Why leaders should focus on long term growth (new book)

The Vice Chairman of Korn Ferry and a McKinsey partner have published a short book that has studied the benefits of long term thinking.  There’s an interview with the authors on the Wharton site that gives some context and one extract from this stands out:

Just beware of the trends going on in the world. Larry Fink, the CEO of BlackRock, which manages $6 trillion in assets, says that it would be key for CEOs to realize some of the changes going on in society. For example, [consider] this shift towards automation and artificial intelligence. A McKinsey study we cite in the book says that [those technologies] could displace 30% of American workers.

CEOs who want to survive in the long run, and want their companies to survive in the long run, have to be aware of what’s going on in society, and try to steer their companies to address some of these issues. If they do that, they’ll get the support of their investors, customers and employees.

Turbulence ahead (Bain and Co in the HBR)

As most of my updates now go to my clients rather than here on my blog, this post may seem out of place compared to previous writings.  However I’ve become increasingly concerned about the failure of governments to understand the implications of the:

  1. interplay of complex systems that form the framework of modern society (including the complex system that is the climate)
  2. effects of automation
  3. alarming rise in inequality
  4. threats from cybersecurity

There are significantly more risks to consider in the years ahead, and these have severe implications for stability.  Bain and Company has completed some good work on this recently, and a summary has just appeared on the HBR site.  I don’t usually include large quotes here, but this piece of work is a concise summary that is hard to beat (the highlights are mine):

The benefits of automation, by contrast, will flow to about 20% of workers—primarily highly compensated, highly skilled workers—as well as to the owners of capital. The growing scarcity of highly-skilled workers may push their incomes even higher relative to less-skilled workers. As a result, automation has the potential to significantly increase income inequality.

The speed of change matters. A large transformation that unfolds at a slower pace allows economies the time to adjust and grow to reabsorb unemployed workers back into the labor force. However, our analysis shows that the automation of the U.S. service sector could eliminate jobs two to three times more rapidly than in previous periods of labor transformation in modern history.

Of course, the clear pattern of history is that creating more value with fewer resources has led to rising material wealth and prosperity for centuries. We see no reason to believe that this time will be different—eventually. But the time horizon for our analysis stretches only into the early 2030s. If the automation investment boom turns to bust in that time frame, as we expect, many societies will develop severe imbalances.

The coming decade will test leadership teams profoundly. There is no set formula for managing through significant economic upheaval, but companies can take many practical steps to assess how a vastly changed landscape might affect their business. Resilient organizations that can absorb shocks and change course quickly will have the best chance of thriving in the turbulent 2020s and beyond.

The full report from Bain is also well worth reading, and is available here.

Making Sense of Current VUCA Levels: Carlota Perez

Among colleagues around the world at the moment, there’s a definite recognition that VUCA is increasing.  One of more interesting theories about why this is happening comes from the work of academic Carlota Perez who has studied long-wave change theories for three decades.  In a nutshell, she believes that we’re currently transitioning from what she calls the “installation period” (where technology is developed) to the “deployment period” (where economic booms occur).  Perez believes that the levels of VUCA we are seeing now are reflective of the transition.

So how do you know when you’re in the gap between the two?  Here’s one metric that she uses to support her view:

During Installation, there is always strong asset inflation (both in equity and in real estate) while incomes and consumption products do not keep pace. This creates a growing imbalance in which the asset-rich get richer and the asset-poor get poorer. When salaries can buy houses again, we will be closer to the golden age.

In many countries around the world there is a profound disconnect between average income and the ability to buy a house. For example in Canada the average home price was $480,743 for July 2016 while the average Canadian employee makes just over $49,000 a year. 

In parts of the UK such as Trafford (and it’s important to note that this isn’t London) house prices are now 8.9 times higher than average wages and 7 times higher in Stockport. In Manchester, the number has risen to 5.1 times in 2015.

In New Zealand the average house price is now six times the annual household income.

One of the other key changes Perez points to as an indicator, is the birth of new economic instruments:

…there need to be innumerable investments and business innovations to complete the fabric of the new economy. Here’s one small example: Millions of self-employed entrepreneurs work from home with uneven sources of income. Where are the financial instruments to smooth out their money flow so they can work and live without anxiety?

