Navigating high uncertainty markets

Bénédicte Germon: Philippe Méda, we decided to place our exchange under the sign of “Navigating high uncertainty markets”. The sanitary crisis hit markets and our daily lives drastically and suddenly. According to you, which changes have been brought in society?

Philippe Méda: Mapping the changes in society is currently extremely complex because they are quite widespread. For someone who has been working in innovation for about 25 years, what you learn first is to make a distinction between the so-called first order of consequences and the second order ones. For instance, companies are losing money; sales are declining, people's jobs and purchasing power are compromised, and the situation is worsening. They are the first-order consequences. They are easy to understand because their impact is immediate, and we can monitor them in real-time.

Then there are the second-order consequences, which are how it ricochets around in the market. As an example, we are conducting this interview via video conference today, and we can see the rise of remote working and video conferencing extensively. We could think that companies selling these products will thrive. Maybe. But still, because of the crisis, unemployment is expected to rise, and many people may experience reduced work hours for one to three years, depending on the severity of the crisis in white-collar jobs. This means that the net result for companies selling remote work apps and tools might be a decline, as the business itself will suffer. That’s the ricochet, the second order of consequences.

That is a simple example of distinguishing between the first impacts we go through, and what we should be planning next ahead of us. This is deceptively difficult to wrap our minds around from a medium-term perspective, and this is where we need to apply our strategic thinking as companies, schools, or simply as professionals. Often, innovation is just about preparing for what is going to reshape the market and trying to be an active part of it.
 
B.G: Stating that white-collar jobs will decrease is rather surprising. Can you detail this point?

P.M.: Yes, by definition, white-collar jobs are not those involved in physical production and manufacturing, or supply chain. And as a white collar worker myself, we all had a fairly easy time, even if a bit uncomfortable to adapt to remote working, because at the end of the day, we are working a lot with emails, Zoom, Skype, or whatever. For those of us who were not very keen on digital tools, the learning curve took like a week or two, right? People who are actually manufacturing, moving things around, and controlling processes in factories are those who obviously cannot work remotely. So, their jobs will be better sustained to some extent; not right now, perhaps, because production is down, but in a few months, when production returns to its pre-COVID-19 level. And again, in terms of the second-order of consequences, their jobs will probably be safer than those of the white-collars workers.
 
B.G: Do you believe these changes will be sustainable over time? Or that people reacted because they were hit, and will as suddenly go back to normal because human beings remain human beings?

P.M: I think the latter, and that the way you frame it is precisely that. A first answer is that we adapt to a system shock, and then things revert to normal very quickly. To build on the remote working discussion — because we have had this debate for a long time — I am adamant that corporations that were not involved with remote working before the crash will not be as remote working after the crisis. It is all about the company culture, and this is the hardest thing to change. Therefore, there will be some side adjustments here and there. However, multinationals or even SMEs that will learn something really transformative out of the crisis will be just a few.

B.G: So I understand that you do not believe that post-crisis effects will be sustainable over time?

P.M.: I'm a pessimist because it's safer (laugh), and it's also easier to map out the gaps we need to watch for, rather than trying to be ‘cheerleaders’ and think that this is going to be an epiphany for everyone because it was such a transformative event. I think it is safer to believe the opposite. Moreover, we talked about culture, and most companies will not be transformed because culture has just too much inertia. Nevertheless, these questions remain: How do we apply the right level of pressure? What kind of lever can we use to unlock real conservative outcomes of this crisis? Let us assume they will not unlock naturally by themselves, and see what we can do about it as an active problem to solve.

B.G: So, how would you define uncertainty? When you use this word, what does it cover for you?

P.M.: It's a word that we hate to use because, as business people, uncertainty means that we don't know. It is that simple. And we are trained to believe that businesses are built on predictions, on business plans, quarterly reports, annual forecasts, and warnings for shareholders in the worst-case possible scenario. However, even the warning to shareholders implies that you are aware of what you are warning them about.

That said, a large part of the training we give at KEDGE is just about uncertainty. In the Executive MBA, one of the core values of the program is to elevate individuals from management positions and provide them with access to the tools and mindset required for leadership. This includes developing a leadership vision and mindset, as well as utilizing the right tools to transition from management to leadership. Not that management is bad, and you can have a very successful, entertaining, rich, and exciting career in a management role. No question about that. But if you want to get into a leadership position, the key thing— and I would argue the only thing that makes the difference— is embracing uncertainty. No, it's not because it’s easy or comfortable, but because it’s not, and very few will do it. You see, managers reduce uncertainty because they need to work on operations, and they need to plan, and they need to forecast. People in leadership positions are working beyond the horizon of secure things. They go on the other side of the mirror, and they get into a zone where they deal with uncertainty. This is 80% of their job. There are those in charge of the unknown factors ahead of them in the market. The proverbial « unknown unknowns ».

