Sustainable Survival in a Volatile Economy

To survive in an uncertain global economy, business leaders must deliver in the short term while investing in what’s new and risky in the future. We ask experts to share their thoughts on the ideal tools.

By Matthew Brodsky

In today’s economy, business leaders are being called upon to answer the question: What are the sustainable strategies designed to ensure that their business succeeds?

This question leads to another: What does “sustainability” mean? While sustainability has become the buzzword for green initiatives, at the highest levels of business the term has regained, or perhaps always retained, its original, fullest meaning: the ability to survive and grow over time.

This is not news. Our conversation builds off a foundation of research from the Wharton community that began with the financial crisis. One example is work done by Michael Useem, William and Jacalyn Egan Professor of Management and director of Wharton’s Center for Leadership and Change Management. Along with coauthors Michael Patsalos-Fox of McKinsey and Dennis Carey of Korn/Ferry International, Useem published the findings from interviews done with leaders of 14 major companies, ranging from Tyco to Travelers, Pepsi to Macy’s.

What they arrived at was agreement on broad strategies that leaders can apply during uncertain times. In particular, they agreed that leaders must confront and accept the present, while keeping faith in and working toward the future, no matter how dark the present is.

Building off this understanding, we offer here a survival toolkit of strategies that will ensure that organizations will thrive in this decade and the decades to come, no matter what changes occur during that time.

We spoke with a cross-section of alumni and faculty experts to determine the short list of items that should be in this survival toolkit, what is needed to harness the emerging trends in innovation, emerging markets, talent management, marketing, and resource and waste management and other green initiatives.

“The operative word is ‘long term,’ ” says Useem.

“It’s not just a quarter. It’s five, 10 years down the road we stay focused on,” says Alex Gorsky, WG’96, the vice chairman of the executive committee at Johnson & Johnson who is responsible for the diversified consumer goods and healthcare company’s supply chain, government affairs and venture-capital groups, among others.

Or another way to put it, sustaining success through the current historically troubled times is about focusing on your core business and asking if you will be around doing the same thing in 2020 or 2030, according to Steve Krognes, W’92, the chief financial officer at Genentech, whose background spans mergers-and-acquisitions work with Roche, venture capitalism, investment banking with Goldman Sachs and management consulting at McKinsey.

Innovation Leads to Strength

“To us, having a sustainable business basically means that you have to innovate,” Krognes says of Genentech. Innovation for this South San Francisco, CA-based drugmaker means finding new treatment options and biotech and chemical-based products that satisfy heretofore unmet medical needs.

“As long as you bring a medicine that meets an unmet medical need, there is always a willingness to pay for that,” he says about his market. “You’ve got to be on the frontier.”

Such a core business model is also high risk, and innovation is expensive. It’s a “numbers game,” as Krognes explains it. When perhaps only one in 10 projects in human testing make it to market, Genentech and other firms like it must have the scale to be able to afford those nine failures.

While this might be a high price to pay, Krognes argues that it is necessary. “The key … for me in leadership in times of extreme pressure on the business model is you need to keep learning as an organization, you need to keep innovating, you need to keep evolving,” Krognes says. This innovation leads to success.

Unfortunately, it does not appear that these “times of extreme pressure” will end soon.

“It’s going to be a challenging five years,” estimates Vikram Malhotra, WG’86, director and chairman of the Americas at McKinsey & Co.

During this time, businesses can’t just stop what they are doing. They must deliver earnings results, real growth and shareholder value.

“You absolutely must deliver in the near term. The capital markets are too brutal. Boards are restless,” Malhotra says. “Otherwise, you as a CEO are not going to survive.”

Serious about ERM

The challenge for CEO s and other leaders is that living only for the short term puts long-term success at risk. They must also find the time and money to study, prepare and invest so that they have the capacity to respond to whatever their risks are—and all while somehow balancing their current business plan and short-term performance expectations.

