2021 Ahead! Are you ready?

2021 Ahead! Are you ready?

Thank god, but 2020 is nearly over. While it has been a crazy year, it has, in many ways, flown by. It seems only yesterday that we were all locked down and adjusting to a new world. However, the year is nearly over, and the world has not changed. However, we are experiencing a “K” shaped recovery. Effectively, the economy is bifurcating, and many industries and companies will end up on the downward slope.

As I have said before, I expect COVID to be with us until Q3/Q4 2021, but call me a pessimist. Even so, we should expect to be here till the end of Q2 2021. So how are you planning for 2021? What got you here won’t get you there!

This Year It Is the Accelerant Stupid

As you begin the planning cycle, consider that COVID is an accelerant. Whatever were the major trends were in your industry at the end of 2019, take them forward ten years, that is where the industry is now! So where are you and where should you be?
Concerning where you are and where you need to be when COVID is over, you need to take a realistic look at your organization and do a gap analysis on:

  • strengths and weaknesses,
  • culture and core values,
  • human and capital resources,
  • processes and systems,
  • customers and buying habits,
  • product and service delivery,
  • suppliers, and
  • competition.

With that gap analysis, you can determine where to focus your attention, so that you can emerge from COVID in a leadership position. I am not going to go through all these today, but here are few things to consider.

Culture

Culture has never been more critical. If employees adhere to the company’s core values and live its culture, then provided they know the organizational goals, they can make the right decisions. Moving decision making down to the front lines is critical during the next twelve months as the environment changes quickly. Having the decision process moving up and down the organization is a luxury few can afford.

For a great reminder, look at Turn the Ship Around by Capt. below.

Further, reading “Adaptation under Fire: How Militaries Change in Wartime,” by Lt. General David Barno and Nora Bensahel, there are several crucial lessons for management.

  • Everyone Knew the Mission, not just the task. Post World War I, decentralized, independent battlefield actions, a tradition in German military thinking, returned and became a central tenet of German army doctrine. Mission orders were regularly emphasized and practiced during peacetime training exercises.
  • Continuous Improvement. The German army established the culture of relentlessly critiquing its leaders and units’ performance in exercises and war games. Commanders and staff officers at all levels were expected to do so candidly and objectively, without regard to personal embarrassment or potential career damage. This candor extended to critiquing the performance of senior officers and higher headquarters as well. These principles made German doctrine inherently adaptable in the face of battle.
  • Changing the rules of the Game. The French army believed the next war would be the same as WWI. French interwar thinking focused primarily on leveraging defensive operations to prevail in any future conflict. Thus, they undertook no “no large-scale examination of the lessons of the last war by a significant portion of the Officers Corps.” In contrast, the Germans examined how to use new technologies to change the “Rules of the Game” and win using offensive operations. They improved their Blitzkrieg tactics that had great success in World War II.

I would bring these lessons into your organization as part of any new model to succeed. Regarding business Blitzkrieg offensives, I would look to John Boyd and his OODA Loop as a better model.

Process and Systems

As you examine your processes and systems, I would recommend asking, “If we didn’t do it this way, would we?” and “Will these systems get us to where we need to be?” In many cases, with the acceleration that has been experienced, the answer may be no. Thus, put together multifunctional teams together to examine these and use different problem-solving models, as I mentioned in “Want the Best Results, Get out of your Comfort Zone.” Some I would look to are:

  • Get out of your comfort zone. Change the environment or put limitations on the team. Use Brian Eno’s Oblique Strategies, where each card puts a constraint on the team to help too when teams are struggling to break through a problem. They are available on Amazon.
  • Break your business process down to its most simplified version, e.g., ship a product to a customer and then work on new solutions. The more you define the process in the question, the more you are tied to that system in the solution. By being most simple, you can expand the range of solutions.
  • New ideas, enforce the rule that you cannot challenge any idea until 100 are developed. This rule stops the thought process from being shut down early by those that oppose change, and often the craziest ideas come at the end, but a gem of something great.
  • Also, in examining systems, take a look at Tom Wujec’s TED Talk, “Got a Wicked Problem, First Tell Me How You Make Toast,” below.

