A Better Way To Lead In A Downturn

Chief Executive Officer

This post was originally published on this site

The Covid-19 crisis continues to unfold rapidly and unpredictably, creating disruption across the world. With the latest forecast from the IMF projecting that global GDP will shrink by 3% in 2020, businesses are clearly in an unprecedented situation, at least since the second world war.

Unlike previous crises, the impact of Covid-19 is being felt deeply in our personal, social and professional lives and navigating the challenges this poses calls for an understanding of human nature, as well as business practices. For many businesses it is hard to think about anything other than survival in this moment. If previous crises are anything to judge by, however, the decisions and actions we take now will ultimately determine our success in not only surviving the current crisis but thriving afterward.

In the shadow of the 2008-2009 financial crash, Gulati, Nohria, and Wohlgezogen presented compelling research in their HBR article about how companies that strike the right balance of defensive and offensive moves fare the best in a post-recession recovery. The central finding of their research was that companies that simultaneously made defensive moves focused on operational efficiencies, as opposed to headcount reductions, and offensive moves focused on asset investments and market development, achieved significantly higher sales and EBITDA growth compared to their competitors. These lessons remain helpful as we enter another global recession.

There are, however, significant differences between the current situation and previous recessions like the financial crash of 2008 or the dot-com crash of 2000. The current crisis is different both qualitatively and quantitatively in some significant ways:

• The breadth of industries and regions directly impacted is much larger as Covid has spread to nearly every country around the globe.

• The situation continues to evolve at an incredible pace due to constantly evolving research and learnings about the virus and its impact, changing public health and public policy guidelines, and the rapidly shifting economic fallout.

• Significant disruptions are being felt in both demand and supply due to lockdowns across the world, social distancing measures, changes in consumer behavior and sentiment, and global restrictions to the supply and movement of goods.

• High uncertainty on multiple fronts, including the path of the pandemic, the intensity and effectiveness of the countermeasures, the immediate and long-term changes to business operations, and the monetary and fiscal policy efforts.

These differences in how the impact will be felt in the economy, combined with the anxiety and disruption to our personal and social lives, places a greater emphasis on responding to the current situation through both an understanding of human nature and the business reality.

Through the combination of decades of intense observational research and the latest brain science that has been able to map the hardwiring in our minds and bodies, we have developed a model to understand how human beings respond to external stimulus. This model can help leaders define successful strategies to not just ride out the storm but also prosper through it.

The model we developed, which we call Survive|Thrive describes a two-channel system of our brain-body hardwiring that has evolved to help us detect and respond to threats and opportunities. The Survive|Thrive system provides an explanation for the behavior of individuals and groups through complex, fast-paced change and provides some insights for how leaders can best navigate these uncertain times. The Survive Channel, which is the more dominant and evolutionarily older of the two Channels, has evolved to detect threats that trigger an instinctive response, releasing hormones and other chemicals that initiate a “flight-or-fight” response. While these threats were initially physical threats to our survival, this same mechanism is activated by threats to our health, our status, our egos or any other aspect of our wellbeing. The real and perceived threats during the current pandemic are especially likely to trigger a strong Survive Channel response because: 1) it is a physical threat; 2) it is invisible; and 3) individuals cannot take actions to completely eliminate the threat (at least not immediately).

The Survive Channel, when functioning well, narrows our focus and increases our level of problem-solving activity to eliminate the threat. However, when we have limited ability to eradicate the threat and are being hit over and over again by news and information that repeatedly trigger our Survive Channel, it results in either a freeze response and complete inactivity, or frenetic, chaotic activity that does not lead to better outcomes.

By contrast, the Thrive Channel is activated by opportunities and is associated with feelings of excitement, passion, joy and enthusiasm. These triggers activate the parasympathetic nervous system, allowing our mind to broaden its perspective and to ponder, create and collaborate in new ways.

In the current situation it is increasingly important for leaders to activate both channels appropriately—to provide focus on tackling the threats faced in the moment, while also seeking out opportunities that will fuel the future. Our research has shown that there is not only a better way to make defensive moves, like restructuring and efficiency improvements, but also to more intentionally activate Thrive by focusing on opportunities, even when it seems challenging to do so.

Organizations that are able to successfully navigate rapid change and uncertainty, differ from their peers in four critical ways:

1. Leaders calm Survive and activate Thrive: During this crisis employees are feeling anxious and fearful about job security, their health, their loved ones, and the future in general. As individual Survive Channels are overheated, the Thrive Channel becomes overwhelmed. Leaders must find various ways to calm workforce Survive responses, in addition to activating Thrive.

Calming Survive begins with taking actions to address the controllable threats and providing confidence in the organization’s ability to successfully do so. Given the nature of the real and perceived threats employees are facing, leaders need to do more than take the necessary actions. Leaders often believe that communicating incomplete or uncertain information will cause confusion and anxiety, but an absence of communication creates even greater unease. Calming Survive requires transparently articulating what is known, what is uncertain, and what possible outcomes are being considered. Given that the current crisis extends beyond our professional lives, business leaders may need to provide communication that goes beyond the business context, even if they are not comfortable doing so. Leaders can help by clarifying perceived threats from real ones, reducing ambiguity through clear communication, and inspiring confidence through transparent, inclusive decision making.

