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The Hare and the Tortoise: The race is not to speedy (XVII). Scintillant Stability. Treasures await.

… “The tortoise meanwhile kept going slowly but steadily”…

The hare and the tortoise, a fable by Aesop

Have a beautiful weekend. As I promised, today we will continue with the second corporate strategy path that corresponds to decisions related to the pace for progress denominated Stability.

Today´s outline

What is stability? Stability is nothing else than decisions taken to procure a steadfast condition. Stability is maintaining equilibrium and a self-restoring position in which all things get in place after a growth phase, or after a chaotic situation. Stability routes are usually beneficial after a disturbance of events, or after a situation in which the corporation has been fluctuating without direction, or when a company is experiencing a huge external disequilibrium that needs to be fixed first.

An example of a stability path happens when a ship and its mariners experience a tempest, and its boat infrastructure has been damaged. The stability decision of the captain is to repair the injuries, maintain the balance of the ship and resume to its original position before the storm. Another example of stability occurs to procure a steadfast position for installing an enduring or permanent building block from which a strengthening position of excellence will result. By stabilizing, there will less difficulties to decay in the future. Right now, after the COVID19 pandemic, for those companies that reached exponential growth or have benefit from it, it is of profound benefit to consider to stabilize themselves. Not to grow. A stable corporate decision-making path for at least a decade, before proceeding with their growth plans further.

Why pursue stability? There are so many reasons to pursue stability. As mentioned above, a firm may choose stability over growth paths by continuing its current activities for a strong consolidation. Or by updating and preparing itself for a systemic business model transformation that requires a new mindset by the society. For example, once we begin to include the respect for the environment in our business models, it is imminent that the packaging section of our value chain will include different alternatives to reduce plastic contamination. One option to explore will be the refilling, and this measure requires adaptation by consumers. To make this, it is better to do it under an stability path, and not under growth mood. Look below:

Example of corporate strategy leading the business model transformation that implements refilling instead of plastics contamination.

According to some authors, “a firm following a stability strategy continues its current business and product portfolios; maintains the existing level of effort; and is satisfied with incremental marginal growth or some adjustments in their value chain”. But the purpose of a stability path is mainly to polish what was not functioning well or what was wrong during growth. Stability also procures on improving its business operations and improving functional efficiencies through better deployment of resources. It also adds or removes those business activities which need to be supplemented, and eliminates those that are not successful.  In addition, the stability path takes place when there is a change of leadership, or when a new cohort of young successors at the corporate level come to pass. The new front-runners require not just to learn on what to lead, but how to do it, but why to become ethical groundbreakers in the middle of new situations that ensued their predecessors.

In family corporate strategy, stability is imperative when changing leadership. From the point of view of the business owners who work in family offices or where the new cream of the crop trailblazers are coming from the same family, a stability path is not just convenient,  but imperative and it should last as long as it is required, even after the young cohort is taken into account at the board of directors level. During this time, in which the baton is still not in the new generation leaders, it is of wisdom to prepare them as a delightful learning intellectual and practical opportunity.

From the point of view of the operational side, a firm is said to follow a stability/ consolidation path if:

1. It decides to serve the same markets with the same products;
2, It continues to pursue the same objectives with a strategic push for incremental improvement of functional performances;
3, It focuses on polishing its resources in a narrow part of its value chain or a reduced product-market sphere. It can be applied also for testing pilot projects in the case of developing a meaningful competitive advantage.
4. It prepares for eventual external unpredictable scenarios.
5. It is temporal, and it durations depends on the objectives to reach stability. It is not meant to last for a lifetime.

Following a stable path does not mean that a firm lacks concern for business growth. It only means that their growth targets are modest and it is chosen for strengthening its competitive position, to maintain an equilibrium or to reach it. It also means to provide a “window of time” for preparation for what will come next. Since the company has decided that, the products, markets, and functions are chosen to remain literally unchanged, with minor changes or some polishing them; the stability strategy is a defensive path for replenishment and equilibrium.