Using these problem-solving methods, if done correctly, could provide an additional benefit, reinforcing your culture and camaraderie among your employees, which has been challenging to do during our COVID work from home.

Contact me if you need help facilitating any of these processes as you look ahead as I wish you all the best succeeding in 2022 and beyond.

Copyright (c) 2020, Marc A. Borrelli

Are We Driving (the best) Half of Our Workforce Away?

Are We Driving (the best) Half of Our Workforce Away?

Last week was the Vice Presidential debate, and I didn’t watch it. Honestly, I am on a diet, forbidding alcohol, so it was not an option. However, looking at Social Media, my understanding of the debate’s outcome was:

  • It was a traditional debate; both sides avoided questions, had their talking points, and remained calm.
  • The Fly Won
  • Senator Kamala Harris made all sorts of unpleasant faces and was a “b****.”
  • Vice President Mike Pence talked over Kamela and the female moderator, demonstrating male sexism.

As I didn’t watch it, I have no idea who won; however, many women saw Vice President Pence’s interruptions of Senator Harris sexist norms. Simultaneously, various news outlets reported that Vice President Pence did a great job among many of the President’s supporters. This data ties in with a fascinating paper just released, “Status threat, not economic hardship, explains the 2016 presidential vote,” by Diana C. Mutz, at the University of Pennsylvania. According to Professor Mutz, “Candidate preferences in 2016 reflected increasing anxiety among high-status groups rather than complaints about past treatment among low-status groups.” Thus white males continue to be threatened by other groups diminishing their privilege and claiming to suffer discrimination. 

To those who are up in arms so far claiming there is no sexism in the U.S., I would recommend looking at the “Am I the Asshole?” forum on Reddit. The AITA forum provides a thorough look at gender inequality and the degree of sexism in our society. Once you have read this, reflect on what it means for your wife, daughter, and mother. We need to face it and remove it. Adopting the Administration’s stance with its executive order’s stated goal is “to combat offensive, and anti-American race and sex stereotyping and scapegoating,” is just doing more damage and denying reality.

However, being sexist in business and creating an unwelcoming environment for women will not attract more women into the business world. As I discussed in a prior blog post, we need them in business, and we need women more at higher levels of the organization. The data shows that:

  • Companies with female CFOs improved their earnings;
  • Companies with female CIOs improved their investment returns; and 
  • Companies with women on their boards performed better.

Furthermore, some claim that countries with women leaders have performed better during COVID, but there is more to that discussion. While this may be a correlation and not causality, it is worth noting. Women also are better at today’s’ leadership requirements, e.g., working in groups and showing empathy. As I said last week, most of our graduates from undergraduate, law, and medical schools are women; to drive them away is just putting us at a global disadvantage.

So, given the above, having more high performing women should put you at a competitive advantage. It is time for what I call the “Moneyball” approach. There is a market of high performing employees who are not valued as highly by your competition. The key is to provide an attractive work environment for them, design compensation to meet their needs, e.g., flexible time, and seek out to recruit them. Building an organization that attracts and retains high performing women at all levels will also attract other women and will provide you with a competitive advantage. We all need one of those in these times.

Copyright (c) 2020, Marc A. Borrelli

COVID continues to accelerate changes in business models

COVID continues to accelerate changes in business models

As I have said repeatedly, COVID is accelerating change for all businesses, whether or not they recognize it.  A recent survey by the IBM Institute of Business Value concluded that “executives must accept that pandemic-induced changes in strategy, management, operations, and budgetary priorities are here to stay.” I see three significant shifts taking place.

