Doing Business in the Permacrisis: Thriving on Uncertainty
My previous blog proposed a "Permacrisis"in which crises are no longer states of exception after which we return to normality but a regular and persistent feature of the modern world. If this is true, this has important implications for both governments and companies. In this blog I will look briefly at some of the implications for companies.
Traditional approaches to business management, still taught in most business schools, assumes a stable economic environment and considerable, if not perfect, knowledge. These to a large extent reflect the assumptions of free market theory. Agents external to the company – primarily clients, competitors and suppliers – are thought to act in rational and predictable ways. The role of governments is essentially regulatory to ensure the smooth functioning of markets. Crisis management is seen as a speciality to rescue companies from previous bad management, and best avoided if possible. But in the world of the Permacrisis none of this holds. In the world of the Permacrisis all business management is crisis management.
In the Permacrisis the international environment is volatile and unpredictable, and information limited. The latter may seem a contradiction in the information age. But having relevant information for decision-making in a timely fashion is different from drowning in data. Big data analysis and various versions of machine and deep learning do not necessarily make any difference (which I will discuss in a future blog). Kissinger has said that the tragedy of foreign policy is that when you have greatest freedom of manoeuvre you have least information. But when you have more information your freedom of manoeuvre has disappeared. Foreign policy is difficult because you not only have to decide on your policy but also persuade other countries (and indeed other entities like companies) of the value of your policy. The means of coercion available to governments, economic sanctions or military pressure, are not available to companies, making life for them in the Permacrisis even harder.
The traditional approach to business management is evident in business strategies. These are focused on the internal structure and functioning of the company and assume a stable environment. Strategic plans are lovingly crafted and presented to financial market analysts. But in the world of Permacrisis, these plans have become irrelevant before their presentation. The Prussian Field Marshall von Moltke famously commented that “no plan of operations extends with any certainty beyond the first contact with the hostile force”, or as it is usually paraphrased “no plan survives first contact with the enemy”. He also commented that “Strategy is a system of expedients; it is more than a mere scholarly discipline”. In the world of soldiers and diplomats, strategy is auto reflexive and constantly adapting. Strategy seeks to bring together objectives with means and resources to shape the external environment. But changes in the external environment feed into changes in strategy and even of objectives. Business strategy in the Permacrisis needs to learn from the diplomats and soldiers.
Analysis of the geopolitical and geoeconomic environments must necessarily feed into the development of business strategies. But that analysis must be company, not country, centred. The level of geopolitical risk a country poses depends on the company. Different industrial sectors obviously have different risk levels. Risk varies according to the duration of a company´s involvement in a country, whether a short-term transactional relationship or a long-term investment. Even within a given sector, different companies have different cultures and different tolerance for risk. Geopolitical risk analysis must eschew the temptation to predict or forecast the future. Building different scenarios which allow companies to explore the different possible futures, and what they mean for the company, offers executives better ways of understanding what the future may bring and for integrating it into their business strategies.
Basic management principles will need to be revised in the Permacrisis. In a stable environment with steady growth and low interest rates, cash-rich companies made little sense. Rather than retaining cash in the company, it should be used for investment in innovation or new markets or for dividend payments to shareholders or share buy-backs. Indeed, it made sense to go further by increasing the company´s debt burden to support these activities (although, in my opinion, borrowing for share buyback amounts to fraud). In the world of the Permacrisis, building resilience against external shocks becomes as important as short-term profitability. As my grandmother would have said, putting aside something for a rainy day. Making companies cash-rich, and reducing their debt burdens, begins to make sense.
A volatile and unpredictable international environment requires different skill sets in business executives. There is a principle in evolution that the best adapted to any given environment will not only survive but also squeeze out species that were less well adapted. When the environment changes not only may the surviving species be ill-adapted to the new environment, but it will already have squeezed out those species that would have been better adapted. This may have happened in the business environment. Not only are the executives who flourished during the so-called “Great Convergence” ill-suited to the Permacrisis, but those who might have been well adapted were eliminated from leadership roles in the previous environment. The skills and capabilities needed for the Permacrisis were not only not needed during the “Great Convergence” but were even seen as negative and disruptive.
Companies will need to make increasing use of wargaming techniques. The military, and to a lesser extent diplomats, use wargames both as tools for training officers and as ways of testing strategies and operational plans. The capacity for strategic planning and reading the external environment are learnt through practice, not lectures. Developing wargaming as a training tool for executives will help prepare them better for the new environment in which they will have to operate. Likewise, wargaming will allow companies to test their plans and strategies against a range of possible scenarios, developing and testing different responses. Wargaming both for training and testing strategies will be informed by the scenario building exercises.
This blog can only touch on some of the implications of the Permacrisis for companies. There is much more to explore here. But a key theme running through all these aspects is that resilience against changes in the external environment becomes as important as short-term profitability.