It could be that what was a great recipe for last ten years is not a great recipe for the next ten. — Sven Smit, Co-head, Global Strategy and Corporate Finance, McKinsey There is a pretty steep increase in levels of insecurity. — Martin Hirt, Head, Asia Strategy and Corporate Finance, McKinsey
Chief Executive Officers of Indian companies are worried that the strategies that worked in the last five years may not work in the next five. So, how should they deal with this? Business Line caught up with two experts on strategy to find out — Sven Smit, who co-heads the Global Strategy and Corporate Finance practise at McKinsey & Co and Martin Hirt, who leads the same practise in Asia. They were in India recently to conduct workshops for Indian CEOs on crafting market-beating strategies.
You have interacted with quite a few CEOs on the subject of strategy, during your visit to India. Today what are the areas in which they see the most challenges?
Sven: Many CEOs express the fear that the strategies they have used in the last five years to succeed in business may not work over next five, because their advantages have been competed away.
They want to know the changes that need to be made to deal with this.
The other thing we talked about was biases in decision-making. We found that decision making was not always fact-based.
Martin: What struck me was that in many people’s minds, there was a pretty steep increase in levels of insecurity. In the past, the question was probably all about functional optimisation, now the questions are getting more profound, about the business itself.
That is triggered by the fact that the business models they are running are being disrupted by a drop in demand and overcapacity in many manufacturing areas. Intermediaries in the distribution chain are being cut out by manufacturers trying to sell directly. Manufacturers are being forced to accept low prices. This shock to the system has gotten many people to re-think the model. So, that has made them think about things like how to optimise their performance, whether to do mergers and acquisition (M&A) or get into new businesses.
The trillion-dollar question is, of course, whether this (change) is here to stay or is a temporary shock to the system.
You spoke about rational, fact-based decision making. In India, promoter holdings in companies are quite high and many businesses started out as family-owned firms. Does that lead to less ‘fact-based’ decision making?
Sven: No. I think the fact-base comes from the personality of individuals and the culture of companies. The only thing I would flag is biases. As the founder of a very successful business, you correlate the success of the business to the belief that everything you do is right. It could be that what was a great recipe for the last ten years is not the great recipe for the next ten. But the founder may not see that. But that holds good for a professional CEO, too. If you have a good run for ten years, you become a little omnipotent. Successful leaders are prone to notion that it is their decision making that led to success.
Martin: This is not the only bias that management falls victim to. You could be subject to over-optimism, or confirmation bias, that prompts you to look only at information that reinforces your beliefs.
How do you cure managers of these biases?
Martin: You can’t cure them because they are hard-wired into the human brain. But you can make them explicit and then find ways of dealing with them. For instance, you can have an investment committee looking at whether to enter a new business or not. You split it into two teams, one to look at the case for entering it and one to analyse why you shouldn’t. Then you bring all the facts on to the table and get them to argue their case. That is how some of the best private equity firms operate.
Sven also has a rule that when everyone in the management sits for a meeting, the youngest person talks first. The founder goes last. That helps the founder hear stuff he may never hear. This was deeply recognised in the sessions we had in India today. CEOs recognised that there were many of these biases around.
In India, we have many instances of businesses being impacted by sudden regulatory change. How do you plan for that in your strategy?
Sven: Globally, Governments are getting more involved in business. CEOs we polled tell us that regulatory issues take up a quarter to a third of their time. Regulation and Government influence is everywhere. We have an estimate that regulations and policies define up to 30 per cent of profits.
Martin: Though CEOs have to spend time on it, watching regulatory issues is a little bit under-funded in most organisations. Another point we made to CEOs is that it is not enough to build only on the most-likely scenarios. It is necessary to have a Plan C, which factors in less likely scenarios too.
Many Indian companies have gone global. They now find unexpected risks surfacing there, like a regime change or new taxes. How can businesses prepare for such risks?
Sven: It is a good practise to take risks as seriously as opportunities. So, preparing yourself for the worst things that can happen, doing a fire drill and making sure that the balance sheet can survive them is the minimum that businesses must do.
On political risk, like regime change and so on, you can deal with it by diversifying your portfolio. Take a strategy of going into Africa. If you are present in one African country, there could be a high risk of a regime change, say once in five years. But if you are present in 20, it is unlikely that all of them will face a regime change in the same year. But you cannot mitigate political risk in any other way.