Management – like chess – is a tremendously complex sport. You have to constantly make decisions while evaluating an infinite number of situations and variables. Alternatives must be weighed before making a move; and the decision not to move a given piece also has an associated cost.
The coronavirus crisis and the tough measures introduced for its control have created an unprecedented test for the entire productive sector. This crisis has changed the priorities of companies and executives like no other event. We are going to offer directors some reflections on how to face this difficult situation – without being exhaustive nor dogmatic.
Leadership on three fronts
Every senior manager from every organisation and sector now faces significant challenges on three levels.
The first level requires urgently safeguarding the health of the individuals for whom he or she is responsible; and ensuring, to the best of their ability, that decisions and priorities are aimed at protecting the health of employees. This also implies managing stress and anxiety – a significant risk in the short and medium term.
The Covid-19 outbreak has changed the priorities of companies and executives like no other event
At a second level, the important issue is to guarantee the working capital (the liquidity) in order to safeguard capital assets. This is perhaps the most Herculean task faced in the career of any director – even those with the greyest hair – and for which there are no precedents. Moreover, we must know how to respond in an extremely uncertain environment in which nobody knows how much longer the economic stoppage will last, nor the cost of its consequences.
Last, but not least, is the strategic consideration of preparing the organisation for the post-Covid scenario. We still do not know how much normality we will enjoy in May, or when the quarantine will end, or how we will be able to reconcile the apparently incompatible requirements for containing the epidemic while returning to economic normality.
We do know that the return to normality will be very gradual – and so surviving until the year end looks like an impossible task for many businesses in various areas of the service sector.
As I am not an epidemiologist, nor a medical doctor, I will leave aside the first horizon and focus on the other two.
Any fall in sales usually causes tension in a business: most companies try to optimise their processes and balances as far as possible, but the company that is free from all fixed costs is yet to be invented. Financing this structure when income drops to zero is perhaps the greatest challenge facing businesses and this must be the focus for every manager.
Financing fixed costs when income drops to zero is perhaps the greatest challenge facing businesses
The maximum of creativity in finding sources of liquidity is demanded and wise decisions must be quickly made. What liquidity do we have in cash and credit lines? How much liquidity will we need in the coming months? What is our expected burn rate? How can we ensure that our business has a life expectancy greater than the duration of the collapse in sales in our sector?
Renegotiating bank debt or bonds (as the case may be) are two essential sources of liquidity. A note for optimism is that the banks are much better capitalised than in the recent past with up to three times more capital than in 2011.
More good news is the containment of "investment grade" rates (the spread on good quality corporate debt remains at 120-130 basis points), unlike "high yield" debt (or speculative debt with spreads of nearly 700 basis points). These low rates for quality debt ensure scope for debt renegotiations that enable business continuity.
Renegotiating bank debt or bonds are two essential sources of liquidity
A different story awaits those companies that have been hit by the coronavirus crisis with too much debt on the books; many of these firms will have to issue more capital – or face defaulting in the most serious cases where the impact on sales is greatest.
Another important and welcome resource are the temporary layoffs (known as ERTE in Spanish) that give us flexibility and convert fixed costs into variables when used intelligently. However, these layoffs have certain limitations and the government is unfortunately calling into doubt their legality. Tight and disciplined cost control is an essential element.
We must be extremely cautious in the current uncertain environment: it is preferable to be pessimistic in our cash flow forecasts, rather than show an excess of optimism that forces us to make new forecasts a few weeks later. In an interview, the hotel entrepreneur Antonio Catalán (AC Hoteles) was clear and forceful when speaking about the impact of Covid in his sector: "2020 has gone down the drain."
Speed is also essential. As Jeff Bezos warns: do not wait for all the information before deciding – because it will be too late by then. He notes that the cost of deciding at the wrong moment is always less than correcting (equally quickly) a decision that we later see to be not entirely accurate.
