burn today while giving the employee a longer term benefit when the business recovers.
Ultimately when companies have no choice but to let people go, they should benchmark Uber or Airbnb. I think these are very good case studies of how to eventually lay-off people with a lot of “heart”. They realise that tomorrow when the economy picks up, they will need these very people once more. So they have created very nice policies wherein when they need to hire, they go out and hire on priority, people who the company had previously laid off. They also give people who depart good recommendations and packages.
So, that’s the short term threat response, do what it takes to survive and keep a cash runway that is longer than what you might initially estimate. This COVID-19 crisis can go on for much longer, and we don’t know exactly how long. A vaccine is maybe a year away or maybe miraculously, recovery is just two months away as we acquire herd immunity.
When there is uncertainty, you need to prepare a response that ensures your survival over a longer horizon than you initially estimated.
The second part is the opportunity response. Companies who decide to use this as an opportunity to build market share or core competencies, acquire smart people, etc, basically position themselves to come out of the crisis stronger than they went in. This could include pivoting to new business models. So, you have garment manufacturers, for example, who have shifted to producing PPE, which is a reasonable pivot. Alcohol companies are also making hand sanitisers. Even Unilever has started producing more of the kind of products that actually help hygiene including hand sanitisers, soaps, etc.
IBT: What are the risks that CEOs need to be wary of as they reorient their organisational structure and dynamics to respond to crisis?
Prof Nandu Nandkishore: It is critical to remind leadership and everyone in the organisation of what the company’s core purpose and values are. While your core leadership task is to prepare the organisation for change, you have to be very careful before you change anything that affects core values or core purpose or your company’s culture. These things have evolved and stood the test of time and they are your “reason for existence”. By changing these arbitrarily, you may end up doing serious damage to your credibility and the trust of employees and customers.
IBT: Please tell us about some of your personal experiences and learnings on leading in a crisis. Also, would you like to mention some leaders who you personally admire for their handling of a crisis situation and why?
Prof Nandu Nandkishore: There are many examples in the Nestlé universe of CEOs who have managed crisis well and developed this competency, including the current CEO of Nestlé India, Mr. Suresh Narayan. He handled the recovery from the Maggi Noodles crisis very well.
This also reminds me of a situation I faced in my career in 1998. I was in Indonesia, when suddenly the ASEAN financial crisis happened. So overnight the exchange rates changed. The Indonesian Rupiah, which was at 2,000 Rupiah to a dollar, had gone down to 17,000 Rupiah to a dollar. So you can imagine the scale of disruption. It wasn’t easy. The first thing we decided was that we were going to stay in the country. Lots of competitors like Kellogg’s decided to pull out. The second thing we said was that we would not lay off any of our people; and the third thing we said was that there would be absolutely no compromise on the quality of our goods.
Fourth thing we said was that to keep the quality, we would take price increases. In fact, we were taking price increases every 2 weeks. That basically meant a drop in volume in the first year and we were giving salary increases also every 2 weeks to compensate inflation. There was a drop in volume, but the fact that we stayed and invested in our people and brands whereas many competitors looked the other way went in our favour eventually.
When the Indonesian economy bounced back 15 months after the crisis, we witnessed a good 10 to 15 years of growth, as we were beautifully positioned to benefit. The lesson therein is Never waste a good crisis.
IBT: Can you create a culture where you help people prepare for crises before they happen?
Prof Nandu Nandkishore: You must help people to simulate crisis as well as how to balance a threat response and an opportunity response. Within the opportunity response, you don’t know what’s going to work, so create a culture of small constant experimentation. Figure out what the correct answer or solution is through small pilots, and then scale it up really, really fast. Because if you don’t create a culture of doing this, people could intellectualise 20-25 crisis response approaches and still get lost.
We can’t solve everything from an armchair. You need to actually go out and do some trials. When you are scaling up, people shouldn’t start to second guess questions like which idea is better.
At the time of scaling up, you should scale up based on data, based on an actual experiments. Then you don’t question the choice of idea anymore, you just scale up fast. But all of this is to be part of a culture that is responsive to change. And this is not only for COVID 19.
This is a cultural response that needs to be built in more for the underlying change dynamics and black swan events that keep coming. There will be other black swan events – an earthquake somewhere, undersea cable cut somewhere, disruption of data somewhere. These are just facts of life. So an important part of culture is actually to simulate crisis regularly. The more you prepare, the better you are at dealing with crisis till it becomes a second nature to people.