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Leader's Digest - January 2023

This edition is all about the big picture.


As we move into 2023, as Europeans, we are facing substantial changes.

Changes that we have been anticipating and discussing for decades.

Changes in the world order. And changes in our everyday lives.


The Economical Macro Perspective: Europe's Downfall

By the end of 2022, Western Europe's stunning 20-year descent both in terms of economic and political relevance, has progressed to a point, that it can no longer be ignored. A recent McKinsey study shows, that while some micro-regions in Western Europe were able to keep up with the economic development of the world, not a single Western European country (except Ireland) has managed to keep up with the global pace of growth.


The 30% of countries and micro regions, where GDP per Capita increased the most in 2000-2019.

Hint: Western Europe is not part of the global growth club.


Adding to this, we are struggling with the aftermath of a global pandemic that shocked supply chains. On top of that, we just got outof a record-long era of low interest rates and rally in asset prices. And if that was not enough, there is a new war on European ground, leading to soaring energy prices.


The consequences of Europe's decline coupled with recent developments have now arrived at the European end-consumer level.

Prices for goods that are being traded on the world market have skyrocketed. For some luxury goods such as champagne, there is a shortage on the European Market because producers prioritize Asian customers.


And that doesn't even factor in, that after 15 years of global prosperity, a recession may be upon us. A scenario that many of the younger generations face for the first time.


The past three years have shown time and time again how quickly the winds can change – and how important it is to be able to react swiftly to changing circumstances.


The Technological Macro Perspective: Will AI deliver on its promises?

Artificial Intelligence has made a real, visible impact when ChatGPT was released to the public in late 2022.

There seems to be a consensus that we are now just a hairbreadth away from rendering a vast array of white-collar jobs obsolete.

Lawyers. Programmers. Large parts of HR. Many types of scholars. Writers.

To name just a few.

What's peculiar: Many knowledge-workers believe, that their jobs are immune to automation. And those, that are currently most certain of being irreplaceable, are actually most prone to being replaced by AI.

The reason for this is simple: The sheer cost associated with these specialized roles provides the highest economic incentive for automation - these specialists are typically compensated well. And they are difficult to find and to retain. This means that replacing them is targeting the highest salaries first. And, as a nice bonus on top, it reduces organizational risk to automate specialist jobs because their role cannot be taken over by any generalist.


But, let's take a step back. The looming question is still, if this is how AI adoption will actually play out. Many indicators and the trajectory of the technology say, that the big impact is imminent. But it wouldn't be wise for leaders to blindly bet the house on a "most likely" scenario.


Brain Food for Leaders - An Approach for Taming Uncertainty


If complex uncertainty is upon you, coming up with a strategy may not be as easily done as it is said. If, for example, a fundamental shift in technology such as AI is upcoming, and it's combined with macroeconomic turmoil - how can you take decisions if you don't know which one will hit first, and at what order of magnitude?


Here's on approach that works:


You probably heard of McKinsey's three horizons framework. It's a proven methodology for anticipating the organizational requirements at different stages of future growth. For example, in terms of metrics, people and capabilities.

In times of upcoming disruption, the same framework can help to identify the major steps or escalations of changes. In AI, the horizons can be defined as maturity levels or as capabilities of technology. In finance they may be represented simply by different interest base rates or more complex state-of-the-market descriptors.

Once the horizons are defined, the consequences of each stage can be anticipated. And for these, action plans can be devised.

But that is not enough.


Modelling complex future scenarios

In some cases, there are multiple upcoming disruptions. After defining the according horizons, their consequences and the required actions, things will typically get blurry. Because priorities begin to overlap. Different changes require different courses of action.

One tried-and-true solution to manage complexity and build targeted capabilities ahead of time, is scenario planning.

Depending on the specific situation, there are different approaches for scenario planning that suit different, specific requirements.

The general methodology is to first identify the key uncertainty drivers and then cluster divergent developments into a small set of overarching scenarios.

For these scenarios, strategies and courses of action can be developed, that will work in every conceivable future world.


How much does scenario planning help?

If you ask Shell - it is a key enabler for their long-term strategy! Contrary to popular belief, Shell has been a pioneer in the sustainability space and has been preparing for a world without oil and gas since the 1970's. They look into the future as far as 100 years. They achieve this through scenario planning.


How to put it all together and proactively leverage disruption

In order to prepare for the substantial upcoming changes and the pertaining uncertainty of how the world will look in the foreseeable future, the key is cluster complexity and make it manageable.


Our approach is to first cluster the uncertainty drivers into scenarios. Second, create strategies for the different scenarios. And third, explore how each strategy will play out in the different scenarios. This is an effective stress test and helps to identify the "must-bet" courses of action.

It doesn't mean, that strategies that don't perform well across all scenarios are to be dismissed. They are just as viable. However, it is critical to analyse how and why they will fail under certain circumstances and establish contingency plans.


What are possible scenarios for a future with AI?