Uncertainty can paralyse followers but not leaders – as Pablo Isla and Amancio Ortega at the helm of Inditex (owners of Zara) showed when they cancelled the dividend on the same day that the Spanish government announced the quarantine.
Uncertainty can paralyse followers but not leaders
From a strategic point of view, we must try to ensure that the cuts necessary to ensure liquidity affect as little as possible the assets that enable us to be competitive: we want to survive the storm, and once the storm has passed, we want to continue our journey.
The current scenario imposes new spending restrictions, which will require simplification at all levels – and this makes good decision-making even more critical for obtaining good results.
This strategic dimension also affects foreseeable cuts in items of CapEx – as we must safeguard and continue investing in those areas that represent substantial improvements for the business model (such as cost reductions, better processes, and time savings).
Thinking about reconstruction
In addition to focusing management efforts, the leadership role demands making decisions on preparing the organisation for the end of quarantine. Again, caution is essential. Many sectors, especially but not only the services sector, are going to experience a slow recovery.
A good way to reduce uncertainty is to hope for the best while preparing for the worst
It is highly recommendable to work by scenarios: define a list of priorities and key decisions based on the various types of possible recovery: a "U" shape or the dreaded "L" shape. A good way to reduce uncertainty and keep morale high is to hope for the best while preparing for the worst.
Apart from the difficult landscape we see on the horizon, the new situation will bring about changes.
Digital is one of the big winners. We are all now using tools that until just a few weeks ago we knew about but did not rely on. Thanks to these new platforms, many companies have discovered new levers for efficient management.
These tools are here to stay and will have a growing influence in the months and years ahead. Big data, artificial intelligence, online advertising and robotics are other mega trends that will accelerate in the post-Covid scenario. How prepared are our organisations to best use all the levers of value creation provided by the digital revolution?
Another great series of changes is related to risk management in global supply chains: something I addressed in detail in my previous article.
The global industrial sector has been achieving an impressive and almost unlimited increase in operating leverage at every level. However, when this increase is added to an excessive supply dependence on certain countries, the result has been tremendously costly when tackling stressful situations.
We can expect that companies will emerge from this episode with an improved management of operational, geographical and supply risk
New technologies combined with cheaper and faster transport have meant that businesses operate with very little stock sitting in value chains that are increasingly fragmented, complex and international. And as we know, the more complex the system, the greater the margin of error.
Stock plays the same role as shock absorbers in a car, it prevents the structure from being damaged when hitting a pothole in the road. Shock absorbers may seem superfluous, or even useless, on a smooth piece of road, but they are essential for the active safety of a car – and a company. As happened in the financial sector after the 2008 crisis, we can expect that companies will emerge from this episode with an improved management of operational, geographical and supply risk.
Final note on leadership and communication
There are many ways to define leadership – but it is best defined by achievements. At times like the present, it is essential that the most senior managers lead by example. Remaining serene and maintaining honest and transparent communication with everyone (including employees, shareholders, customers and suppliers) is a determining factor for ensuring the whole organisation is ready to deal with the challenges of the coming months.
Quick decision-making and convincing communication are needed in moments of crisis
Daniel Goleman defines a good leader as somebody who knows how to adapt their leadership style to the situation. Quick decision-making and convincing communication are needed in moments of crisis, and in such moments, a hierarchical clarity prevails over more participative models.
As Goleman explains: firefighters do not vote on who stands on which side of the hose and so somebody is needed who is capable of imposing coordinated action. This same logic must also be accepted lower down the organisational chart.
That is why leading by example is so important. Juan Roig, chief executive of the Mercadona chain of supermarkets, has continued to work from his office every day despite being 70 years old and at risk. He has declined to attend online management committee meetings and visits shops to personally encourage employees (who are on the frontline in terms of risk).
Visibly leading from the front is one of the best ways of instilling confidence throughout an organisation and so is a crucial part of successfully overcoming the challenges ahead.
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