How to compete in tumultuous times and operate in complexity

Competing in
tumultuous times.

tumultuous
adjective
making an uproar or
loud, confused noise.

Competing in tumultuous times 1
The Current
Operating
EnvironmentOperating in Complexity
The current operating environment in which today’s leaders’ navigate is
characterized by uncertainty and rapid change, with the growing influence
of technology impacting business decision and organisational behaviour.
Despite improved global financial conditions and reduced short-term
risks, the world economy continues to expand at a subdued pace. After
a marked downturn over the past two years, global economic activity is
expected to slowly gain momentum with a low-growth pattern expected
to persist for at least several years. The macro environment in which senior
leaders must learn to operate is no longer characterised by extraordinarily
rapid growth punctuated by short and sharp V-shaped downturns and
recoveries that affect only particular geographies,
Now senior leaders tasks will involve developing strategies to successfully
steer companies through a rapidly changing, uncertain and complex
environment. Furthermore executives will need to find ways to navigate
this environment by taking advantage of the growing role and impact that
technology has in influencing business trends.

2
The rate of change is increasing. 87% of global CEOs are saying that they
face deeper and faster cycles in their businesses than ever before with each
subsequent revolution happening faster than those before. Shakeups like
the European financial crises were felt worldwide and mature markets are
grappling as high-growth economies are shifting their attention away from
manufacturing for export and towards capturing domestic markets.
Contending with such a remarkable range of economic risks, executives
are becoming increasingly accustomed to volatility with 86% of global
CEOs saying that their business environments are to some extent, or a large
extent, becoming more uncertain2
.
The degree of complexity is also increasing. More variables are salient
to business decisions than ever before, and the interrelations between
them are increasingly non-linear. 88% of global CEOs say their business
environments are to some extent, or a large extent, becoming more
complex while less than 50% of them feel uncertain about how to cope
with that change.
Above any other external factor (including the economy), technology is
anticipated, by most global executives, to be the primary driver of change
in organisations over the next 3-5 years. Technological advancements have
driven a sudden convergence of digital, mobile and social spheres, resulting
in a new dynamic in stakeholder relationships by connecting customers,
employees and partners in new ways to organisations and to each other.
Executives recognise that this newly connected era is fundamentally
changing the way in which people engage and are looking for ways to take
advantage of the multiple opportunities that have arisen for innovation and
growth. Leaders have also begun to make changes in talent management
strategies. Over 75% of global CEOs described collaboration as the number
one trait in employees critical to organisational success and as a result
are shifting their emphasis towards creating more open and collaborative
cultures and encouraging employees to connect, learn from each other and
thrive in a world of rapid change.

4
Global
SituationA Global Economy in Recovery
Emerging markets, such as Africa and Asia offer significant growth in
comparison to developed markets which are slowly recovering from
recession. Despite the growth prospects in African markets, persistent
regulatory and infrastructure challenges remain, which place a risk premium
of doing business in the region.
South African companies are inevitably influenced by the rapid change,
uncertainty and complexity of global developments, with macro-economic
growth and international markets strongly influencing domestic companies’
profitability. Whilst global growth continues to be disappointing on the
back of a slow and weak recovery, growth remains unevenly distributed
with emerging and developing countries growing faster than advanced
economies, steadily closing the income gap.