A stability path does provide space for growth, though to a limited and discreet extent. Designing and implementing a stability roadmap does not imply stagnation as the basic drive is the search for stabilization and recovery of the equilibrium for decision making at the spearheads of the organization.

The stability path family of decision making at the corporate level are three

  1. Pause/Proceed with Caution
  2. No Change
  3. Profit

Number One. Pause/Proceed with Caution

This decision is equivalent to the “time-out”. It is stability at its core. It is defined by strategists as an opportunity to take a break for nurturing and establishing poise, a sense of balance after a chaotic growth. It is also defined as a deliberate attempt to make only incremental improvements until a particular external situation change.

A pause/proceed with caution is the route usually conceived as a temporary “rite of passage”, in which all the players of an industry or a whole economic system is fixed, or the industry becomes more hospitable by changing the rules of the game, or to enable a company to hold steady its resources after prolonged rapid growth. For example, according to BCG Henderson during the last two decades, the growth reached after the year 2000 has been erratic and unstable. The next graph (which doesn´t take into consideration the impact of the Coronavirus pandemic) tells us a lot to consider at the moment.

From the BCG Henderson Institute article “THE CHALLENGE OF SLOW”
By Martin Reeves, Ryoji Kimura, Hiroaki Sugita, Saumeet Nanda, and James Yuji Grosvenor. Published in 2020.

Rendering to BCG Henderson Institute, economic growth, in the long run, is driven by two factors: growth in the labor force and growth in labor productivity. In the United States, growth in the labor force contributed about 30% of economic growth in the US from 1960 to 2010. However, the retirement of the post–World War II boomer generation and the subsequent decline in fertility rate have depressed labor force growth. The same BCG consultants affirm that an impact on economic growth is already visible (without considering the pandemic impact yet). The 20-year average GDP growth rate has already declined from above 3% before 2007 to 2.2% in 2018 and is expected to stabilize around 1.75% to 2% during the next 20 years. The same story is playing out at different speeds and with different time frames in all major economies. For these group of BCG authors, “a long-term decline in economic growth will likely lead to a long-term decline in shareholder returns”. Not even an adoption of speculative digital money as Bitcoin will transform this situation. If we consider the next 30 years of slow growth as a time for stability path, then we have to consider how to provide a solution to economic expectations for a whole world that is expecting to have a possibility for a middle-class belonging, in a world that is not growing. And we also need to consider a cyberwar attack that will cause a digital financial crisis as worst as the one lived during the year 2008. This will inevitably come at any time before the year 2050.  

What to do in the middle of a global GDP long-term decline? The best thing we can do is to think first how to be prepared before considering about what can we do. To procure a nurturing thoughtful educational base for those who will take the baton of leadership in the next 30 years is crucial. The combo of NAIQIs (Nanotechnology, Artificial Intelligence, Quantum Supremacy and the Internet) disruption may provide a happy face at the beginning. As it is celebrated right now by the industrial sectors that won with the pandemic, but nothing stays only in the start line. The Smartphone introduction that offered the NAIQIs to our lives only materialized 12 years ago. In consequence, the correction of the Smartphone economy will inescapably come, not because I wish it, but because it will occur. It will happen, regardless if we like it or not.  It is like when you marry your spouse. The first years of marriage are the honeymoon and the rapid growth for freedom to love each other. After living with our parents, the beginning of any marriage is awesome, if there is love involved. Once things settle, a first crisis occurs, and a correction or at least therapy to solve it is required. If successful, then marriages continue. Otherwise, divorce befalls.

Photo from La Champanera – Blog de bodas | by Ana Gayoso

Number Two. No Change

This route is a decision to do simply nothing. Nothing new. Nothing to transform. It means to continue current operations, policies, technologies, and the whole value chain without a pinch of change. This is exactly what the Hare decided to ensure once he thought he was winning the race.