With a Survive Channel that is sufficiently calmed, leaders can then work to activate Thrive by focusing on opportunities and creating ways for employees to contribute ideas, innovate, and take actions towards an exciting vision for the future. Thrive and corresponding positive emotions have been shown to enhance collaboration and innovation, behaviors that are necessary to effectively play offense. As many organizations work to calm Survive, very few are effectively pivoting to activating Thrive through a compelling picture of the future. In a recent survey we conducted, only 19% of respondents, across industries and levels, have confidence their organization will recover quickly, and almost all want more long-term, post-pandemic strategic focus from their leadership.

2. Leaders cultivate an opportunity seeking mindset: During times of high uncertainty, we are often advised to not rock the boat and ride out the storm, but the most successful organizations take a different approach, recognizing that it’s even more critical during times of doubt to cultivate an opportunity seeking mindset. Urgency that stems from a belief in a forward-looking opportunity, that is, a well activated Thrive Channel, provides motivation and energy that is far more sustainable than that stemming from fear. The opportunity seeking mindset is what allows organizations to identify the appropriate investments, adapt to the current context and play offense, even in times of crisis. Decades of research, from data initially presented in Corporate Culture and Performance through to today, reinforces that organizations with an adaptable culture (supported by a well-functioning Survive Channel and highly activated Thrive Channel) are best equipped to navigate economic downturns and are most likely to win, now and in the future.

To be clear, we are not only referring to growth opportunities for new markets or new products, but also to the recognition that actions taken during a crisis provide an opportunity to make a bad situation better. While it might seem like semantics, the science backs up the impact of this reframing on the enthusiasm and engagement it can illicit.

This opportunity focus is clearly visible in the story of a company that not only survived but thrived during the last recession of this severity—the Depression. Thomas J. Watson took three small, unknown businesses and helped build the first truly global high-tech firm, IBM. His focus on opportunity, creating highly positive, motivating and inspirational emotions associated with pride in winning, camaraderie and a belief that employees were working for something special was especially visible during the Depression. With Survive overheated, innovation at most companies had largely disappeared. When many companies were ignoring true innovation, IBM built one of the finest R&D labs in the world. When the Roosevelt administration passed the Social Security Act in 1935, the government put out bids to maintain the employment records for 26 million people. With creative products, a large inventory ready to ship, and a skilled and dedicated workforce, IBM won the contract easily. In a time when so many firms went out of business, IBM grew during the Depression: in sales, profits, employment, and reputation.

3. Leaders create broad employee engagement and participation: Traditional management systems are effective at handling situations where information is complete or at least the process for collecting the information is known. A small elite group of senior managers can then analyze this information, make good decisions, and communicate these decisions to the rest of the organization. In rapidly evolving and highly uncertain situations, this reliance on a small group is no longer feasible. No leadership team, no matter how sophisticated, well connected, or intelligent, will be able to gather information and insights quickly without a significant group of engaged bodies, brains and alert eyeballs. Without this broad engagement it simply is not possible to see how customers are responding, market demand is evolving, supply chains are adapting, or local/regional government policy is changing.

Participation does not end there, however. Particularly given the scale of the current disruption, agility in execution is necessary to respond to the evolving needs. Without enough sufficiently engaged people, it is not possible to make rapid decisions and overcome all the barriers to execution in a timely manner.

4. Leaders broaden their view of innovation: While in every crisis there is a sense that the world will look different and will eventually settle into a new normal after the danger has passed or lessened, in recent downturns the post-recession world has not looked too different. Following the financial crisis there were new regulations and capital requirements for banks and the crisis accelerated some changes to corporate culture, but two to three years after the crash not much was different for most people. Similarly, in the Dot-com crash, while the valuation of new internet firms changed, and for individual businesses the changes were large, there were no broadscale lasting impacts. There are strong reasons to believe this pandemic crisis will be different.

The breadth and depth of the impact suggests that we are likely to see significant changes in employee policies and expectations (work at home, sick leave, etc.), diversification and realignment of supply chains, rapid increase in the pace of digitization and online retail, and potentially a lasting change in consumer behavior. The implication for businesses as they look for a path forward from the recession, is that innovation will need to extend beyond developing new markets. Innovation should be focused on new ways of doing work, new ways of connecting with customers, new product and service offerings, and yes developing new markets. Some of these changes are already happening, with factories in China starting to reopen with new procedures to maintain social distancing—leading to a greater push for automation, remote maintenance, and reconfiguration of factory floors.

This wider view of innovation is supported by great employee engagement and participation. Even more so than before, organizations that can tap into the ideas, passion, and energy of the broader employee base will be the ones that can rapidly innovate and experiment.

The current crisis has put a spotlight on the need for strategic agility. The speed with which this situation is evolving is stressing the ability of businesses to react, let alone gain some sense of proactivity. All indicators are that we will be facing a prolonged period of uncertainty and an acute global recession. Driven by our mind-body hardwiring, it is natural to fall into an exclusively prevention-focused mindset and look only to eliminate problems. But those businesses that are able to simultaneously address threats and opportunities, will be the ones that in the short term suffer less pain and in the long term innovate, grow, and outperform their peers. The decisions that leaders make in adapting to this rapidly changing situation will have a tremendous impact on their businesses, people they employ, and society at large.

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