  1. How CEOs Lead
  2. Changes in priorities
  3. Changes in business models.

How CEOs Lead

  1. Unlocking bolder (“10x”) aspirations. COVID caused most CEOs to question their assumptions about the pace and magnitude change attainable. The realization that a change in mindset can dramatically affect goal setting and the operating model, many CEOs are effecting changes in a few months that companies previously assumed would take years. The speed for many of these changes is down to employees working longer and harder; however, many CEOs also recognize that many employees have more time available with the stop in travel.
  2. Elevating their “to be” list to the same level as “to do” in their operating models. With COVID, leadership has to change. CEOs’ priorities were setting up strategy, culture, and making people decisions at regular times. However, now it about maintaining morale and ensuring employees are prepared for whatever may come in the face of uncertainty. Thus, leaders are changing how they and their senior management team show up. Leaders now need to be empathetic and offer words of encouragement.  According to Lance Fritz, CEO of Union Pacific, “[Employees] need to see that their leadership is vulnerable, empathetic, and making decisions in accordance with our values, which I’d better be the living proof of.”
  3. Fully embracing stakeholder capitalism. While I have also previously discussed embracing stakeholder capitalism; however, COVID has accelerated this trend as it has emphatically affirmed the interconnection and interdependence of businesses with their full range of stakeholders. CEOs are confronting tough decisions with profound human consequences every day. CEOs have realized that their choices are affecting their employees, communities, and suppliers. How they behave will have a long term effect on their business, especially as 87 percent of customers say that they will purchase from companies that support what they care about.
  4. Harnessing the full power of their CEO peer networks. As a result of COVID, CEOs talk to one another much more and at a much greater rate. The belief is, “Let’s learn from each other. Let’s hold hands. Let’s commiserate.” They are achieving this through informal networks and groups like Vistage. The power of a Peer group where you can be vulnerable and get input into these hard decisions is immense. CEOs don’t have to feel like they are carrying all the weight themselves. During the Great Recession, Vistage member companies outperformed non-Vistage member companies [. ]

Changes in Priorities

Not only are CEOs changing the way they lead, but companies are finding that their priorities have changed dramatically! According to the recent IBM survey, companies will focus more inwardly over the next two years. Their top priorities now are:

87% Cost Management
87% Enterprise Agility
86% Cash Flow and Liquidity Management
84% Customer Experience Management
76% Cybersecurity
75% I.T. Resiliency
65% IoT, Cloud and Mobility
58% New Product Development
52% New Market Entry

 

As companies move away from just-in-time delivery, 40% of those surveyed identified the need for space capacity in their supply chains. However, about 60% said they were accelerating their organizations’ digital transformation, and three-quarters plan on building more robust I.T. capabilities.

Changes in Business Models

Finally, many companies have also changed their business models to address market changes resulting from COVID, including some clients. Some of the creative pivots are:

  • Mandarin Oriental. As mentioned last week, many high-end hotel chains are supplying alternative residences for the wealthy. MO has not only done that; it seeks to deliver the luxury experience where you are rather than at a destination. The company promotes “Staycations at M.O.” at its properties if there is one in your city. These staycations offer early check-in, late check-out, a free bottle of wine, and credits for other purchases. However, if you don’t want to leave you home, MO says, “Just call room service.” They will deliver food, items from the cake shop, supplies from the spa, or other merchandise to your house.
  • JD.com. For producers of alcoholic beverages, COVID was a considerable blow. During the Chinese shutdown, its e-commerce giant, JD.com, go D.J.s and performers to stage three hour live show online. During these shows, viewers could purchase alcoholic beverages from Rémy Martin to Budweiser and have it delivered to their doors with a single click. As a result, whiskey sales from “a single partner brand” increased eightfold during a day with the show. As a result, JD.com plans to continue its live music events but to expand the products it offers.
  • David Dodge. As auto sales plunged nationwide, according to the Washington Post reports David Dodge in Glen Mills, Pa., the auto dealership sold more cars in July than in any previous month in its 15-year existence. David Kelleher, David Dodge’s owner, pivoted to meet the changing market. The company created a business development center to consolidate online leads and located it prominently just inside the front door. Salespeople now work phones, email, texts, and Zoom. They are using FaceTime to accompany customers on test drives. For those customers who want to stay socially distant, David Dodge allows the whole process online, and they deliver the vehicle to the customer’s home. Kelleher and his top salesperson, Mike McVeigh, doesn’t expect to return to the old ways once COVID is behind them.
  • Chipotle Mexican Grill. For a company that had been struggling with several crises over the last few years, when COVID hit, Chipotle new it had to change its business model to survive. The model was for pickup orders to be its lifeline. The company added “digital kitchens,” which handle online orders for pickup, at those restaurants that didn’t already have them, to enable this pivot. In May, Chipotle announced it would add 8,000 new workers to meet the growing demand. In July, it needed to hire 10,000 more. The company has aggressively added “Chipotlanes,” drive-thru lanes exclusively for picking up digital orders. That business model requires more employees than traditional stores—hence all that hiring is much more profitable.