And this is what they should be paid for. If you pay someone in a leadership position not to do that as their daily job, I believe you're doing something really, really wrong, because you will be facing uncertainties no matter what. It might just be that because of the pandemic, we realize all this right now, and we will probably forget it in one month or two. The final point is that uncertainty and leadership are deeply intertwined with innovation.

Innovation is not something that some companies do better than others; it is not something that only elite or technological companies have to do. No, innovation is business as usual.

Dealing with uncertainty, you automatically bring the innovation part. A definition of Innovation linked to what Schumpeter explained a century ago is fairly simple: « changing the social order ». And the market is a specific form of social order. Therefore, the way you change the market is through innovation. If you do not change the market at all, never, well, then you do not innovate ever.
These are all nuances of the same corporate element: leadership, innovation, and dealing with uncertainty.

B.G: So would you say that uncertainty is good or is bad?

P.M: In that sense, it is neither good nor bad. It is there. There is no way to avoid uncertainty, whether you are a human being or a moral entity. So it's there, and you need to deal with it. If you do not like the weather, well… tough luck, you still need to deal with it. But rain, storms, or sunny weather all have their perks. And uncertainty is that, where is the market going six months from now, is it kind of predictable, at some level, six years from now?  No one knows. And sometimes, like right now, no one really knows six days from now.
However, this is why you need to continually work on that as part of the business as usual of a company. Not doing so is somewhat foolish, like driving a car and refusing to look on the side of the roads regularly.

B.G: As a senior consultant on innovation strategy, what are you in a position to anticipate in the next three years?

P.M: The easy answer is two words: High volatility. Because when the second-order consequences hit various parts of the market, many restructurings will take place, business models will need to adapt faster than expected, and probably in a different way from what they are currently doing. Currently, many businesses are trying to adapt to the current first-order of consequences, which is all right, of course, as this is an emergency response. However, they do not plan extensively for the next two or three years and do not attempt to anticipate the market's potential shifts, which will allow a return to the old normal. I am concerned that a significant portion of the money being spent to adapt to the crisis will be wasted, as it focuses primarily on the short term, and new problems will continue to emerge for the foreseeable future.

B.G: Don’t you think that trying to plan too early in a crisis is a factor favoring a potential loss of money, as you could planning in the wrong direction is a risk?

P.M: It depends on how you do it. If you try to adapt by being extremely predictive and being too assertive on how situations may evolve, then you spend money on rigidity and are likely to waste it. That is what some corporate cultures will try to do: be extremely serious, knowing precisely what to do and discussing it with investors; that is a huge mistake. Corporate cultures that understand how to manage uncertainty tend not to be overly predictive, but rather to leverage uncertainty. One way to do this is to build up optionality.

Optionality means that you are not going to invest in a single-track, perfect solution for the next five years. I recall that in 2010, all major corporations published ambitious 2020 plans that began to be sidetracked as soon as 2011... To the contrary, when you build optionality, you invest in a portfolio of solutions. You essentially admit that you will not know precisely what is going to happen, but you get the general directionality. Instead of building a cathedral of a product for the next five years, you build three or five, or a dozen lower-scale candidates to be your next blockbuster product. You admittedly start with less grandiose plans and fewer market announcements. But you actively and fiercely probe ahead in the market and reinforce what is working out.

And the key to optionality is investing in as many options requiring the least sunk costs possible, but each of these options should have such a high payout if it survives, that it will eventually bring an impactful ROI for the whole process. That's the portfolio logic. Not a rigid predictive roadmap that underlying uncertainties will betray, but a portfolio that is fed by the very same uncertainties.

This kind of shift is very easy if you have been educated in dealing with uncertainty. Very innovative companies have applied this logic for decades. This is their DNA; they know how to do that. They will survive the crisis. But the rest of the companies will need to adapt and learn from this playbook as fast as possible.
To sum it up, companies announcing “this is our plan for the next three years”, are probably sending the worst possible signal at this time. Companies that say, “Hey, this is how we are exploring different options in the market,” are companies reacting properly to the crisis. But admittedly, the narrative is often less attractive for the press and the stock market.  
 

B.G: Could you provide a specific example of a sector or company?