“Stick to your knitting, absolutely, but markets also have a habit of upending our current ways of doing business with periodic game-changers,” Useem says. “To lead a company these days is to require a capacity to deal with great uncertainty, rapid change and catastrophic risk, and to change the business model when necessary.

In part, leaders are turning more than ever to enterprise risk management (ERM) to develop this capacity.

“Catastrophic events, extreme events, are very high on everyone’s agenda now,” says Howard Kunreuther, Wharton’s James G. Dinan Professor and co-director of its Risk Management and Decision Processes Center, who is working on a study about risk management in Standard & Poor’s 500 companies, along with the Center’s managing director, Erwann Michel-Kerjan, and Useem. Despite tight budgets and fiscal crises in the developed world, Kunreuther says, U.S. business leaders are devoting the resources to mitigate these events.

The goal is not to overreact to the perceived, large dangers out there. Rather, according to Kunreuther, business leaders are overcoming short-term “myopia” and learning to do a better job of assessing all risks that could interfere with their long-term strategies, understanding the uncertainty surrounding those risks, estimating the consequences of direct and indirect losses if those events come to pass, and finding ways to mitigate the risks and build resiliency.

As importantly, they are coming to grips with the costs of failing to follow these risk management steps, and the benefits when they do and their competitors don’t.

There is an opportunity for firms that take the time to prepare for a disaster now to be propelled forward to future success. “They may be the best firms on the block,” Kunreuther says.

ERM is not all about catastrophes, and not all risks will be bad for the bottom line. Malhotra at McKinsey foresees several macroeconomic trends manifesting themselves on the horizon, which, if harnessed properly, could help companies enjoy sustained growth over the next decade.

“I think what you’ve got to do in the next five years is absolutely invest against these trends,” Malhotra says. Companies that do the opposite—hunker down and focus exclusively on cutting costs—risk being left behind in the long run.

The first of these trends is a great rebalancing in wealth from the West to the East and the South, to emerging markets hitting their “sweet spot” thanks to growing numbers of younger laborers with fewer children, as well as urban migration. More than 1.5 billion individuals will move to cities in the next 20 years in emerging economies.

“To sustain yourself and to grow in an increasingly competitive world, it is vital to focus on emerging markets in China, India and elsewhere,” Useem says.

For the developed world’s economies, growth will be more challenging because the demographics are working against these economies, according to Malhotra. Growth for them must come from productivity driven by innovation, not just efficiency. Technology must also be applied to assist with the process of globalization.

Helping to Govern

For Malhotra, another macrotrend to plan sustainable strategies against is that “big government” is here to stay.

Enterprises in emerging markets are benefiting from pragmatic, business-savvy governments that look for ways to enable private companies to succeed. In a special report on these macrotrends shaping the next decade, McKinsey points to Poland and Singapore as but just two nations “wooing enterprises.” In the developed world, on the other hand, governments are increasingly challenged by budget deficits, debt levels and social obligations, he said.

“Which means you’ve got to deal with regulation,” Malhotra says. “The successful ones will learn how to work with all these disparate governments and disparate policies.”

Business leaders might also need to take on government’s customary leadership roles if and when politicians fail to advance public policy. Leaders in large companies need to collaborate with colleagues and competitors and weigh in on vexing social and political issues that increasingly affect how companies operate, like unemployment, Useem says.

“In the United States, unemployment and other social challenges have historically been a focus of public policy, but increasingly they require intervention by the private sector as well,” he notes.

The global stage is another location where business leaders could step in in the absence of intergovernmental progress, particularly if you consider climate change a pressing issue that needs addressing. Eric W. Orts, Guardsmark Professor and director of the Initiative for Global Environmental Leadership (IGEL) at Wharton, is pioneering research into “climate contracts,” whereby corporations tackle climate change in partnerships with other companies, nonprofits or associations. Joining business networks that recommend long-term, market-based regulatory solutions is one way, according to Orts.