Cause for Concern

All these changes are requiring more from employees in terms of working longer and harder. As I have noted on numerous occasions, empathy is needed, and burnout is a huge issue. What is worrying is that IBM’s research, drawing from other surveys that included employees, found a disturbing wide gap between “employers significantly overestimating the effectiveness of their support and training efforts” and how employees feel about these measures.

Source: IBM Institute of Business Value

As CEOs and leaders, it is critical that as you face COVID and plan for changes in leadership style, changes in priorities, and pivots in your business model, you need to do more for your employees. They are scared, uncertain, working from with kids doing school virtually, potentially overwhelming debt (see below), and they need management to support them. Those leaders who don’t rise to this challenge will see the good employees leave and create a reputation stain that could last a generation.

Are we losing (the best) half of our workers?

Are we losing (the best) half of our workers?

The job numbers released last week confirmed what we heard for some time. Women are leaving the workforce in record numbers. According to the jobs report, 865,000 women over 20 dropped out of the American workforce compared with 216,000 men in the same age group. Thus, four times the number of women are leaving the labor market compared to men. Women are bearing the brunt of parenting and running a household while also working a job during the pandemic. The consensus is that even though men are doing more than they’ve perhaps done in any other generation, it’s still not half. The Labor Department finds that married mothers do almost double the household chores and parenting as married fathers.

This environment has created a pressure cooker environment in many households, and it has come to a head with the start of the new school year. As many children stay home instead of returning to school, many women are making the difficult decision to drop out of the workforce altogether. The child care crisis is wreaking havoc on women’s employment.

The new school year has brought it to a head with many children staying home instead of returning to their classrooms in person. And it is forcing many women to make a difficult choice and drop out of the workforce altogether. At the end of 2019, women held just over half of all payroll jobs for only the second time in history. Women now account for 49.7% of the workforce.

This departure from the workforce isn’t just an issue for women, it’s an issue for families, the government, and the economy because women employment it drives GDP.

For women. The longer women are out of the workforce, the harder it is to get back in. Every month and year that a woman is out of the labor force leads to a decline in skills, behind on the latest technology, and increasing the wage gap between others who have been in the workforce.

For the economy. Women are critical contributors to household income. According to many, family finances are going to deteriorate in the immediate term.

For the government. If women leave the labor force, there is a risk that the country will take a step back in gender dynamics, both in the workplace and at home. It will reduce the number of women seeking to enter the workforce in the future, and many will leave due to harmful gender dynamics.

The country’s issue is that today more women (72.5%) are graduating from college than men (68.5%). The effect of this is rippling through the economy; more women (50.5%) are graduating from medical school than men (49.4%), and more women (52.4%) are graduating from ABA-approved law schools than men (47.51%). As a result, we are sacrificing our best and brightest.

Not only that, studies show that once women land leadership positions, they excel, often surpassing men, because they have developed soft skills necessary for effective leadership. Females CFO seems to correlate with high income, female CIOs lead to better investment decisions. Traits like empathy, communication, and listening are qualities that serve women well when in management positions.