Important global economies such as the United States, Europe and China,
are slowly recovering from the recession; however, there are mixed
signals for future growth. While the United States, the world’s largest
economy, has been recovering slowly driven by the continuing purchases of
long-term securities by the Federal Reserve Bank and Congress’s agreement
to permanently maintain lower income tax rates, Europe continues to
face a sovereign debt crisis. In response to this, the European Union has
undertaken deep structural reforms.
These have included various financial support mechanisms (such as bailouts
and austerity programmes) for countries with troubled economies. While
this may have temporarily appeased markets, the memory of the Eurozone
crisis is likely to remain fresh in investors’ minds for years to come. And
with limited post-recession growth prospects in the United States and
Europe, companies have looked to Asia to drive global demand. China’s
expected growth rate of 8.4% in 2013 falls short of its pre-recession
growth rate (averaging 10.3% between 1999 and 20092
); however, the
year-on-year increase from 7.5% in 2012 is positive news for South African
companies who rely on China’s continued appetite for resources (over 90%
of Chinese imports from South Africa are resource-based ).
In today’s globalised world, technology is increasingly essential for companies
to compete and prosper and the agility with which an economy adopts
existing technologies to enhance the productivity of its industries can increase
efficiency and enable innovation for competitiveness. As global mobile
penetration and subscriptions continue to grow (subscriptions are expected
to rise from 5.3bn in 2012 to 6.8bn in 2017, an average annual growth rate
of 5.4% whilst the subscription penetration will grow from 100% to 125%3
)
the proliferation of mobile based industries such as mobile banking, especially
in emerging markets, is expected to increase. Vodafone India and ICICI Bank
introduced m-Pesa in India in April 2013.

6
The service which was originally launched in 2007 in Kenya, is an example of
how technological advancements in mobile technology can help to deliver
services to an untapped portion of the population (currently 41% of Indians
do not use banking services). Juniper Research predicts that more than 1bn
people worldwide will use their mobile phones for banking by 2017, up
from about 500m today. In light of recent trends policy makers in emerging
markets like China and Mexico have begun enacting measures to make their
telecoms markets more competitive, whilst the trend in developed markets
such as the US and Europe is more geared towards consolidation.
Despite a particularly uncertain regulatory environment in Africa, companies
cannot ignore the substantial growth prospects that the continent offers.
Africa is expected to grow by 4.8% this year and 5.3% per cent in 2014,
driven by increased output in the natural resources sector, underpinning
rising fiscal expenditure, especially in infrastructure projects and expected
increases in Africa’s trade and investment ties with emerging and developing
economies. Rising incomes and urbanisation are supporting growth in
domestic demand which is helping to decrease the exposure to external
economic shocks and increase diversification into service sectors such as
construction, financial services and telecommunications, which will create a
more solid growth profile and contribute to continued economic expansion.
Companies looking to operate on the African continent cannot be guaranteed
long-term certainty or a high degree of predictability as the continent offers
unique challenges. These markets are characterised by several challenges that
contribute to the perception of Africa as a risky destination for business. Poor
governance, the prevalence or perception of corruption, tenuous legislative
frameworks, fragile security of tenure and unclear royalty and tax regimes
make strategic decisions difficult on the continent. Furthermore, long-
standing issues such as civil unrest, insurgency and a history of ethnic conflict
pose additional operational risks in certain countries.

Infrastructure also remains a significant barrier for African operations.
Beyond socio-economic and political complexities, the lack of appropriate
infrastructure across the continent is a further barrier for companies
operating in industrial and service sectors. The required infrastructure
capital is far more than the current infrastructure spend, leaving a
substantial spending shortfall. This development constraint leaves investors
with little confidence that public-sector infrastructure development will
improve sufficiently to facilitate easier operations. African governments are
turning to companies in individual sectors, such as mining companies to
accelerate infrastructure development and these multi-billion dollar foreign
investments are likely to have a far greater impact on African infrastructure
development than public-sector spending.

8
The Promise and Challenge of South Africa
South Africa is the largest economy in Africa with significant market
opportunities owing to the emergence of a black middle class, and fiscal
and monetary prudence and investments in infrastructure designed
to facilitate and support business. However, the country’s business
environment faces several challenges, including widespread skills shortages
and labour unrest, high crime rates, rising electricity prices, stricter
consumer protection laws and a lack of regulatory consistency and clarity.
In 2012, economic growth in South Africa was adversely affected by strikes
in the mining sector and the recession in the euro area. However with
improved global demand and supportive macroeconomic policies a gradual
recovery is expected for 2013 and 20148
.
The labour environment presents significant challenges for South African
companies and potential investors as it is characterised by an expensive
and unproductive labour force coupled with social unrest, the inflexibility
of employers to manage labour expense inflation and a shortage of
indigenous skills. Labour costs remain higher than many other developing
countries and it is evident that increases in salary do not equate to a
similar increases in productivity which contributes to poor labour–employer
relations, which is labelled as confrontational and ranked the lowest in the
world.
South African
Situation

