Most executives and managers, once or twice in their careers, encounter or miss the early signs of distress leading up to a company crisis, whether driven by technology disruptions, industry consolidation, regulatory change, or a combination of all. Seeing it coming is not enough. It must be acknowledged that there is a problem – not just an industry lifecycle problem – but an organizational crisis in the making. Acknowledging it raises a sense of awareness and urgency, a far better solution than pretending the problem will go away or be resolved by deep cost cutting and restructuring. Often, this goes beyond operational efficiencies; it is about coping with the big shift and navigating your way out of it.
An apt metaphor is putting a frog in hot water: The frog won’t notice the water is heating up until it is too late. Today, shifts usually happen fast and the heating up is intense. The question is, what can the frog do?
Admit your company is in a crisis, but don’t show signs of panic.
Executives may be smart and highly experienced, but – having looked at similar numbers before – may assume the situation is of a cyclical nature and will reverse. Those who work with these old assumptions and expired business models will find that most shifts today are unpredictable, catching them off guard. Everyone checks the milk in the fridge to make sure it’s not expired. Why wouldn’t companies check their business models too?
Today’s enterprises have access to massive data, but even a data-driven approach to strategic management may not be able to predict or explain the shift. Oftentimes, executives also get caught up in the pressure for short-term financial returns, ignoring their company’s long-term health – or even wilfully sacrificing it. Cheap capital should not be used as an excuse for inaction, and spending your way out of the problem is a desperate move that won’t save the company.
Less than one out of ten executives step back to look at the macro environment and try to see what is causing the shift, objectively asking, “What is actually going on and what does all this mean to our business strategy? What would the impact be in the long run? Are we heading into a crisis and, if so, how threatening is it? What are the different options and scenarios we can use to get out of this, and how would each one implicate our business models? What is the rate of survival?” The answers don’t have to be complicated.
01 // Contain your crisis and don’t let the company go into panic mode.
It’s not helpful for a company if people are making decisions under distress. Leaders may be in survival mode, conservatism takes over, and some become defensive, deflecting any responsibility for creating the crisis. There are usually more than a few reasons for any company to be in crisis, but often the primary issue is missing the big shift and becoming irrelevant. Whatever the scenario, stay calm and don’t panic. Good crisis leadership can be the difference between life and death – between the company surviving or going bankrupt.
Rudy Giuliani phrased it well when he said, “It is in times of crisis that good leaders emerge.” It is at these times that you see who the true leaders are, which ones can take the pressure, and which ones get people rallied around a common vision forward, instead of giving in to the despair around them.
02 // Avoid jumping into a plan too quickly.
Having a plan is probably not a good idea. A plan means you have flushed out all strategic and tactical components, as if things are in a static state. When a shift happens, it doesn’t have a clear starting point or end state, thus creating a plan based on many moving parts is pointless. The key is to understand the weak signals and how they shape the dynamics of the industry structure and value flow. Once there is a mental map developed and visualized, management can see where value is flowing and debate value creation and value capture mechanisms. You can now look at the potential impact on basic market performance, financial metrics, and cash flow, and where you could be with respect to your industry and competitors if you stay on course.
03 // Leverage your board and rally them.
This is the time to leverage your board and expect to get more from them. The beauty of a strong board is that they can provide a cross-industry perspective; by having a reasonable distance from the company, they can see the forest for the trees. Managers often treat their board as another roadshow to finish so they can get on with their real work. It is a mistake to undermine the board’s role as both an early-warning detection system and strategy oversight for navigating the big shift. They can also highlight risks – be it real or not – and pinpoint significant events that few could have foreseen.
04 // Unlock finances and rigorously manage cash flow.
Money is the bloodline of a company. Before a new business model kicks in, it is critical to manage cash flow. In addition to rigorously managing costs, the company should unlock cash from assets that are not core to the business. It’s a mistake to maximize immediate return. In most situations, there is a time period for reinvestments, and burning cash for a controlled period of time is not a bad thing. No company can cut their way out of a crisis, unless the goal is to stabilize for a sale. Eventually the company needs to bring in cash, but insisting that it happen too quickly will undermine the company’s success in the long run. Cash management is key to ensuring there is some predictability and no nasty surprises. If not done well, it can send a company into a spiral they may not recover from.
05 // Create an emotional and credible story.
Companies in distress don’t focus enough on creating a change story that is credible, industry relevant, proud, and emotional. If you can tell that story in a paragraph or less, in a tone that means something to the people on the front line, they will get on board. The key is to have a simple message and an emotional and credible story. Admit your company is in a crisis, but don’t show signs of panic. Demand significant action, but not desperate ones. A company that is in a true crisis will be willing to try radical moves it normally wouldn’t consider, and it’s those bold actions that change its trajectory. Starbucks is one of the best recent turnaround stories. When Howard Schultz talked about his plan for Starbucks when it was in a crisis, he – unlike other leaders – also spoke about his feelings and taking things personally. He admitted that Starbucks had lost its edge, stating that they were “being squeezed from the bottom by fast food brands like McDonald’s and Dunkin’ Donuts, and from the top by high-end independent coffee shops.” Schultz told an emotional story of how the company had forgotten what it was all about: coffee. He made himself credible by making a symbolic move: In February, 2008 he closed all 7,100 stores in the United States for a few hours to re-train baristas. It was an emotive story to bring the magic back, supported by action.
06 // Build a new leadership team and inject it with new energy.
There are two types of leaders you will need for your new leadership team. One is strategic leadership: those who can see beyond the crisis, understand the industry dynamics, and think ahead of the curve. These leaders understand how to create value by aligning with the future. The second are leaders with institutional knowledge. They don’t need to be top performers, but they know all the ins and outs of the organization and ecosystem. They are the ones who can execute the turnaround, but aren’t leading it. A leadership team needs to have both kinds of executive leadership in order to work. Look for people who are two and three levels down, waiting for an opportunity to demonstrate their leadership potential. Find outside consultants who can bring fresh views and carry no baggage, and make them feel that they can be part of something bigger than themselves; saving a company and making it great again is a good selling point.
Leadership in a crisis mode requires more than just good managers and operators. You need to simplify complex and dynamic scenarios into something people can understand and make bold decisions. As General Colin Powell says, “Great leaders are almost always great simplifiers, who can cut through argument, debate, and doubt to offer a solution everybody can understand.”