GUAYAQUIL — Many managers work hard, are creative and invite the people around them to strive for excellence. But often their objectives fail to reach beyond, well, just hard work. Top executives, meanwhile, keep pushing for higher budgets at board meetings to pay for a bigger and more sustainable business. Both parties have the best intentions but are often immersed in unnecessary frictions and frustrations.
The difference between company directors and day-to-day line managers is that managers seemingly live in a simple and linear world, believing their work to be nothing more than to pressure and challenge. The business executive, however, lives in a fierce world of hyper-competition, thinking of new enterprises, unforeseen events and aggressive rivals.
The world is neither simple nor flat. Businesses need time to flourish and hyper-competition is no novelty, although management, even those that know how to handle such conditions, are victims of traditional systems and dogmas that resist any change of methods. The solution, therefore, could be to recognize — both at the directorial and managerial levels — that the world is changing fast, and that the management of firms must also change and break with old, outdated practices.
A starting point could be to revisit the classic annual strategy-design meetings, which tend to be filled with egos and partial visions that nobody dares challenge. The idea is not to eliminate these. If managed well, such meetings can generate alignment, interesting debates and trust between the firm's leadership and administration. But for that to happen, participants need to permanently engage in strategic validation, evaluate new combinations of scenarios with emerging information, make bold choices, and direct resources accordingly.
Thus, directors and managers must organize strategic discussions more often and dare to adjust their strategies quickly, in response to relevant events.
Second, when budgets fall short, it is no good sticking to them. It may be better to supplement annual budgets with dynamic and flexible systems that correct and update projections. Every three months the firm can make projections for the next 12 or 18 months, adapting to volatility or so-called black swan events that change the original scenario.
The emphasis must be on creating value in the medium to long term, defining milestones that can be monitored frequently to check one's distance from the expected financial value but also other, critical elements that make that value sustainable. In that way, budgets stop being straight-jackets that limit management innovation and creativity, and become a base tool for projecting chosen scenarios in a flexible and adaptive manner.
The third point to revise is the incentives systems for executives, which should not be based too much on the short term. Budget discrepancies and changes over the year can make previous figures irrelevant, undermining manager motivation and beyond that, a strategy's potential.
One way to resolve this is to establish short and long-term incentives. The first should be based on challenging albeit reasonable expectations on both financial and non-financial (like sustainability and capability development) indicators that meet the minimum targets top management wants to see fulfilled.
Firms must also emphasize long-term bonuses tied to value creation, using mechanisms aligned with stock prices if the firm is listed, or calculations of its shadow value if it is a closed company. When real shares are not involved, other good reward criteria can be EVA (Economic Added Value) or Total Shareholder Return, provided calculation formulae are always transparent and consistent in time.
Stretch it out — Photo: Marco Verch
The absence of a risk management culture is another big problem. Even firms that do devote time to this become obsessed with less important risks, while skirting around more important ones to avoid seeming pessimistic or entering conflict zones.
Innovation without results is another trap to avoid
The daily struggle to meet the operational targets expected of you distracts managers from the broader vision. Amid concerns to sell to big clients that bring in the crucial monthly sums, they may ignore the negative impact of bad sales or some of the negative trends that have no relevance now, but will do later. It is up to company directors to see that their managers duly consider and manage risks and prepare the firm for when those risks do finally become reality.
Innovation without results is another trap to avoid. Many firms struggle to find agile methods of making mistakes early, rectifying and finding evolving solutions that bring traction and scale, due to organizational flaws and internal cultures.
Firms should certainly learn to absorb the processes and microclimates of startups. If every business is a commodity in the long term and firms are essentially digital today, then all firms must effectively incorporate processes of open innovation. Many already do, though not effectively. Why? I think mainly because many firms do not understand the difference between the day-to-day and creating future businesses. They do both with the same policies and people, which impedes success.
The world is becoming more volatile and uncertain, that much is clear. The options are either sink or swim. Survival depends on the latter, but that means adapting appropriately.
See more from Business / Finance here