The majority of the country’s social unrest challenges are concentrated in
the mining industry, which has battled with increasingly violent strikes and
unreasonable wage demands from the labour force in recent years, with
unrest further fuelled by opposing unions that fight to be recognised by
employers. Exacerbating labour challenges is the significant skills shortage
in South Africa that has been a problem for several years. Although various
attempts have been advocated to improve the problem it is still evident
that South Africa is ranked as one of the worst globally in the area of
primary and general education. In addition, the availability of scientists
and engineers in South Africa is also a concern which means that skills are
typically imported at a premium.
The current outlook in electricity tariff escalation coupled with the
uncertainty of supply is threatening the profitability of existing companies
and deterring potential investors away from otherwise attractive market
opportunities. It can be argued that South Africa is still one of the cheapest
suppliers of electricity globally however this is not the case when compared
to similar developing countries.
A lack in the clarity and consistency of regulatory messaging, with topics
over recent years such as nationalisation, carbon and super taxes, has
further impeded the momentum of the local operating environment and
the flow of foreign direct investment. Nationalisation may not become
official policy despite being supported by some factions in the ruling
alliance, but that does not rule out other mechanisms available to the
state for greater participation in mining rents. New draft land laws calling
for expropriation in some circumstances will continue to dent investor
confidence.

The Strategy
of Decision-Making
Strategy is about making choices. Companies choose to do certain things
and choose not to do other things (as opposed to tactics, which are about
how to execute on the choices made). The complex operating environment
in which South African companies operate results in difficult choices. This
necessitates a deep understanding of the factors that influence profitability,
as well as the factors affecting the company’s reputation and relationship
with stakeholders.
Adopting a structured approach to making choices at a corporate and
business unit level is necessary. Strategy is an iterative process and involves
an integrated set of choices that includes both strategic positioning choices
and strategic activation choices. A clear and powerful framework for
thinking about those set of choices can provide a helpful foundation for
leaders looking at improving their business strategy.

Winning
Strategies
Winning strategies require conscious choices. Poor strategy is often
characterised by the failure to make choices. Asking the right questions
allows companies to successively focus on key aspects of their high-level
and operational strategies which collectively form the basis for long-term
strategic planning and short-term prioritisation. Monitor Deloitte assists
companies to make difficult decisions based on a series of cascading
choices, as shown. Companies should be able to answer each question
successively, working down the cascade. Where a question leads executives
to re-evaluate their initial propositions, executives can track back up the
cascade to redefine aspects until the strategy is cohesive.

What are our aspirations?
Companies should be able to clearly define both their financial and
non-financial objectives. Winning strategies define their goals and
aspirations in terms of customers. The most important choice is about
which customers to win, and who to win them from. These objectives
should form the basis of the company’s overall vision, as they will guide
investment decisions.
Where will we play?
Companies must choose the playing field on which they plan to compete.
This includes customer segments, product portfolios, and the geographies
in which they will compete. Companies must also choose which parts of
the value chain they will target, and where in the business life cycle they
should enter or exit.
How will we win in chosen markets?
To win on their chosen playing field, companies need to define their
distinctive value proposition that will enable them to win their target
customers from their competitors. They should identify sources of
sustainable advantage, and use these as the basis for business model
development. These choices are necessary to achieve the goals and
aspirations within the confines of where they have chosen to play.
How will we configure?
Companies should ensure that they are properly configured with their core
competencies focused on their winning value proposition. They need to
ensure that they have the capabilities and skills in place and that they are
configured appropriately to successfully implement these strategies.

