Recently, I attended the Executive Focus International's (EFI) executive forum on Strategy and Leadership in a Turbulent World. The conference themes centered on managing change, coping with chaos, and effective strategic and leadership responses. The timing of this forum was particularly meaningful, since these are extraordinary times for business. Financial services firms that are successful today and will thrive in the future will be those that have effective strategic planning, effective talent planning, and disciplined management processes. Most leaders recognize the importance of strategic planning and disciplined management processes. However, "talent planning"the process of recruiting high impact people, assessing their potential, developing their talents, and retaining them for the long haulwhile recognized, is often not effectively managed.
To cope with rapid change and uncertainity, leaders need to strike a balance between the infusion of outside talent and the development of tenured, high-potential people. This is important because, while living in a time of great change, we frequently lose sight of the things that have not changed. 1
In our lives and organizations, we seek stability at the same time we demand change, growth, and innovation. This is the paradox that must be managed. All firms are managing change and transitions because the new game now begins before the old one ends. However, one lesson learned in the last decade is that you cannot manage change without managing continuity. Today's leaders are challenged to preserve the organizational culture that has made them successful while at the same time energizing it with new people who bring new ideas, fresh ways of thinking, creative friction, and best practices. This often means keeping the core company growing and addressing disruptive innovation, while simultaneously running the business.
How have businesses performed throughout the last decade? By some accounts, the metrics from the last decade show superior economic and corporate performance. We have seen the longest U.S. economic expansion in history, material productivity gains, strong employment, and significant advances in computational capability and information technology. By other measures, however, company performance has declined. We have experienced an Internet and telecom meltdown, the failure of firms previously celebrated, weak core industry profits, and an inability of firms to sustain pricing. These factors have created a cycle where companies pursue a single best way to compete, imitate each other, and pursue strategies based on cost cutting, mergers and acquisitions, accounting gimmicks, layoffs, and restructurings.
Strategy and leadership in a turbulent world needs to stay grounded with a central goalthe creation of economic value. Throughout the 1990s, shareholder value, not economic value, became the goal, and management ran companies to increase share price. While shareholder value is a desirable outcome, it should not guide a firm's strategy. 2
Strategy is the creation of a unique and valuable position involving various sets of activities. As the banking industry emerges from a mild recession, now is a good time for organizations to rethink their core strategy, with a focus on sustained return over a business cycle.
A firm understanding of industry structure is critical to strategic planning. Leaders need to know what is driving profitability in the industry to best position their company for success among the competition. This requires a sound analysis of revenue and cost factors to ensure management knows how their business makes money. This sounds overly simplistic, but often due to environmental and industry change, the standards for business and value propositions constantly shift. Every time the competitive landscape in banking changes, the industry evolves.
It is also important to understand structure at the firm level. Internal structural responses to change are often complicated by the fact that rapid change increasingly requires integrated processes and flexible networks, particularly for knowledge workers in a distributed system. Leaders must acknowledge that structure, by its nature, divides, while people integrate. Consequently, firms must establish core processes that integrate people's efforts across structural boundaries. For banking organizations, this will be essential to implement enterprise-wide risk management practices. Management must be everywhere in a networked organization to ensure alignment.
When management is armed with a firm grasp of the fundamentals, their strategy should deliver a unique and sustainable value proposition. Sustaining a competitive position requires trade-offs. In today's competitive markets, it is generally not effective to be a jack of all trades and a master of none. We have seen recent business models in banking that attempted to focus on the financial supermarket or on being a niche player. Choosing the right strategy is key. However, executing the chosen strategy is equally important. No strategy can be executed successfully unless it is simple, clear, and actionable. As a banking organization identifies the strategy that will result in the right value proposition, it will need to develop fast feedback loops to respond promptly to change.
In a stable market, a firm can differentiate itself by focusing on quality. However, today's market place is not stable enough to demand perfect products. Financial services companies will need to become agile, capturing the upside while avoiding the downside. Success today is less sustainable, and strategies die faster and are replicated faster. Consequently, banking organizations will need to be resilient and manage strategic transformation in a way that is not overly detrimental to the organization.
So, what does all of this say about leadership? Leaders have to set clear strategies and goals, and execute them effectively. Given the pace of change, practices may have to be based more on principles under which people are expected to act as opposed to specific procedures. Leaders must set compelling visions not only through logic, data, and cognitive means, but also through connecting with people on a human level. Leaders will need to display absolute integrity and foster trust and openness to create a new social fabric in organizations. They must train staff on values and principles as well as technical aspects of their jobs. There must be a recognition that accountability comes from how much a person cares about the work, and not just from compensation.
Leadership has always required persistence, tenacity, and the ability to select and motivate the right people. None of this is new. However, the performance of future leaders will likely be measured by a balanced scorecard, and not just by share price and short-term results.
The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.