Strategic leadership is at a crossroads

This is the first in a series of four articles. The second article (The end of easy ways to finance operations) discusses the end of easy ways to finance operations. The third article discusses continued disruptions from the pandemic. The fourth article (Strategic Leadership Crossroads Part 4 -- Where we stand today) addresses what leadership need to do differently to adapt.

Today’s generation of senior executives developed their expertise, and advanced in their careers, in a world that looks very different from where we stand today. This series of four articles addresses how things have changed, where they stand today, and what leaders now need to do to enable successful strategy execution in 2025 and beyond.

How things have changed

It seems like someone is always saying “we are living in unprecedented times” or “the world of business is fundamentally different now than ever before." Most of the time, that’s just click bait and there isn’t a solid foundation for the claims.

Yet there are real challenges facing organizations today that make the job of leadership substantively different than it has been in a very long time. I’m not talking about AI and other technological changes which leaders constantly focus on and scenario plan around. If anything, we pay too much attention to the shiny objects of digital and technology change, which distracts from other challenges that can be greater threats to strategic success.

Instead, I’m focused on two key challenges that are underplayed in importance. They are:

• The end of easy ways to finance and build your operations at low cost.
• Continued disruptions from the pandemic.

Up until recently, the economic patterns and business model options that dominated for decades created relative stability in the external economic environment. That stability enabled three key “rules of the road” that guided decision making for senior leaders:

• Frontline labor cost minimization. In industries where frontline labor costs are a substantial portion of budgets, labor cost minimization often has been the guiding principle for generating cash to be invested in other parts of operations, or returned to shareholders or owners. The strategy was realized through (a) outsourcing and offshoring work wherever it was the cheapest to operate, and (b) holding back compensation increases for many frontline roles, even while people in leadership and professional/technical roles saw substantial gains in compensation.
• Global supply chain optimization. Supply chain optimization – both nationally and globally – has been a second pillar strategy for reducing operating costs. In many cases, the increased margins were generated by stretching global supply chains to the limit, and building in very tight linkages across each stage of production. Those tight linkages emphasized cost minimization through strategies like “just in time manufacturing” and generating immediate cash flow, and were the opposite of redundancy and buffer stocks. Yet, in order to succeed, those strategies needed a stable global supply chain, which is much less reliable now.
• Funding investments via cheap external financing. Cheap external financing lessened the need to cover investments from internal cash flow. This enabled leaders in industries with long product and service profitability timelines to aggressively pursue higher risk opportunities. With generationally-low interest rates, and large amounts of money available globally for investment, the internal ROI needed to set appropriate hurdle rates was at historic lows. This enabled deferring hard decisions about what to invest in, and encouraged using highly leveraged approaches to fund investments. The net effect was a ton of freedom to try lots of different things, and to try more risky ventures. In tech industries, the extraordinary payoff from scaled solutions (network effects, etc.) further justified highly risky investments because succeeding with one bet usually more than offset the costs of large numbers of misses.

Fundamental decision rules and heuristics were developed in all industries around one or more of these value drivers. Those rules and heuristics were honed over years of trial and error, through proof of concept, and then operating at scale. This created a lot of stability in the internal organizational system, which included known ways of engaging the right people for the right decisions, without having to reconvene all relevant perspectives across the enterprise. We knew the basics of how our systems operated, including what could be delegated downward and what had to be elevated to more senior levels.

Today, the factors that go into managing labor costs, deciding about investing for the future, and optimizing operations locally and globally have shifted from what dominated board rooms and C-Suites for years. Consequently, the decision rules and heuristics most senior executives developed over their careers for assessing and deciding on whether, where and how to engage labor versus capital are often no longer fit for purpose.

If you don’t pay sufficient attention to these challenges, you will undermine your ability to realize your strategic, financial and operational objectives. Dealing with them for most leaders means adapting new ways of thinking about:

• The ROI or hurdle rate used to make investment decisions
• The cost of labor, and the risks of trying to economize on how much you pay your frontline staff
• Who gets allocated what tasks, and where the work takes place
• The career options of your people
• What your people want and need: what will get them to be willing to go the extra mile to ensure your business model succeeds

A change to any one of these on its own presents challenges. The combination of two or more of them makes things even more complex. And most organizations and business models are being buffeted by at least three or four.

The challenge to traditional leadership approaches is the interdependencies among these issues. Over the recent decades, an entire generation of leaders honed their expertise in a world that was defined quite differently, and where responsibility for each of these challenges could be compartmentalized and delegated down the hierarchy. Yet the interdependencies among them means that delegation and dealing with them separately is likely to create unacceptable risks to your business model.

All of these issues are interrelated in ways that require close coordination and decision making among the senior leadership team, and across all levels of management and your frontline staff. Yet that is not the norm in most large and medium sized organizations. The status quo has to change to ensure success. It needs to be replaced by a less compartmentalized approach to sensing and decision making that more directly involves middle management and frontline staff.

The next two articles take a deep dive into the two key challenges, addressing where we came from and how things have changed. The fourth article addresses how to successfully tackle this collection of interdependent challenges. If you want to skip the details on how we got here, you can go directly to the last article.

Article #2: The end of easy ways to finance operations

Article #3: Continued disruptions from the pandemic

Article #4: Strategic Leadership Crossroads Part 4 -- Where we stand today