Survival
Strategiesto Avoid when Facing Tough Choices
These choices are difficult to make given the pace of change and the
levels of uncertainty and complexity described above. So how can
executives make choices that are relevant and useful, whilst navigating this
environment?
Adopting a survival strategy runs the risk of increasing the likelihood of
emerging from a recession in a weakened competitive position. Knee-jerk
reactions such as cost cutting and the adoption of risk averse strategies
and a defence of core businesses, can have unintended long term
consequences.

18
Cutting of costs is unlikely to result in a long term competitive advantage.
60% of Monitor Deloitte clients found that traditional cost reduction
approaches fail, 50% of companies allow costs which they ‘eliminate’ to
bounce back, and 30% of cost reduction initiatives weaken the company
by diminishing critical assets, or slowing down critical development
programs.
Adopting a risk averse strategy diminishes the potential for long term
rewards. Companies that are averse to taking on any form of risk are
unlikely to remain competitive in a complex and uncertain environment
dictated by change, as reductions in investment, postponing of big
decisions, halting recruitment, retrenching staff and cutting back on
innovation are likely to diminish the potential for future growth.
Defence of a company’s core business by competing within the confines
of their existing industry or retaining existing market share is unlikely
to ensure survival. Instead these companies are likely to fall behind
innovative companies that create uncontested market space and make the
competition irrelevant by pulling in a whole new group of customers who
were traditionally not customers of the industry or by adapting its product
offering to service ever evolving customer needs.

Tool 1: Take a long-view
Companies can benefit from thinking about the long-term future using
tools such as scenario planning. Scenario planning allows companies to
organise critical uncertainties about the future, along with pre-determined
elements into a manageable set of scenarios that vividly describe potential
future states of the world in which stakeholders live. Scenario planning
was developed at Royal Dutch Shell in the 1970s as a tool to aid executives
in making high stakes decisions involving large investments and volatile
situations, and can be applied to a wide range of industries.
The foundational proposition of scenario planning is that no one can
predict the future. However, companies can choose to adopt a disciplined
and imaginative point of view about possible futures by focussing on
key interactions among critical uncertainties and how these interactions
could reasonably play out. Strategies can then be tested for robustness
against each scenario. Choices can then be made more confidently with an
informed view on how each strategy could play out in different scenarios.
As a further tool, scenario planning also generates early indications which
can act as warning signs of danger, or even more valuable early indicators
of high value opportunities, some of which are barely visible or unlikely at
the point.

20
Tool 2: Innovate aggressively
Innovation is no longer optional as the rate of structural change in all
industries is occurring rapidly and optimising current models is no longer
sufficient. Whilst most companies are challenging existing models,
innovation efforts are often unsuccessful with a “normal” failure rate of
96%. What is commonly found is that most firms generate an abundance
of ideas but tend to execute on innovation efforts poorly. This is because
firms do not have a number of key success factors that are essential to
successful innovation, namely:
Key success factors to
innovation
• Strong senior leadership of
innovation efforts or leaders that
have a clear innovation intent
• Management of the balance
between continuous
improvement and breakthrough
innovation
• Systematic tracking or
measurement of innovation
efforts
• Effective rewards and incentives
for innovation
• Discipline for innovation,
including methodology, tools,
protocols and metrics
Case Study: Innovate
Aggressively
P&G’s innovation “revolution”
has been hailed as both a huge
success and an exemplar on how
to reconfigure innovation to
connect with a broad set of experts
outside the firm. P&G’s CEO
issued a mandate that 50% of all
innovations would need to come
from outside P&G whilst the rest of
innovation would come from the
use of existing network in addition
to investing a significant amount
in order to reconfigure R&D. This
resulted in an annual sales growth
of 10% from 2000 to 2008 and the
launch of successful products such
as Crest Spinbrus, Mr. Clean Magic
Eraser and Pringles Prints.

