How ambidextrous leaders manage through volatile times

| Podcast

Strategic courage is never more important than in times of high volatility because that is when tomorrow’s winners are decided. In this episode of the Inside the Strategy Room podcast, Michael Birshan, global co-leader of the Strategy and Corporate Finance Practice, and Ishaan Seth, who co-leads McKinsey’s Banking and Securities Practice globally, discuss how to develop three types of competitive edge necessary to lead boldly in today’s uncertain times, based on their recent article co-authored with McKinsey global managing partner Bob Sternfels. This is an edited transcript of the discussion. For more conversations on the strategy issues that matter, follow the series on your preferred podcast platform.

Sean Brown: You open your article with a quote from the late Formula 1 champion Ayrton Senna, “You cannot overtake 15 cars in sunny weather, but you can when it’s raining.” What’s the connection to strategy?

Michael Birshan: It’s certainly raining hard out there in terms of economic upheaval, but volatility is when corporate performance rankings can dramatically change. Today, we have new shocks, such as the tragic war in Ukraine and the return of inflation, layered on top of old shocks that haven’t gone away, namely the overhang from the COVID-19 pandemic in the form of debt, adjustments to hybrid work, and supply chain disruptions. Those come on top of trends we have been wrestling with for a while, such as digitization or the net-zero transition.

All these shocks are amplifying one another, making volatility rampant. You can see it in the economic indicators, whether it’s inflation or consumer confidence hitting historic lows in parts of the world. We have seen periods of volatility in the past, but what our clients find unusual is the number of elements that are outside normal ranges now. Another factor exacerbating volatility is what we call sectors without borders. A company used to operate in one sector and understood what was happening to the left and right or upstream and downstream. Now, more and more sectors are colliding with one other. Take energy: many companies are realizing that they need deeper customer intimacy and to behave more like retailers.

Sean Brown: How do you see business leaders responding to this volatility?

Ishaan Seth: In dozens of recent conversations with CEOs, CFOs, and other C-suite executives, one refrain is common, which is, “We haven’t seen anything like this. This feels different.” And we are beginning to see two leadership mindsets emerge. One group is generally cautious. They are more on the defense, battening down the hatches on balance sheets, doing all the right things on expenses, planning out scenarios, but strategically they are in a “wait and watch” mode. We also see another group that are very much on the offense, thinking about the M&A pipeline given current valuations, planning material resource reallocations, and figuring out how they can pull ahead of the pack, to use that racing analogy. They are conservative on managing the downside but bold and aggressive on capturing the upside.

We see a group of leaders emerging who are very much on the offense. They are conservative on managing the downside but bold and aggressive on capturing the upside.

Ishaan Seth

The value of this ambidextrous leadership has been borne out by our research over several economic cycles. We measured the performance of thousands of public companies before, during, and after prior crises and two things came through strongly (Exhibit 1). First, resilient companies1 performed much better than the nonresilients, but more importantly, they were firing on all cylinders to achieve that outperformance: on revenue growth, margin enhancement, and preserving strategic optionality, which we define as retained earnings on the balance sheet.

1
Resilient companies play both offense and defense.

Sean Brown: Did your research find any industries or regions being more resilient to external shocks than others?

Ishaan Seth: We have cut this data five ways from Sunday and at the highest level this has been consistent across almost every sector. Where there is huge variability is in performance between the top 10 or 15 percent in a given industry and everybody else.

Sean Brown: In your article, you say that leaders need to develop three types of edge. What are they?

Ishaan Seth: The concept of an edge is akin to an option. The price of options rises in times of volatility and, equally, the value of each edge grows in times like those we are living through now. The three types of edge are found in insights, in commitment, and in execution. Outperformance, or leadership alpha, on these dimensions can set you apart.

Sean Brown: What constitutes an edge in insights, and why is it particularly critical now?

Michael Birshan: If we all know what will happen, knowing it in a bit more detail is not terribly valuable, but in volatile periods when we are unsure, being 10 percent more right 10 percent more often is a true edge. You can find an insights edge in many places. Think about supply chains: we have all become more acutely aware of the complexity and impact of supply chains, so one element of an insight edge is, do you have true visibility into your supply chain down the tiers—and into our competitors’ supply chains as much as possible—so you can make adjustments to prepare for volatility?

If we all know what will happen, knowing it in a bit more detail is not terribly valuable, but if we are unsure, being 10 percent more right 10 percent more often is a true edge.

