Operations in an Era of Radical Uncertainty

Operations have always been, and remain, crucial to achieving a competitive advantage. Tim Cook, who has created more shareholder value than any other CEO at any other company, is an operations specialist. Indeed, he believes that being innovative in operations was crucial to Apple’s success even when the visionary, Steve Jobs was at the company’s helm.

But the nature of competitive advantage shifts over time — and so does the role operations plays in it. Historically, the main strategic value of operations was to create scale in order to gain a self-reinforcing efficiency advantage by riding the experience curve. With the digital revolution, static, physical scale lost its edge: By building or leveraging digital platforms and ecosystems that connected suppliers and consumers, even small start-ups were able to attain dominant positions and high margins.

Resilience: Today’s Operational Advantage

The new source of advantage became flexibility, the ability to adjust business models in tune with shifting technologies and competitive conditions. Flexibility comes in different modes: It can mean being able to rapidly scale up solutions as new opportunities present themselves. It may mean being resilient to unanticipated shocks. Resilience proved to be a key source of advantage during the Covid pandemic, as evidenced by significant divergences in performance between firms. Some never regained their pre-shock performance levels, others were able to recover, but have since lost their temporary edge, and few emerged as structural winners, able to thrive sustainably in the post-shock environment.

Covid not only underlined the value of resilience but revealed the work to be done both within operations teams and across the broader organization to turn it from an intuitive set of approaches applied during a crisis to make it a perennial, systematic, and repeatable capability. In the multi-crisis world we find ourselves in after the pandemic, honing and systematizing resilience capabilities will be crucial. To do this, leaders must:

1. Adopt the right mindset.

Efficiency continues to dominate the financial management mindset — particularly as investors’ demand for short-term profitability has risen alongside interest rates. Investments in resilience may appear to be inefficient and have limited immediate payoffs, causing managers to undervalue them.

However, empirical analysis shows that resilience drives shareholder value: Over a 25-year timeframe, 30% of companies’ total shareholder returns (TSRs) were accrued during times of crisis — even though these times accounted for only 11% of the period investigated.

By positioning companies to leverage crises as competitive opportunities — rather than as shocks to be temporarily defended against — resilience can drive long-term outperformance. Leaders need to think of resilience as a strategic capability that can be built by honing the ability to experiment, as well as select and scale up emerging models, and harnessing the power of imagination to proactively reinvent the firm and reshape its environment.

2. Take a holistic approach.

Building resilience includes taking actions at the operations level, for example, by creating early warning systems or setting up multiple, redundant manufacturing facilities or supply channels.

But resilience also needs to be thought of beyond operations — it’s a property of whole systems, not parts of systems — and firms need to take a broader approach. Measures also need to be taken beyond the company: By aligning their goals and activities with the broader business ecosystem and society, firms strengthen relationships with stakeholders that can be relied on in a crisis.

3. Institutionalize learnings from crises.

While many leaders are eager to move on once a crisis has passed, they should instead take time to institutionalize what they have learned.

For this, we propose a three-step approach, which entails evaluating your performance (against your peers and over time); extracting the lessons (e.g., which capabilities were missing, which decisions were right or wrong); and implementing necessary enhancements (e.g., writing a crisis playbook, creating more flexible collaborative structures). As one CEO put it “we cannot rely on the initiative and surge capacity of a handful of individuals to create a sustainable capability of resilience.”

4. Adopt resilience measurements.

The benefits of resilience are difficult to measure with traditional business metrics, which causes leaders to make decisions that overweight short-run efficiency.

To re-orient towards long-term value-creation, firms need to introduce new metrics that measure and incentivize flexibility and responsiveness. This includes strategic measures, which can be quantified retroactively, such as recovery rates (how quickly did the company return to pre-crisis performance levels, relative to competitors) or the share of an industry’s or economy’s post-shock upswing a firm captured.

Just as crucial are operational measures, which can help companies assess their readiness for the next shock: For example, analyzing the flexibility of capital or capacity (how much of it can be reallocated, and how quickly) or the agility of operational mobilization (e.g., how quickly can back-up systems or facilities be spun up).

By systematizing and institutionalizing resilience, firms will be positioned to withstand specific, low-probability, high-impact events, and to thrive in changed circumstances by leveraging the flexibility to jump to new experience curves.