Typical companies react, in times like these by becoming more risk averse and
focusing on defending core business, aiming to survive the recession rather
than lead out of it. The attitudes of successful companies are rather to go on
the offensive and look to innovate differently by focusing efforts on the most
critical projects and shut down the rest—make a few big bets and put the
rest of the good stuff on ‘slow burn.’ Leaders should also focus on finding
new ways to improve performance, take advantage of low cost innovation
resources— move quickly to get new ideas into the market, and share their
secrets— invite others to innovate with them to share cost and risk.
Driving higher returns, leap-frogging the competition and inspiring
employees, partners and suppliers demand a focus on the right innovations
by re-thinking innovation goals and strategy, using different metrics and
criteria to prioritize projects, and taking fast action to realign resources.
Leaders should also bear in mind that right execution is pivotal and
should uncover new insights, think beyond the technology, speed time to
implement through quick and inexpensive concept testing and use open
innovation to tap into new resources.
Innovation is often associated with products or technology. While this is
often the case, there are many different ways in which a company can
innovate including exploring new business models, channel partners and
customer experiences as shown in Figure 1.

22
Figure 1: 10 Distinct Types of Innovation
There is no lack of innovative ideas in any business. The challenge is
turning these ideas into a step change in results. Good ideas often fall foul
to resistance to change, and a failure to understand the whole system
of innovations required to make the idea successful. For example, a new
technology for the company of the future will inevitably require innovative
thinking in skills provision, operational planning and performance measures.
Companies should focus their innovation efforts on the critical few projects
that will achieve a step change in performance and then move fast. It is
also not necessary to reinvent the wheel. Many of the most successful
innovations started with an idea from outside the company.

Tool 3: Manage costs adaptively
Companies should make conscious decisions about their overhead ratios.
Some companies manage their overhead ratios according to economic
cycles, cutting overheads during recessionary periods with either less focus
on cost optimisation during periods of growth, or actively allowing for
increased costs to fuel capabilities that drive growth. Rather than allowing
for cyclical cost fluctuations, companies should manage their overhead
ratio consistently over time. Research has shown that companies that
consistently manage their overheads fare better than those with more
volatile overheads, as shown in Figure 2 below.
Figure 2: Managing costs consistently can lead to better returns

24
Companies can approach adaptive cost management by mapping their
costs against four main groups to gain a deeper understanding of where
to create value. The return of each overhead class can then be calculated,
allowing firms to prioritise and optimise costs, focusing on value creating
activities through the cycle, as shown in Figure 3.
Figure 3: Analysing return on overheads

Tool 4: Engage proactively
with stakeholders
Stakeholder engagement is difficult but is ever more crucial as social unrest
and strike action increasingly threaten the operability and profitability of
South African companies, and as government intervention increases and
regulations tighten. Failure to effectively pre-empt and address stakeholder
concerns will continue to negatively affect the already tough operating
conditions that aggrieved individuals face.
Creating shared value for stakeholders and companies is the most
effective way to approach stakeholder engagement. It is less about
influencing or manipulating the viewpoints of stakeholders, and more
about developing a deep understanding of stakeholders’ issues and needs.
Such an understanding enables companies to identify areas of overlap
between their needs and those of their stakeholders and allows for the
establishment of relationships in which all parties benefit, and trade-offs are
made effectively and with minimal detriment to those involved.
An in-depth assessment of the stakeholder landscape is required to identify
the various stakeholders to be engaged, what their key issues are, and
what it is that they value most. Stakeholders should be grouped according
to their similarities where possible. Examples of such groupings are by
industry, by government departments, or based on identified needs.

26
This aids in efficiently engaging a larger set of stakeholders with a
single message and approach. However, while efficiency is important it
is necessary to customise the message for interactions with individual
stakeholders. Such customisation will be informed by the stakeholder
assessment and knowledge gained through it. Determining the degree of
influence that each stakeholder has with regards to the overall stakeholder
landscape is important to allow the company to prioritise its available
resources on the most influential players.
Analytics can be used to segment stakeholders into meaningful and
actionable segments based on the issues that they care most about and
how they can be reached. Figure 4 shows how analytics can be used to
make sense of the landscape, whilst Figure 5 is an example framework for
how generic strategies can be developed based on the outcomes of the
analytics.

