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Flexible capacity and worker skills are essential, but in a context of strategic clarity
Over the years managers have developed tools and techniques to overcome challenges ranging from inconsistent quality to stagnant productivity. (Think Six Sigma, Total Quality Management, and just-in-time supply chains.) Now what they need is a system for addressing volatility. How does a chemical company, for example, cope with oil prices that bounce from $50 a barrel to $150 and back in 18 months?
And commodity prices are just one factor in the volatility we're seeing in the global business environment. The U.S. has a new Administration with a fast-evolving regulatory posture. We may soon be saying the same thing about Japan and Germany. Terrorism and pandemics pose threats of major disruptions. Changes in consumer sentiment, such as "going green" or shunning conspicuous consumption, can rewrite established patterns of demand in a remarkably short time--just ask automakers. Volatility is here to stay.
What this does is force managers to harmonize two critical capabilities: on the one hand, strategic clarity and consistency; on the other, agility and resilience in operations. This may seem counterintuitive, but organizations can handle extreme change only when they can address it within a clear strategic framework. Otherwise, companies can only wait and react.
Some aspects of managing in a volatile environment, such as focusing on operational efficiency and staying liquid, are givens. But more important are the abilities to scale up and down and reconfigure resources rapidly. Here, there are lessons to draw from volatility-prone India, with its shifting regulations, spurts of growth, capital shortages, and challenging supply base.
Scaling up and down quickly requires a renewed focus on the breakeven point of businesses. Can a company break even at 30% to 40% of capacity utilization? If the answer becomes yes, this creates a lot of room for dealing with shifts in demand. But to get to that point, managers have to focus on capital intensity and fixed costs.
Not long ago, Airtel, India's largest telecom carrier, with 100 million subscribers, saw opportunities for growth but was starved for cash. Typically, telecom carriers invest in capacity, but Airtel outsourced IT management to IBM (IBM) and leased network capacity from Ericsson (ERIC) and Nokia (NOK). By paying for only the capacity it needed, Airtel converted fixed costs into variable costs. So the company shrank its capital intensity and gained the ability to scale up rapidly. It can also scale down without the penalties a capital-intensive telecom carrier would face. Airtel may now be the world's lowest-priced carrier (at less than 2 cents a minute) and is one of the most profitable.
Indian IT providers have to hit a number of moving targets. As customer requirements change, the mix of skills needed to serve them changes, too. These companies must also expand the range of services they offer to capture emerging business opportunities. Further, they have to juggle an overlapping series of projects of differing durations. Many of these companies have found ways to handle all this flux without painful restructuring.
One of their rules of thumb guards against sudden shifts in demand: Don't allow a single customer to contribute more than 5% of revenues. Many IT companies make it a goal to draw clients from a variety of sectors. Managing their client portfolios this way offers a first level of protection.
To better handle the constant project turnover, employees are cross-trained in many different skills. This requires an arsenal of training programs. Employees are regularly tested, and the hallmark of the best of them is the ability to learn quickly.
Having this much flexibility in a staff, and within each staffer, forces these companies to equip their managers with instant access to data on what each employee can do and where they are--physically and in terms of the finish date of their current assignment. All employees know they will be moved from one assignment to another, and in many cases across the world. It becomes the cultural expectation.
In this volatile world, more and more companies will strive to become "Velcro organizations" in which people and capacity can be rearranged and recombined creatively and quickly without major structural change. The winners won't stop focusing on quality, cost, and efficiency, but they'll be paying a lot more attention to agility, too.
Jack and Suzy Welch are off this week.