Michael Birshan

Sean Brown: Do strong technology capabilities in data analytics and artificial intelligence provide an edge?

Michael Birshan: They definitely help. Superior data and analytics resulting from years of investments in sensors and data governance can be crucial sources of insights. A more prosaic source is having a culture that is sufficiently diverse, inclusive, and externally oriented that you get more and better information from a wider range of sources.

For example, a financial services firm trying to develop a perspective on inflation crunched data from rating agencies, governments, and academics, but it also added historians. What can we learn from previous periods of inflation about how today’s inflation may trend? The management team sought out contrarian voices who would have different perspectives. They talked to local market executives. My clients sometimes say, “If only we knew what we know. If only the center knew what is known in the broader organization.” Some of that is about systems and processes; some is about inclusion—creating the conditions where people who have diverging views feel free to voice them.

Ishaan Seth: I recently helped put something along these lines into action at a large bank client, where they brought together about 75 country heads around the world, put them in a room for two days, and had them share observations on everything from inflation to payments and trade flows to regulatory themes. The goal was exactly the notion Michael was describing: how can we tap into the latent knowledge resident within the organization and harness that in a more systematic way?

Sean Brown: How can business leaders determine whether their insights are sufficiently distinctive to constitute a competitive edge?

Ishaan Seth: The provocations we would put forward is to ask yourself, what proprietary, privileged insights and data do you have? How much of a pulse do you have on what your customers are saying and thinking, and how they’re spending? Do you have enough of this external orientation that Michael was describing in terms of your access to different knowledge, moving beyond common sources of wisdom and data to unconventional sources? Reflect on what in your industry would truly define an edge—or outperformance alpha—on insights and work together as a management team to generate it.

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Sean Brown: This type of outreach could provide a lot of contradictory information. How do you distinguish the signal from the noise?

Ishaan Seth: You will always get multiple perspectives. Developing a point of view as a management team is one of the prerequisites of strategic commitment, and usually that means creating forums to have a dialogue, ideally in advance, to hear different perspectives and have debates. It is a heck of a lot easier to decide and act when it’s your third or fourth conversation on the topic as a senior team than if it’s the first.

Sean Brown: You mentioned that having a perspective is a prerequisite to commitment, which is your next edge. First, what exactly do you mean by commitment?

Ishaan Seth: At its core, building an edge in commitment requires having the courage and conviction to make decisions that are bold, material, and made with sufficient resource allocation. Resources are sticky—budgets, capital and operational spending, sales and marketing dollars, human capital. The tendency to allocate roughly the same amounts to the same executives and businesses year on year is exceptionally high. But what we have found conclusively, backed by data, is that companies able to dynamically reallocate resources to higher-yielding, higher-growth, higher-potential opportunities outperform their peer groups (Exhibit 2).

2
Resources are sticky, but active reallocation pays off.

Our book, Strategy Beyond the Hockey Stick, dives into this in detail, but there are five areas where boldness matters statistically. Resource reallocation and creating a performance management mechanism that allows you to move resources flexibly is a big one, but so are programmatic M&A, outspending your peers in terms of capital investment, being at the top of your peer group in productivity, and delivering gross margin growth at a level higher than your peers, which we call differentiation. On these five moves, it’s not enough to be making them—you need to make them at a level that matters. It’s not about directionality; it’s about materiality. And your likelihood of outperforming your peers is far higher if you deploy two or three of these moves.

Sean Brown: One of the big moves you mentioned is programmatic M&A. We’ve had podcasts on this topic, but could you elaborate why programmatic M&A is an effective approach?

Michael Birshan: It’s partly about resource reallocation. One should reallocate resources organically, but it’s often challenging to move as fast as the market. M&A can accelerate that, and you can access resources and capabilities that either you couldn’t build or would be much slower to build. Sometimes speed is neglected in strategy. It’s not, “Can we get there?” but “Can we get far enough fast enough to make a difference?” M&A is essentially a muscle—something where you can build a capability by exercising it regularly.

Sean Brown: What role do divestitures play in these resource reallocation choices? Executives often struggle more with a decision to sell than a decision to buy.

Ishaan Seth: It’s useful to have a formal mechanism to reassess the business portfolio, whether that’s once a year or every two or three years. Where are we truly the natural owners of the business? As part of these portfolio reviews, some organizations look to trim 5 or 7 percent of their portfolios every year. It may not be divesting an entire business but perhaps putting it into maintenance mode versus growth mode and calibrating the level of spending to that. Another approach to weighing divestitures is to analyze the company the way an investor would. We routinely do activist investor “tear-downs” with clients, where we look at their companies outside in, based on public data, and push the management teams on questions around the portfolio makeup. And divestiture almost always come up.