Figure 4: Stakeholder Landscape Map

28
Figure 5: Stakeholder Assessment Matrix

Developing specific and focused engagement plans and identifying
the most appropriate points for intervention with each stakeholder is
imperative to ensuring that the communication is effective and reaches the
correct audience. Doing this requires an understanding of what motivates
each stakeholder and drives their individual behaviour patterns. This will
enable the company to find common ground with stakeholders and to
identify ‘win-win’ situations, whereby the needs of the company and those
of the stakeholder can both be met.
Throughout the process of stakeholder engagement the effective tracking
of results is crucial to understanding the efficacy of the company’s strategy
and to providing insight into where improvements can be made. This
is of particular importance as stakeholder engagement is a long-term
process and the methods of engagement used, as well as the needs of the
stakeholders themselves, will change over time, requiring the evolution of
stakeholder engagement processes.

Companies face tough choices around their profitability in a tumultuous
and increasingly connected world as well as challenges relating to
attracting and developing key skills, capital allocation and stakeholder
engagement. Executives need to think strategically about these issues and
integrate them into a sustainable long-term strategy.
The rising pressure on companies to grow profits despite a sub-optimal
macro-economic environment and rising costs requires in-depth
understanding. Executives can use scenario planning to understand
possible futures as the basis for informed decision-making in an
uncertain environment, and then optimise their portfolio accordingly.
Seizing opportunities to innovate, from new customer propositions and
technological breakthroughs to internal process changes, offers companies
a further opportunity to control their future.
Companies should also welcome innovation to address skills shortages
affecting the country at large and their specific industries. Scenario
planning may also be useful to structure thinking around the kinds of
skills that will be required in the future. This will provide the basis for
developing strategies to attract, develop and retain these skills to secure
future capabilities. Furthermore, executives face difficult capital allocation
decisions. By integrating lessons learnt from scenario planning to create an
understanding of which business units and geographies will develop the
company’s sustainable advantage in future, executives can adopt aspects
of modern portfolio theory to analyse and select appropriate business units
and geographies to deliver shareholder value.
Conclusion

32
Finally, companies must take cognisance of their operational context,
especially in South Africa and must understand and anticipate the needs
of various stakeholders. Executives can use an analytical approach
to understand the stakeholder landscape, ensuring that an effective
stakeholder engagement strategy is in place. This strategy should seek to
create shared value for stakeholders, resulting in mutually beneficial and
productive relationships between the company, government, labour and
the community.
Even in tough times, companies
can use strategic thinking and
analytical tools to face their
tough choices.
Andrew Lane
Director
Monitor Deloitte Africa
alane@deloitte.co.za
+27833262849
Nthabiseng Mosia
Consultant
Monitor Deloitte Africa
nmosia@deloitte.co.za
+27846472110

1
Kelly, E. & Weber, S. 2012, ‘Growth in a low growth economy’
2
IBM, 2013. ‘Leading Through Connections: Insights from the Global Chief
Executive Officer Study’ Retrieved from IBM (www.ibm.com) on 31 July 2013
3
African Development Bank Group, ‘Africa Economic Outlook Report 2013’
Retrieved from African Economic Outlook (http://www.africaneconomicoutlook.
org/en/) on 31 July 2013
4
International Trade Centre, Trade Map Database, Retrieved from ITC (http://www.
trademap.org/) on 29 July 2013
5
The Economist Group, 30 April 2013. “World: Telecoms outlook” Retrieved from
the Economist Intelligence Group (http://viewswire.eiu.com) on 1 August 2013
6
African Development Bank Group, ‘Africa Economic Outlook Report 2013’
Retrieved from African Economic Outlook (http://www.africaneconomicoutlook.
org/en/) on 31 July 2013
7
McNitt, L, 25 June 2013. ‘A new type of colonialism?’ Retrieved from AgWeb
(www.agweb.com) on 26 June 2013
8
World Economic Forum, June 2013. ‘World Economic Situation and Prospects
2013’ Retrieved from WEF (www.weforum.org) on 31 July 2013
References

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How to compete in tumultuous times and operate in complexity

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