Seizing the upside of turbulence
‘RETURN TO BASICS’, and ‘sticking to our knitting’ rank among the most commonplace ‘strategies’ adopted in an economic crisis following the hedonistic growth of a prolonged boom market. What managers are really saying is they intend to wait it out for the recovery.
Business strategist and author, Professor Donald Sull, speaking to MBA students at the University of Pretoria’s Gordon Institute of Business Science, believes that would be a mistake. Market turbulence is something that is here to stay and company managers had better get used to dealing with it in a more pragmatic fashion than simply waiting it out.
These financial crises and market collapses are happening more often and the cycle will continue to accelerate. His latest book ‘ The Upside Of Turbulence’ demonstrates that there have been four serious global financial crises in the past 30 years, compared to four in the previous 120 years, but that the accelerating volatility coincided with an unprecedented increase in global per capital GDP.
So turbulence, volatility, interesting times, call it what you will, appears to be good for creating wealth. Rather than wishing away market turbulence, said Sull, management should embrace it by preparing the tools to weather the immediate storm and emerge stronger than ever.
“Global turbulence and volatility has been demonstrably increasing over the past 30 years,” said Sull. Highlighting this growing volatility is the fact that during these periods, major US household-name firms have become statistically twice as likely to fold and three times as likely to be dethroned from positions of industry leadership; the likelihood of a global financial crisis has increased fourfold, as has the global dissemination of technological breakthroughs.
Sull concludes from this that the factors that lead to turbulence have also been the factors that have driven this unprecedented period of economic opportunity.
His research into which firms thrived and which firms succumbed in poor economic conditions uncovered two broad themes:
“I found there are two broad methods of successfully dealing with turbulent markets, but that the most successful companies evidence both characteristics. They are: agility and absorption.
“Agility is the ability to consistently spot and seize opportunity faster than competitors. However, for many people, dealing with turbulence starts and stops with agility – and that would be a mistake.
“Absorption is the ability to weather changes in the market place, which then gives you the space to take advantage of opportunity when it comes along: and factors that influence absorption are size, diversified earnings, partnerships and others. This is every bit as important as agility – because you have to still be there as a business to take advantage of new opportunity,” said Sull.
Research has found that agility has three components.
“Operational agility can be company-level agility or at business unit level. Most firms are on a perpetual roller-coaster ride of growing the business in good times without any consideration for expense control, and only when a recession arrives do they get religious about costs.
“Portfolio agility is the ability within the group to reallocate resources to wherever they are most needed. McKinsey research has found that only the most successful companies are able to achieve this. My own research among leading CEOs found that they struggled most with this form of agility.
“For instance, the tendency is to put the best managers in those divisions that simply print money, and the most inexperienced managers where the business finds the most competition – exactly the opposite of the way it should actually be,” said Sull.
“Strategic agility: companies can waste a lot of time looking too far into the future in establishing a long-term vision. In reality, nobody can predict that far ahead what is going to happen in a market. So companies that do well are those that have mid-term portfolio agility and short-term operational agility,” he said.
“My research has found that a 3-5 year