But this is not the final frontier for operations.

Optionality: The Next Frontier of Operational Advantage

We are now entering an era of radical uncertainty, with multiple crises unfolding simultaneously across different scales and timeframes. As a result, firms must be prepared to adapt to a very broad range of plausible future states of the world – and they must be able to do so efficiently, given recently elevated costs of capital. In other words, they must flexibly combine both efficiency and flexibility considerations to thrive in this new era.

To succeed in this context, operations must enable and create radical optionality: The ability to efficiently build a portfolio of options — each of which could be the basis for future competitive advantage — and retune and reweight them as the future manifests itself.

How can firms conquer this next frontier of operations?

1. Expand customer interactions and insights.

To create new options more efficiently, firms need better approaches to harnessing customer information. Each customer interaction is unique, and operations must be set up in a way that the information from it is captured and analyzed, and lessons learned are fed back into the company’s exploration process. An example of this are digital tools leveraged to record, analyze, parse, and encode customer calls.

Companies can learn not just from their customers’ actions (i.e., what they buy), but also from their search activity (i.e., what (else) they want to buy). Datadog, a provider of a cloud-based monitoring and analytics platform, uses this approach successfully: Following an open-source model, the firm welcomes code contributions from its user community, which inform Datadog of the kinds of problems their customers need to address, inspiring its development efforts.

2. Monetize customer search.

Customers don’t just consume — they also explore. By interacting with their customers’ search processes, companies can also shape their journey, exposing more of their offerings to clients. Most e-commerce platforms do this via recommendations – think of “wear it with” or “other buyers liked” tabs.

Another powerful approach is monetizing the customers’ exploration journey itself: For example, Spotify realized that the value proposition of a music streaming service would not only be the ability to instantly access songs users already know they want to listen to, but also the ability to discover new artists and albums they might enjoy. Its “Discover Weekly” feature, a personalized playlist, uses data collected from millions of users exploring Spotify’s catalogue to predict which songs an individual might find appealing. For Spotify, this creates a unique and monetizable competitive advantage that is more difficult to imitate than the breadth of its music catalogue or the reliability and sound quality of its app.

3. Individualize offerings.

By leveraging information from customers’ actions and search processes, firms can better cater to specific customers’ individual needs. For example, Indochino updated the business of made-to-measure suits for the digital age. An online store allows users to design suits and shirts, choosing cut and fabrics that will be fitted to their measurements. With this model, users are offered a broad selection of products, but Indochino does not have to invest upfront into designs that will not sell — meaning that it can expand optionality in an efficient manner.

Taking customization a step further, companies like Roblox give their platform users the tools to build the products they desire themselves. Instead of guessing which experiences will be most engaging, the platform focuses on maximizing ease of development for users, so they can realize their dream creation, as well as inspire (and be inspired by) the creations of others. This virtuous circle has helped Roblox reach enormous scale: In 2020, more than half of U.S. children below age of 16 had played on the platform, which now boasts more than 65 million daily active users.

4. Integrate search and execution.

Finally, firms must integrate their internal processes of search and execution in order to improve the flow of knowledge across the organization, as well enhance the speed with which new offerings are brought to market.

This entails, on the one hand, feeding learnings from daily operations into the R&D process. An example of the power of a tight feedback loop is Slack, which was originally a side project of developers working on a video game who were looking to improve communication within their team. As both users and creators of the tool, they could quickly see which features worked best and what could make the software even better. When their game failed to take off, the company realized that in Slack they had built something valuable that could help other teams be more productive.

On the other hand, it means embedding components of search into execution — for example, by leveraging A/B-testing to improve the design of webpages (like Netflix or Booking.com) or by rolling out new solutions to users early to obtain feedback. Consider the successful launch of ChatGPT, which was made available for free not only to spark interest, but also to improve the technology based on user interactions.

. . .

As companies navigate our era of radical uncertainty, operations will remain crucial to competitive advantage, but in a new way – by creating strategic optionality, efficiently. This means moving from a model of thinking then doing to one of thinking while doing: Strategizing and operationalizing will become even more intertwined, with successful strategies being continuously tuned based on operational data and new operational capabilities emerging regularly to support the strategic intent.

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