This sounds remarkably like the innovations surrounding the deployment of blockchain, where one of the best quotes that I’ve heard about this technology is that:

If the Internet is a disruptive platform designed to facilitate the dissemination of information, then Blockchain technology is a disruptive platform designed to facilitate the exchange of value.

Perez quotes two other indicators that can be used to spot the transition: the first is more financial regulation at a global level.  However the complexity at play here is that in a world that is heading away from globalisation, it’s very difficult to bring nations together to agree on these types of initiatives.  It may take another severe financial crisis to induce a global agreement.

The final indicator is increasingly stable industry structures, and I’d argue that currently this is harder to discern.  However one signal may be in the form of  digital consolidation of internet traffic by Google, Apple, Microsoft, Facebook and Amazon.  Most of the world’s internet flows through one of these organisations and they also act as enablers – for example the creation of a store front with Amazon with promotion via Facebook/Google.

Whichever way you look at the current macro global situation, it’s clear we’re not in what Perez calls the “Golden Age.”  Perez herself notes that the Golden Age might not even eventuate, and that patterns from the past might not foretell the future:

Historical regularities are not a blueprint; they only indicate likelihood. We are at the crossroads right now.

McKinsey on foresight in Boards

Although it dates from 2014, this McKinsey article is full of gems for organisations seeking to connect foresight, strategy and innovation at the highest level. It’s a solid five minute read but I’ve culled the absolute highlights below:

Governance suffers most when boards spend too much time looking in the rear-view mirror and not enough scanning the road ahead. Directors still spend the bulk of their time on quarterly reports, audit reviews, budgets, and compliance—70 percent is not atypical—instead of on matters crucial to the future prosperity and direction of the business.
The alternative is to develop a dynamic board agenda that explicitly highlights these forward-looking activities and ensures that they get sufficient time over a 12-month period.

“Boards need to look further out than anyone else in the company,” commented the chairman of a leading energy company. “There are times when CEOs are the last ones to see changes coming.”

VUCA gets an ‘S’ and a ‘T’

Eric McNulty is the director of research for Harvard’s National Preparedness Leadership Initiative.  On O’Reilly he’s published a very accessible piece about VUCA (volatility, uncertainty, complexity and ambiguity) where he’s added S and T.

The two additions are system-scale change and ubiquitous transparency, and Eric explains them further:

If VUCA were not daunting enough, I will add two new elements that take us from VUCA to VUCAST. They are system-scale change and ubiquitous transparency.

System-scale change can be seen in four mega-trends that I have been following since 2008. These are what I call “Pillar Trends” because they are global, will affect virtually everyone, have a discernable long-term trend curve (even if final outcomes are not clear), and no single individual or organization can alter their basic trajectory (the pillars are climate change, aging, urbanisation and technology).

Ubiquitous transparency is a direct outgrowth of the last component of system-scale change. You have to assume that almost anyone can know almost anything in almost real time. While this will cause some organizations to try to lock things down more tightly than ever, expectations of transparency will also grow.

I’ve also noticed these two components on the rise – my term for transparency is “the perfectly informed consumer” (however this cannot be added to VUCA to make a better acronym).

Leading in a time of tumultuous change: Our VUCAST world – O’Reilly Media

Complexity and technology

This is an insightful piece from the NY Times about the rise of American tech giants, but it also touches on an issue which increases the VUCA score of the world (my emphasis in bold below):

“What’s happening right now is the nation-state is losing its grip,” said Jane K. Winn, also a professor at the University of Washington School of Law, who studies international business transactions. “One of the hallmarks of modernity is that you have a nation-state that claims they are the exclusive source of a universal legal system that addresses all legal issues. But now people in one jurisdiction are subject to rules that come from outside the government — and often it’s companies that run these huge networks that are pushing their own rules.”

Ms. Winn pointed to Amazon as an example. The e-commerce giant sells both its own goods and those from other merchants through its marketplace. In this way, it imposes a universal set of rules on many merchants in countries in which it operates. The larger Amazon gets, the more its rules — rather than any particular nation’s — can come to be regarded as the most important regulations governing commerce.