Many companies have already entered into alliances with nonprofit organizations on various projects. Wal-Mart Stores Inc., for instance, has partnered with the Environmental Defense Fund to measure and reduce its environmental impact—by as much as 20 million metric tons of greenhouse-gas pollution by 2015.

Leaders, Top to Bottom

To lead society, though, an organization obviously must be well led itself. A sustainable human capital strategy could ensure focus on all talent within the enterprise. Malhotra argues that employers should consider how they access talent, if they are seizing upon talents in diverse countries, and how they identify and train young talent within their organization. The CEO should own the top 5 percent of talent, track that talent and focus on the future of that talent, he says.

This emphasis on talent should begin at the top, Useem says, with executive searches and boards selecting the right candidates. These leaders must then station the right people around themselves.

Useem warns leaders against a talent policy that involves “Draconian” head-count chops. According to Useem, talent should be viewed as a “great asset” and treated as such. Top employees will likely be more productive if happy and cared for, and when times turn good again and the job market is vibrant, they will more likely be loyal.

Johnson & Johnson’s Gorsky argues that focusing on “people and values” is a key strategy to sustainable success. Using his employer as an illustration, Gorsky mentions J&J’s decades-old “credo,” which speaks to the firm’s responsibility toward customers, employees, communities and, lastly, shareholders. The credo provides grounding for employees, he says, particularly important “at a time when everything seems to be changing.”

“People want to feel like they’re working for a higher purpose, for something enduring,” he says.

C-suite executives must also be able to serve as the “chief confidence officer,” Useem adds. “If business leaders are not confident in their long-term strategy during a short-term difficulty, and if they cannot convey that confidence, then what reason do other stakeholders have to feel confident in their enterprise?”

Listen, Too.

But business leaders have even more to contend with. They must not only be heard; they must listen. Marketing and advertising has changed, and executives must adapt to this new world where consumers and clients demand a conversation.

“I think certainly for our industry, one thing that will be fatal to any company is if you don’t listen to patients and if you don’t do what’s in the best interests of patients,” Krognes at Genentech says.

This advice easily transfers to any sector. Business leaders refuse or fail to apply this lesson at their own risk, Krognes says. Amid Silicon Valley, he points to Apple and its revolutionary smartphone and tablet computing products as examples, whose success could be interpreted as the result of Apple tapping into an unmet consumer demand for gadgetry. Apple’s competitors either have had to change quickly to compete and survive, or, as some big tech players are already finding out, they will face an exit from a market because they haven’t adapted fast enough.

For Josh Kopelman, W’93, managing partner at First Round Capital, the one common denominator of the 3,000 business plans he sees every year is that they are “all wrong.” A business plan is essentially a prediction of the future, he explains, a future in which the company will grow “faster, bigger, stronger.”

Reality of course doesn’t trend upward in straight lines, and functional crystal balls are hard to come by.

So instead of looking for soothsayers, Kopelman—a seed-stage investor and company launcher himself, having founded firms like Infonautics, Half.com and TurnTide—seeks entrepreneurs who can adapt to the change that can’t be predicted. He likens successful entrepreneurs to guided missiles, adjusting on the fly to hit targets based on “signals” from potential customers, the marketplace and competitors.

“Those are the entrepreneurs we like to fund. We like to fund heat-seeking missiles,” Kopelman says.

As for larger companies, Kopelman sees Netflix as an example of a company forecasting an oncoming disruptive shift in its marketplace, and acting now upon it. The firm had decided to split in two to best prepare for a future where all visual content is delivered digitally versus by disc in the mail, which still accounts for most of Netflix’s current success. Netflix CEO Reed Hastings believed, Kopelman says, that consumers will want to stream their movies and content more and more in the future.

“It’s a fascinating experiment: The willingness to disrupt yourself,” Kopelman says.

