There is a strategic discipline called “scenario planning” that is designed to address the kind of uncertainty we’re facing due to the pandemic. Scenario planning takes for granted that it’s hard for human beings to imagine the future as being radically different from the present. As a result, its practitioners try not to predict what will happen but to stretch the mind to think about what might happen.
One of my favorite ideas from scenario planning is the concept of a “robust strategy,” a strategy that will hold up well against a range of possible outcomes. “Robust” means not only flexibility, adaptability, and bias to learning, but also resilience and openness to sacrificing some efficiency in order to open up capacity for being responsive to changing environments. Having a robust strategy empowers business leaders to decide what actions they can take now that will position them best — whichever way things turn out — especially as business leaders’ and VCs’ goals change in the wake of COVID.
For example, I recently spoke to a software entrepreneur in the big data space. His pre-COVID goal was to get a larger percentage of the company’s revenue from software licenses than from services, because VCs, possible acquirers, and public markets value recurring SaaS revenue far more highly than they value services revenue. But with uncertainty about the continued availability of future VC funding, he concluded that having a higher percentage of services delivering cash flow and profits could be a more robust business strategy for right now. There might be less upside if financial markets remain strong, but less risk of a disastrous downside if funding dries up.
When managing the post-COVID future of a business, leaders should consider not just the wild upsides that seemed almost inevitable in the overheated financial markets of the past decade but also the possibility of a more serious and sustained downturn. And that might mean that, like my friend, they should choose to grow their business securely and steadily through revenue and cash flow from customers rather than blitzscaling profitless growth to inflate their stock valuation. A robust strategy will revolve around a strong balance sheet that is backed by delivering true value to customers who need what the business has to offer. Furthermore, equipping employees with the knowledge, skills and mindset to respond flexibly and quickly to new challenges will provide businesses with the ability to pivot from an offering that no longer works and go all-in on new opportunities.
Moving beyond shareholder value towards purpose-driven business strategies
The COVID-19 pandemic has exposed the weaknesses of much that was previously taken for granted. With companies optimizing for financial efficiency rather than resilience, supply chain disruptions propagated quickly and were hard to recover from. Big, profitable companies needing bailouts after decades of draining their capital to fund stock buybacks. The simple truth is that creating products that are designed to be thrown away — instead of treasured and handed down throughout the years – is not robust. Neither is the focus on driving corporate profits and share price valuations ever higher.
Looking back at our recent past, the kind of pro-social commitments that businesses made post-World War II were far more robust than the “shareholder value” (i.e. stock-price focused) strategies many businesses have adopted today. Companies that are rooted in their communities, invest in R&D, and dedicate time and resources to training their workers make society as a whole stronger — and, by virtue of those investments, they too are stronger. Economist Carlota Perez has suggested that widespread agreement on the importance of skilling and reskilling at the global level would not only help address the war for talent as technological demands of the workplace shift but would also increase the creative capabilities of the population of developing countries, increase trade and, overall, achieve a positive sum game between business and society at a global scale. As the pandemic continues to affect our lives, it is time for companies to turn away from shareholder value as their guiding star and embrace a more holistic view of their place in society.
Economist Mariana Mazzucato has also urged businesses to become more purpose-driven as a strategy to tackle not only economic challenges, but social ones as well. Tens of millions of Americans are now out of work. We urgently need a strengthening of the social safety net. If enough companies are forced to close and people cannot go back to work, we may need to turn to the government to kick-start the economic cycle by putting people to work rebuilding our crumbling infrastructure and investing ahead of future crises.
But this is not the only solution; we do not need to rely on government to take a more active role in setting the direction of our future. Zeynep Tufekci, a sociologist who focuses on the social implications of emerging technologies, wrote a piece about Hong Kong’s success against the pandemic. In it, she describes a new kind of self-governing by Hong Kong rising to meet the crisis — making the case that a bottom-up self-organized movement has the power to return us to a well-functioning, open society.
The pandemic will require unusual levels of economic stimulus and creativity – and the choices we make in response to this crisis can lead to very different outcomes. In its wake, businesses can no longer base strategies on the old baselines of predictable consumer demand, globalization, office life and business travel, access to talent, credit, or venture funding. The most robust strategy they can adopt is to embrace the changes the pandemic has brought about and to use the opportunity to fix things that have been broken by investing in R&D, delivering products that hold real value, and building resilient and flexible workforces.
Tim O’Reilly is founder and CEO of O’Reilly Media.