How AI will play out for organizations is driven by two primary factors: How much AI will change the way we work, and how many white-collar jobs it will replace. This leaves us with four scenarios:


Scenario 1: AI replaces white-collar jobs and completely changes how we work

Scenario 2: AI replaces white-collar Jobs but doesn't change the way we work at all

Scenario 3: AI exponentially increases productivity but doesn't change the way we work at all

Scenario 4: AI exponentially increases productivity and completely changes how we work


In scenario 1, the corporate world is turned upside down. The only two competitive advantages that companies can actively address, lie on a spectrum. On the one end, there is cost leadership. Whoever offers the lowest prices, wins. At the other end, there is brand perception. Because AI makes all superficial brand differentiators available to all brands, there is only one factor left: How customers perceive their human interactions with brands.


In scenario 2, the individual white-collar worker's world is turned upside down. There are few or no of today's white-collar jobs left. For companies, this means that the corporate workforce is significantly reduced or even completely gone. What's left is operations. To differentiate, operational excellence is the key.


In scenario 3, the high performers of today turn into untouchable superstars. Even as of today, in the global tech market, there is a hunt for the "20x" employees. 20x employees are extraordinary software engineers that generate 20 times more output than the average programmer. And the concept is beginning to spread to other roles. In scenario 3, the gap widens exponentially and AI turns the high performing T-shaped generalists of today into the central element of organizational success.


Scenario 4 brings the most drastic changes for organizations. Due to the extreme and disproportionate rise in productivity that AI brings to start-ups and even one-man shows, they have the potential to disrupt entire industries. Because when an AI can spring up an entire corporate headquarter virtually, with the click of a button, and build a global supply chain within seconds, these small groups can leverage their talent and use it at scale. Combined with today's direct access to customers, both in B2C and in B2B, any business is at risk of disruption at any time, practically over night.


How can leaders and organizations prepare for the potential impact of AI?

The underlying question is: How can you hedge your bets?

Each of the four scenarios poses its own, unique challenges and opportunities. And each requires different conclusions for where to steer the business, which products to build to stay relevant and how to build the organization of the AI-powered future.


For all three, strategy, innovation and organization, it is imperative to consider all four possible futures and consider how they will perform in each respective scenario.

This can range from building M&A capabilities to increase flexibility and speed for acquiring emerging competitors to building an organizational for the future to attract and retain exponential performers.


Where there is disruption, there also is disproportionate potential

Whilst these developments may be seen as problematic by many, they also provide substantial opportunities for leaders to rise to the challenge and make a mark that will last.


How can leaders embrace the upcoming change?

In order to turn crisis into opportunity, two deciding factors are required when acting:

  1. Speed

  2. Adequacy

Those two, in turn, are accomplished by creating clarity and flexibility before the anticipated changes materialize.


By using scenario analysis it is possible to anticipate the landmark events that signal turning points in the market or breakthroughs in technology. Critical points, that will quickly translate into impact on business.

Contingency plans and the prerequisites for swift and decisive reactions can be created ahead of time.


The enabler for this is scenario analysis. The key to success is strategy.


However, there is hardly any other topic that is more misunderstood and misinterpreted than strategy. And most of these misinterpretations lead to a lack of clarity in the broader scheme of things and to short-term activism.

Which in turn, is represented by decisions that drive hopeless initiatives and ultimately result in sunk cost that is never to be recovered.


In order to make better decisions in complex, fast-changing environments, crafting an actual strategy is vital.


How is strategy misunderstood?

In most concepts that are labeled "strategy", the content actually is made up of tactics.


The reason: Real strategy requires abstracting from tactics and real-world matters. It requires thinking on a different level.

Not a higher level.

Not a better level.

But an abstract level.

This is a very unintuitive and unnatural way of thinking for humans.

Even well-trained, experienced strategists need to make a constant effort to avoid falling back into real-world thinking.


The consequence of misunderstood strategy

Thinking on a real-world level inadvertently leads to developing tactics instead of a strategy. This will inevitably lead to starting over from scratch every time a tactic does not show success. Which causes the development of "strategy" after "strategy" and leads to abrupt changes of direction in execution. It leads to confusion in the team and makes it difficult or even impossible to keep track of what really worked.


How do you recognize an actual strategy?

A simple test to determine if the concept at hand is truly a strategy: Consider how external circumstances may change in the future and examine whether the "strategy" must change change when external circumstances change.

If yes, then it is likely a tactic.

However, if new tactics can be derived from the concept when circumstances change, then it is likely a strategy.


If you'd like to know more about scenario analysis, strategy or how to apply them - I'm happy to learn more about your challenge and point you in the right direction! Schedule a quick call.


In 2023, be the leader you wish you had


Whether you lead a team, an organization or whether you are a thought leader: The coming year will challenge your ability to adapt and act.

And I'm sure you welcome the upcoming challenges and look forward to them. As am I, because:


With unprecedented change comes unprecedented opportunity!

I wish you clarity and determination for the upcoming year!


If you have ideas, plans or a strategy and would love to discuss it or have it challenged - I'd be excited to hear them. Drop me an e-mail and let's have a call (or a coffee)!


Have a great 2023!

Philipp


 

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