Sean Brown: How should leaders conduct those hard conversations on resource reallocation?

Michael Birshan: The first step is getting transparency of where those resources are. You need a corporate resource map with sufficient granularity—20 or 30 cells; in some cases, as in consumer goods, as many as 400 value cells—highlighting not just capital or operating expenditures but anything that is precious to you. It may be marketing expenditure, talent, or management time. Then, you need to measure, which may show you how little your resources move. Take three business units: business unit A gets 10 percent of the resources; business unit B, 20 percent; business unit C, 30 percent. That leaves you with 40 percent up for grabs (although usually that number is closer to 5 percent). Seeing that “up for grabs” score and how much resource movement there has been over time is very helpful.

Finally, I emphasize the importance of seeing talent or capital as enterprise assets. They are not owned by one part of the company but should be stewarded by the leaders of the enterprise as a whole.

Ishaan Seth: I would add that de-allocating resources takes real discipline. Forced ranking and stack ranking can help so, as a management team, you can review the bottom 10 percent of businesses from a return standpoint. Then you debate whether you should redeploy resources to those businesses, making sure to eliminate bias or being swayed by whoever is pitching the proposal in the room. You could have blue teams and red teams present different cases or formal counteranchors whose job is to push and pressure-test findings. These tactics are effective at eliminating social discomfort, since peers don’t enjoy poking holes in one another’s business plans.

Sean Brown: How do business leaders know whether they are committed enough? What kind of questions should they be asking their teams?

Michael Birshan: We sometimes talk about our “billion-dollar beliefs.” That gets at the question of what truly matters and where the returns on insights and commitment would come from. When we work on scenario planning, we often talk about the critical uncertainties—things that are unknown but the difference between going left and going right is hugely important, so you need to spend more time on that. What are the trend breaks? Where is the future going to be different from the past?

Sean Brown: The final edge, on execution, is important in any type of environment. What makes it particularly valuable now?

Michael Birshan: What’s different is that because of volatility, you may have to execute rapidly—go left at one point and then pivot rapidly to the right. That’s where the execution edge comes in. One area is the technology stack and how modern and modular your IT infrastructure and digital capabilities are. Technical debt is a bit like dark matter: you can observe its presence, but you can’t directly see it. With our digital and analytics colleagues, we assessed more than 500 companies on their technical debt and found those in the top quintile, with the least technology debt, were growing revenues 20 percent faster than the bottom quintile and 10 percent faster than average. Clearly, if you need to pivot, it is not helpful to have your computer saying “no” each time.

Another area of execution edge is organizational speed. The ability to execute quickly correlates with the maturity of the organization’s agile practices. The question to ask is, “How quickly can I mobilize my people to move in a different direction?” A third aspect of execution is the good, old-fashioned art and science of getting stuff done. An initiative being “in progress” can mean many different things. Is it an idea? Is it an idea with a business case? Is there a clear implementation plan signed off on by the relevant stakeholders? Have all the steps been implemented to enable value to flow? This isn’t rocket science, but organizations that excel at executing have a vocabulary and cadence around how they talk about getting things done.

Sean Brown: You’ve talked a lot about the importance of being bold. Are there qualities that distinguish corporate leaders whose companies are particularly bold and resilient?

Michael Birshan: Our colleagues’ book CEO Excellence is a great store of insight on this, but one quality I would highlight is curiosity. I think curiosity is crucial in periods of volatility because that’s the mindset that underpins the insights edge. The second is a propensity to “act and adjust” rather than “watch and wait.” That is often led from the top and is hugely important. “Let’s do something. If we need to pivot, we will pivot.” The top team’s effectiveness also plays a role. Organizations sometimes struggle not because they don’t know what to do but because they are arguing and lack trust in the management team.

Ishaan Seth: I would add speed, which Michael touched on around execution. Leaders who are ambidextrous, who are playing offense and defense, establish a higher metabolic rate for their organizations. They don’t want to see things done in months; it’s weeks or days. Another aspect is role modeling the behaviors we described, from being reliable on commitments and meetings to pushing and challenging on resource allocations to calling out overly consensus-driven behavior. Finally, the best leaders are open to insights from all parts of the organization and from the outside, opening the aperture on how and where they listen.

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