A structural break is an event that jolts a business’ strategy and its operations in a potentially irreparable way. Whether acute or drawn out, the magnitude of the impact and how the business tactically responds will determine whether it survives – anticipating what will become the new normal, will determine whether it thrives.
“Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different” Michael Porter
When running a business, there are many elements that can’t be controlled — the fate of geopolitical events, the economy, trends in the sectors you operate in and competitors’ actions. This lack of certainty about the future is the very reason companies strategise, looking to minimise the downside and ensuring they’re ready to take advantage of the upside to come.
For many businesses, the first quarter of this year will have involved going through the annual ritual of strategising and planning for the next year and/or years to come. However very few strategies and associated risks assessments would have factored in the occurrence of a pandemic or similar such structural breaks. Even if a business had included a pandemic on its risk radar; concerns were likely to be limited to their workforce and health-care costs, as even the most seasoned boards and executives have only limited experience and pattern recognition in these situations.
Consequently, strategies that are ‘hot off the press’ or still in various stages of development, have been made irrelevant by the Coronavirus Disease 2019 (COVID-19) pandemic and the monumental impacts emerging from this global event. In many instances, while the health of workforces has still been paramount, attention has also needed to immediately turn to the impact of travel restrictions, supply chain disruption and even concerns for reputational impacts relating to how the business is seen to respond to the pandemic. These already trying conditions are being further exacerbated by a looming global recession, and the emergence of ever evolving challenges –where the impacts of the recession and COVID-19 end and begin is difficult to tell.
What we’re seeing is that the COVID-19 pandemic is proving to be a truly interconnected risk, that has manifested extremely rapidly due to its systemic nature. Our concern for medical services being overwhelmed has meant much of our current mitigation efforts have focused on ‘flattening the curve’ to make the risk more manageable. Given such a response it can be expected that while the acuteness of the impacts may be reduced, these impacts will be prolonged and far reaching.
What does this mean for your strategy?
Typically, strategies prepare for one version of the future, often without understanding how likely that version is to become reality. However, we can be quite sure that in the wake of COVID-19 there are multiple scenarios, with some business conditions likely to experience temporary change, whereas others will be more enduring. Boards and Executives should be asking themselves “will efforts to 'flatten the curve' draw things out long enough for us to build resilience, or will they create a new normal to which we need to respond?”
Given how things are changing on a daily basis, quite often at a material level (viz. border closure and social distancing) there are few if any who can answer this question through the traditional lens of risk assessment. Instead they would need to incorporate future trends and potential multidimensional downstream threats, injecting forward-looking analysis and assessment, and making results reliant on more than just historical data and opinion fraught with well-documented unconscious cognitive biases—overconfidence, anchoring, loss aversion, confirmation bias, and attribution errors, among others.
This is where a strong case could be made for a company to use methodology which applies a sensemaking lens to the situation; not only establishing the traditional characteristics of the risk (i.e. likelihood and significance), but also measures of interconnectivity and velocity which are increasingly significant for such a systemic risk. By realising that risks function as an interconnected network, it is possible for organisations to identify the most influential risks and to better target and apply risk mitigation techniques to positively impact key challenges and opportunities facing them in a COVID-19 world.
By purposefully introducing the pandemic risk dimension, the analysis from using such a methodology will illustrate the importance of considering connected clusters of risks and exploring how the occurrence of the pandemic risk may change the likelihood of a connected risk being triggered. The analysis would also highlight which knock-on risks would have greater severity and higher velocity of risks when viewed as clusters, compared to the impacts of individual risks captured using traditional approaches.
As an example of the approach and to see the insights from interconnected thinking, Business for South Africa recently completed an analysis of critical strategic risks to the recovery of the South African economy following COVID-19 . This highlighted insights such as how strategic investments into law and order and essential services would be critical to de-risking recovery. To see the full report: Business for South Africa, COVID-19 Response - Dynamic Risk Assessment Findings
It remains to be seen how in the immediate term boards and executives more broadly re-evaluate their current risk profile and adapt their strategies in the wake of COVID-19; however it is without question that in the future they need to incorporate ways to understand the role and impact of structural breaks, risk interconnectivity and risk velocity on a business’ strategy formulation, planning and implementation.