The Hare and the Tortoise Illustration. Artist unknown.

Once a company or an entity creates a secure competitive position in its industry, usually is accompanied by the temptation to don´t do anything else to improve it. The company only continues on its current course, making only small adjustments for inflation in its sales and profit objectives.  This usually happens when the market is saturated and mature, or in cities where there is no danger of outside competition, or/and when the industry has no obvious new opportunities or threats, nor is there much to do in a way of significant strengths or weakness. In addition, there are few aggressive new competitors likely to disrupt the status quo.

The case of ghost towns. The “do nothing” path usually happens in small-town businesses in which everyone knew each other, and there was a legacy of internal production and some traditional imported businesses. This sense of community and respect was reigning in the village.  In these types of societies, there is a degree of relative comfort for which the “no change” corporate strategy decision-making added up.  Even for these protected communities, the “no change” strategy has to be temporal, for a few years or so, but not for generations… otherwise without innovation from the private sector, the “no change” path, tends to create zero opportunities for the young. That is why you see phantom villages and ghost towns all over Europe.

A “no change” business, doesn´t ignite new jobs. People from the villages do not have new opportunities as employees, neither as new entrepreneurs, because there is no domestic demand. That is why you see massive migration from the youngsters to the cities, even in mainland China and in promising countries as the United States.  With the flow of people to the industrial capital metropolises, there are countries as Spain, “in which around half the Spanish country is inhabited by just 5% of the population” (according to Spain’s Research Centre on Depopulation and Development of Rural Areas) The same trend has happened in many villages in Italy, in several countries in Asia, and in Latin America.

European Dying villages or ghost towns are a fact. “The more that village populations shrink, the more birthrates plummet and economies slow down; the more schools are closed down; the more doctors are centralized into larger towns – and the more post offices and public services are relocated to urban centres. Community or public transport is vital for commuting to work or accessing higher level services or education – all too often, this final lifeline also succumbs”.

With the introduction of the Internet and e-commerce in rural areas, it is promising that youngsters may be interested and decide to return to their villages of origin. It will be possible for many executives to work from home (meaning their rustic local hamlets). Probably these new settlers will begin a new life in their villages of origin from scratch. At least at the beginning. That will help to create a new business model for economic development, that will help to recover all the businesses required in a community. It will help to re-establish the taste for the high-quality, or the need for hand-made or artisan shops that will find some beauty of demand in the same village domestic markets. In addition, this will stop the immense flow of Asian imported products, if villagers are conscious to promote-buy-sell their own local production. In my country there are economic sectors which have been wiped out by migration and violence, such as the coffee plantations. It will be interesting to see how can El Salvador attract again the youngster successors from those families, to work on those sectors again, to revitalize them, to recover and to replenish new communities.

Number Three. Profit (making it up)

A profit strategy path is a “short-term vision” decision to “make up a company that has internal difficulties by blaming other external causes” (such as anti-business government policies, unethical competitors, persnickety customers, high regulations,  lousy greedy lenders, etc.). The whole idea is to artificially support profits when a company´s sales are declining. The board of directors then decides on reducing investment and short-term discretionary expenditures, or general & administrative overheads. Once cutting expenses such as research and development, maintenance, advertising, or kicking out employees, then the profits position looks better falsely.

The profit (made up) strategy is useful only to help a company get through a temporary difficulty. In addition, it is a way to boost the value of a company in preparation for going public via an initial public offering (IPO). This path has been used by many technological companies or B2B, B2C or C2C e-commerce innovators that are looking for venture capital.

In our next publication we will continue with the retrenchment decision making. Stay tuned, enjoy your weekend.

Bibliography used today:

Disclaimer: Illustrations in Watercolor are painted by Eleonora Escalante. Other types of illustrations or videos (which are not mine) are used for educational purposes ONLY. Nevertheless, the majority of the pictures, images, or videos shown on this blog are not mine. I do not own any of the lovely photos or images posted unless otherwise stated.

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