P.M: Sure. An example is the pharmaceutical business, which, since the 70s, has had to deal with a lot of uncertainty for various reasons — mainly scientific struggles and limitations of technical roadmaps. So the pharmaceutical business had to adapt and learn not to be too predictive. Instead of taking years ahead of “this is the drug of the future,” they built portfolios of options, developed what is now called open innovation, and learn how to put as little money as possible to start with, and then reinforce the options that survive along the way. It's a very Darwinian process. 

Anyone can learn from this. If you manage a chain of restaurants today, how do you adapt? And well, my get-go answer is to try three or five new different business models, before committing to a grand 10-year plan.

B.G: Don't you think this strategy is more oriented towards large caps/big companies rather than SMEs, as SMEs do not have the financial base to adopt a longer-term perspective?

P.M: Yes, that is fair. The more money you have, the more surface you have as a business, the easier it is to build a portfolio of options. But remember that big corporations also have to deal with a spectacular issue: cultural inertia. If they can explore more, they will less easily adapt to new paradigms. So there's a kind of balance in there.

Coming back to the restaurant example, if you are a plain, normal restaurant, you have explored a new model during the crisis: delivering as your major activity. Connecting to a platform like Uber Eats or Deliveroo seems easy, but this is already a very transformative change, if only because you have also started cooking off-hours (remember the second-order consequences!). That's interesting, you’ve learned something different about your usual market and the one that was not addressable until now. You’ve unlocked new options. You may be discovering that some people are not interested in the full course menu, but just in some key dishes you have, or that you are lacking others, for that matter. This starts to transform who you are. Then you learn some delivery companies are also building remote kitchens and market suppliers, which you can contract to do your dishes and deliver them. This further expands your possibilities. Maybe you tried online cooking classes on Airbnb Experiences and are now pushing your restaurant brand to future Japanese tourists...

So I'm just saying that whatever your business is, you don't have to be in the pharmaceutical or the aeronautics field to explore options. If only for digital tools and platforms, you have quite a few possibilities to play around with.
 

B.G: Going back to management, has COVID-19 had an impact on the qualities needed by a company leader or manager?  Or showed up new behaviors and competencies, for company managers or company leaders?

P.M: I really believe so. The key question is: will we remember what was experienced two weeks after returning to normal? That I don't know. As I said, I'm a bit of a pessimist. Nonetheless, in terms of management and operations, we had to learn how to adapt. Whether we talk about supply chain, quality control, production, or remote working, there are key learnings that need to be faced, addressed, and maybe integrated. I don’t believe in transformative epiphanies, but certainly trust there are interesting adjustments and returns on investment to get out of the process.

Concerning leadership, I would point to two key ideas: Integrate uncertainty as an ongoing factor, and innovation is business as usual. It should be maybe only 10% of your overall work (doesn’t have to be more, probably), but as an ongoing thing (not a two-day management seminar with which you play around once a year).

The second one is: what the crisis has forced you to learn from your corporate culture? If I had to put my money as an investor on the companies that will survive and accelerate out of the crisis, I would look at one main factor: How have they changed their culture? What has changed for the long term in the way they work? Can I see something the company has implemented due to COVID-19 that is not a temporary Solution?
If you want to go back to remote working, which companies will embrace, to some level, remote working in their corporate culture? How will they change the way teams are led and organized?

B.G: To conclude this exchange, Philippe Méda, what are the recommendations you would specifically give away to EMBA participants to navigate in uncertain environments from now on?

P.M: One would be building to learn how to switch from the management to the leadership mindset on the fly. Despite the difficulties we are facing, this is a favorable time because we are navigating the crisis right now.

Look at the companies you might want to work for/with in the next years. Look at them right now. And consider how they are responding to the crisis. Because it's huge, tell you will see how this company's culture is working out and if it's a fit with you. The crisis is cutting through the usual PR and corporate propaganda. We have a very harsh (but useful) assessment of who is who in the market right now.
And you can put us too at KEDGE under this lens, as everyone else. As participants who signed up for an EMBA, which brings, of course, a lot of value in the interactions, what have you been learning yourself working online with us, and how would you transfer that to your job or your next job with your teams?

B.G: Thank you so much, Philippe Méda, for this rich exchange!

The original link:

Navigating with high uncertainty markets - Shared views with Philippe Meda, Professor of Business Model Design for the Global Executive MBA - KEDGE Business School

Shared views with Philippe Meda, Professor of Business Model Design for the Global Executive MBA.

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