Getting women back to work requires long-term thinking about the types of jobs where women want to work. However, according to the Harvard Business Review, misogyny is rampant in the restaurant industry, and we have all seen the stories of its extent in the news and technology industries. Providing opportunities for women in STEM fields will help close the gap and provide more stable employment opportunities in the future. However, individual attitudes will have change.

What does this mean for you? I think the challenge for HR and CEOs going forward is to find a way to provide women a way to keep working and reduce the stress they face at home or offer them a path back in the organization and reclaim their position on the corporate ladder. Those companies that can do this effectively will attract great resources and enable them to get ahead.

Looking at the situation reminds me of Bill Gates’ speech in Saudi Arabia. The audience was segregated by gender, with a large panel dividing the fully veiled women from the men. A participant asked whether the country could realistically become “one of the most competitive economies by 2010.” Gates replied, “Well if you’re not fully utilizing half the talent in the country, you’re not going to get too close to the top.” If the U.S. wants to keep to the top, we have to find a better way to utilize the excellent talent pool we have and not throw a lot of it away.

The stimulus has ended; what does that mean for the economy?

The stimulus has ended; what does that mean for the economy?

The stimulus from the CARES Act has ended, and so far, Congress cannot find a way to replace it. Democrats in the House have passed a bill, but Senate Republicans, lacking a unified approach, have waited until the end of the summer to propose a plan. Currently, Secretary Steven Mnuchin is negotiating with House Speaker Nancy Pelosi to find a compromise. So, what?

Well, without the stimulus, unemployment is expected to rise. Last week’s Bureau of Labor’s jobs report showed that the job gains from April slowed dramatically, adding just 661,000 jobs. The unemployment rate now stands at 7.9%, down from 14.7% in April. Currently, approximately 25 million people rely on jobless benefits to get by, and the outlook is worse. Last week, the Walt Disney Co. said it would lay off 28,000 people, and American Airlines Group Inc. and United Airlines Holdings Inc. announced 32,000 job cuts. These are just the massive layoffs; however, lots of smaller companies are laying off workers.

So far, most of the damage has been to low-income workers, but the pain is moving up the wage scale. A recent Wall Street Journal article pointed to a couple in New York who earned about $175,000, enough to cover the mortgage, two car leases, student loans, credit cards, and assorted costs of raising two daughters in the New York City suburbs. However, since COVID hit shutting down the courts, one of them, a lawyer, is unable to work, and the family is running low on savings. They can’t keep up with $9,000 in monthly debt payments, including mortgage installments.

In the U.S., consumer spending accounts for about two-thirds of gross domestic product, and as more people are unemployed, many will deplete their saving and stop spending. A fall in consumer spending affects everyone as we are all linked in this economy. If consumer spending falls, B2C companies suffer and lay off more people and stop buying from B2B companies, so the cycle continues. No one is immune.

While many have pointed to fall credit card debt levels during COVID, more worrying is the number of people behind on their mortgages, rent, and utilities. As we head into winter, with many facing evictions, no heat or water, the prospects are even worse. As some might recall from their economics class, the marginal propensity to consume is greater for those in lower-income brackets. Therefore, to boost the economy, middle- and lower-income Americans need to be able to consume. While the wealthy will spend some of the benefits they receive, they will spend far less, so the positive impact on the economy is limited.

Many fiscal conservatives have said that they are now concerned about the deficit and deterring people from working. It is nice to see they have finally found some courage; however, it seems more that they object to anyone they believe doesn’t deserve a benefit getting one. There was a deafening silence from this crowd with the passage of The Tax Cuts and Jobs Act (TCJA) in December 2017, which provided benefits to companies and the wealthy. Many in the Administration and other conservatives claimed that the TCJA would pay for itself. Unfortunately, not! The deficit increased since its passing, and Bloomberg’s analysis showed that most corporate tax cuts went for buy back shares. In my opinion, this spending on buyback is the leading cause of the stock market’s continued rise.