Then again, just as Kunreuther advised about risk management, knee-jerk reactions to perceived customer trends can be unsustainable too. Netflix was vilified for its recent decisions by some consumers. Hastings pivoted again in October based on such signals from the marketplace, announcing that the split would not occur.

That’s why some would caution that it’s important to not stray too far away from what made you successful in the first place.

“There’s always a tendency when things are changing so quickly to overreact and chase the trend,” Gorsky says. “Having that right balance between driving change and staying true to your core principles is more true than ever.”

Sustainability Does Equal Green

Now we return to what some people might consider the biggest new trend (or fad) of them all: the green definition of sustainability.

This notion is one of the macrotrends on Malhotra’s and many others’ horizon. The smart use of resources comes down to supply and demand. No matter what conservation efforts the developed world implements, demand for commodities will continue to increase in emerging economies, perhaps as much as 30 percent in the next 10 years. Meanwhile, it’s safe to assume supply will remain the same, if not dwindle.

“You’ve got to be able to figure out how you will operate in that environment,” Malhotra says.

Again, as with our other survival tools, it’s about investing today for tomorrow. Craig Isakow, WG’08, program director of Global Energy & Sustainability for the Building Efficiency unit of Johnson Controls, stresses that the troubled economy of the present is as good a time as any to launch green initiatives that will redirect existing resources to reduce costs.

“If the premise is ‘sustainability is going to drive profitability and reduce costs,’ if anything, you should be doubling down on your sustainability initiatives,” says Isakow, who also is on the alumni advisory panel for IGEL and president of Wharton’s energy affinity alumni club.

Examples include being more energy efficient, reusing and recycling of waste, and designing facilities and operations to be environmentally friendly. As Isakow suggests, these efforts can save money in the short term while also providing long-term resource security. He holds up work Johnson Controls did with the Empire State Building as proof. The owner sought to create a more appealing property for tenants and prospects and a more efficient and better-run building for his organization. The result: a $4 million upgrade that led to 38 percent energy savings and only a 2.2 year payback.

Interestingly enough, by being smart about resources and the environment, business leaders can also positively impact the other “tools” in their survival kit. For instance, take communication. According to Isakow, Johnson Controls’ leadership has expressed its confidence in its own business model—particularly of its Building Efficiency unit, which consults with clients about green facilities— by building its own corporate headquarters to earn a Platinum LEED rating. For green structures, Platinum is the highest grade possible from the U.S. Green Building Council and requires significant investment and dedication to achieve.

“Bottom line is, that we took our corporate headquarters and put our money where our mouth is,” Isakow says.

In terms of optimizing talent management, it’s conventional wisdom now that today’s MBAs want to work for good corporate citizens.

“There appears to be a generational shift in interest. Although different occupational and educational backgrounds matter, many well-educated students put sustainability issues high on their list of concerns,” Orts tells Wharton Magazine.

“There are many issues in this [green] area, such as risk management or stakeholder strategy, that are economically rational to pursue regardless of larger social or environmental value,” Orts continues.

Some companies would not pursue any green strategy that was economically irrational. Intel, in fact, does not pursue any sustainability efforts that do not provide shareholder value, reports Neil Blecherman, EE’85, WG’89, global director of the tech manufacturer’s software platform partnerships.

For Blecherman, who drafted new Intel sustainability programs for the company’s chief executives, the definition of “sustainability” blurs between “green” and “long term.” Sustainability impacts every stage of the chipmaker’s product lifecycle, from R&D to supply chain, from manufacturing to product use and end of life. The programs result in operational goals, like recycling 80 percent of all chemical and solid waste from manufacturing, and successes, like becoming the largest U.S. purchaser of renewable power— which all translate into advantages for Intel.

“Sustainability drives long-term shareholder value,” says Blecherman, who also serves on IGEL’s alumni board. “Sustainability is really key to continued competitiveness.”

Or as Malhotra simply states: “This is not a green question, this is an economic question.”

Then perhaps we are talking about the same definition of “sustainable” after all.

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