Source: Why the World Is Drawing Battle Lines Against American Tech Giants

Working on strategy? Use paper…

If you are working in a strategy team, or trying to grasp abstract and complex relationships, it’s hard to beat the use of paper as a communication method.  While I have three screens on my desk, I still prefer large sheets of paper for the really hard thinking.

Some recent research has supported why this is the case:

In all three tasks, the paper users were significantly more “abstract” in thinking. Digital participants reported preferring concrete rather than abstract descriptions of a behavior–for example, “making a list” would be associated with “writing things down,” rather than the “getting organized” description preferred by those taking the survey on paper.

Digital participants scored higher than the paper participants, on average, in recalling details of both the story and the car data table. But they scored lower on questions of inferred relationships and meaning…

Next time your colleagues suggest writing a strategy using PowerPoint, pull out a pencil…

Source: Screen Reading Worse for Grasping Big Picture, Researchers Find

Strategy, disruption and scanning

This is a long but worthwhile post from a VC taking aim at the overuse of the word ‘disruption’ when it’s linked to strategy.  About half way down the piece is a quote which is worth repeating. It’s from an HBR article written by the former president of PepsiCo:

…most of PepsiCo’s major strategic successes are ideas we borrowed from the marketplace–often from small regional or local competitors.

For large companies that find it hard to innovate internally, it’s worth keeping an eye on smaller ones that are more nimble.

Constantly scanning innovation both in your sector, and in adjacent sectors, is a valuable capability but one that very few organisations invest in. I recall that Texas Instruments used to employ a guy called Gene Frantz who described his role as looking for lunatics within TI with ideas that could spark new directions for the company.

Back to the article that sparked this post – it goes on to close with another great original quote:

Without a strategy you might predict the market and the technology exactly and still lose to someone who does have a strategy.

Source: Disruption is not a strategy | Reaction Wheel

Breaking paradigms – a science story

This article from The Guardian is a long, but excellent read about the health impacts of sugar.  However the story also examines something fascinating – how paradigms change in science:

In a 2015 paper titled Does Science Advance One Funeral at a Time?, a team of scholars at the National Bureau of Economic Research sought an empirical basis for a remark made by the physicist Max Planck: “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.”

 The researchers identified more than 12,000 “elite” scientists from different fields. The criteria for elite status included funding, number of publications, and whether they were members of the National Academies of Science or the Institute of Medicine. Searching obituaries, the team found 452 who had died before retirement. They then looked to see what happened to the fields from which these celebrated scientists had unexpectedly departed, by analysing publishing patterns.

What they found confirmed the truth of Planck’s maxim. Junior researchers who had worked closely with the elite scientists, authoring papers with them, published less. At the same time, there was a marked increase in papers by newcomers to the field, who were less likely to cite the work of the deceased eminence. The articles by these newcomers were substantive and influential, attracting a high number of citations. They moved the whole field along.

In organisations – large or small, formal or informal – it’s easy to get caught in paradigms.  New thinkers, young people and contrarians are essential in challenging accepted assumptions, and for the development of robust thinking that doesn’t fall into the trap of delivering the same outcomes.

Even when confronted with clear evidence that the paradigm is wrong, experts have trouble accepting this, and refute their own work, as evidenced by this other gem from the same article:

The National Heart, Lung and Blood Institute decided to go all in, commissioning the largest controlled trial of diets ever undertaken. As well as addressing the other half of the population, the Women’s Health Initiative was expected to obliterate any lingering doubts about the ill-effects of fat.

It did nothing of the sort. At the end of the trial, it was found that women on the low-fat diet were no less likely than the control group to contract cancer or heart disease. This caused much consternation. The study’s principal researcher, unwilling to accept the implications of his own findings, remarked: “We are scratching our heads over some of these results.” A consensus quickly formed that the study – meticulously planned, lavishly funded, overseen by impressively credentialed researchers – must have been so flawed as to be meaningless.

Just to emphasise this again: The study’s principal researcher was unwilling to accept the implications of his own findings.

This case study should make it into the leadership manual of every CEO when working with their strategy teams.

Source: The sugar conspiracy | Ian Leslie