While some will claim that increases income for everyone, only about 10% of the population owns shares outside of a retirement plan. So, the impact of the rising market does little for overall consumption and the economy.

During the Great Recession, Congress failed to provide enough stimulus for a full recovery. It is in danger of doing the same again, and this time I fear the consequences will be far worse. I would advise all CEOs to what cash levels and liquidity, but at the same time, we need people spending to grow out of this hole.

Are We At the Top?

Are We At the Top?

The stock market has corrected some, but things are still frothy in the financial world. Unfortunately, when things are frothy, the economic forces of gravity come into play at some point, and the pain ensures. Why do I think things are at the top?

I believe t is several things. First, the Fed has flooded the economy with funds through the CARES Act, the Main Street Lending Program, to name a few. The money has to go somewhere, and there is FOMO – Fear of Missing Out – so everyone is piling into the leading tech stocks. Further evidence is:

1. Junk bond debt issues, as shown above. The demand for yield is high as government debt, and AAA debt is offering such low yields. Thus record amounts of questionable paper have been issued to meet this demand.

2. SPACs. Look no further. Everyone and their dog is jumping into the SPAC space. These blank-check companies have raised about $41 billion, year to date, which is more than the last ten years combined, and Since July 1, about $29 billion. Currently, I understand that over 40 SPACs are looking for merger partners. As I have mentioned before, SPACs tend to overpay, reducing the returns for investors. Given that there are so many buyers right now, we can expect the prices of merger partners to rise and the quality to fall. Of course, the people who make the real money buy the founders’ shares and get the “promote.” Take the case of Alec Gores, who put just $25,000 into his SPAC when went public in January. Once their acquisition is closed, their 0.6% stake will be worth $96 million. Not bad work if you can get it. However, if the founders are doing so well, my advice is to stay away. The SEC is concerned that investors don’t understand how the incentives relate to pay in a $PAC compared to a traditional IPO. There may be regulation.

3. Is Palantir the latest WeWork? According to the Wall Street Journal, bankers have told investors that shares may start trading at $10, valuing Palantir at almost $22 billion when it goes public through a direct listing on September 30. Valued at $20 billion in 2015, Palantir has seen some increase in value. However, in the private markets, it is trading below $20 billion, and this month PitchBook valued Palantir at just $8.8 billion. As I mentioned last week, Scott Galloway in PalanThiel: The Uncola pointed out that “But at 17 years of age, and after raising $3 billion, the ‘start-up’ has never made money. In 2019, Palantir lost $580 million on approximately $740 million in revenues. The idiot client they serve (U.S. government) lost 25 cents on the dollar ($1 trillion deficit vs. $3.5 trillion in revenues) in 2019 vs. 78 cents at Palantir. The firm spent $911 million in marketing over the last 24 months, roughly half of what Tide detergent spent over the same period. The firm has 125 clients, 3 of them accounting for 28% of revenues. Palantir feels more like a services firm, with tech at its core (e.g., Accenture), but one that, unlike a services firm, is massively unprofitable.” Driving all that success if CEO Alexandar Karp, who paid himself $12 million. If the market is valuing this at $20 billion, we must be close to the top!

 

The Housing Market

For those that haven’t noticed, the housing market is booming. Many of us stuck inside have realized that we don’t like our homes are moving. In August, new-home sales increased at the fastest rate since 2006. All this demand is causing a supply and demand problem driving up prices.

However, not for long. As I predicted in April, many people are straining to pay their mortgages. Industry analyst Keith Jurow expects “several million” people will have gone nine months without making a payment when the Federal Housing Finance Agency’s foreclosure and eviction moratorium expires at the end of the year. In July, 17% of FHA-insured mortgages were delinquent, according to the Department of Housing and Urban Development. In NYC, 27.2% of mortgages were delinquent in July.

With so much new supply coming online soon, prices may drop, and those that bought now may find they purchased at the top.