The Strategy Wall || 30th Edition

WAZIR - THE STRATEGY AND CONSULTING CLUB OF IIM ROHTAK

“Strategy is not the consequence of planning, but the opposite: its starting point."

—

Henry Mintzberg

STRATEGY CONSULTING NEEDS TO CHANGE AND THIS IS HOW

BY JEROEN KRAAIJENBRINK,

As a November 2019 article in The Economist suggests, strategy consulting is under significant pressure. Whereas it used to be one of the main pillars of the large consulting firms McKinsey & Company, the Boston Consulting Group, Bain & Company and so on it has become a marginal activity now, accounting for about just a tenth of their revenues As the article explains, clients no longer want legions of consultants to provide them with advice. Instead they want them to put products and technologies in place that keep them ahead of the competition.

Lack of Relevance or Wrong Approach

The observations in The Economist article may suggest two things: that strategy consulting is no longer relevant or that it isn’t done the right way While some may argue for the first, it is clearly the second which is going on. For full disclosure: part of my job is being be a strategy consultant, meaning that a significant part of the work I do, is strategy consulting While this used to be something to be proud and giving a bit of status, it seems to have gradually turned into something to almost feel embarrassed about I know of colleagues who avoid the word strategy altogether because they feel it makes them look old-fashioned or incapable of doing anything concrete that really helps organizations

In its critical attitude towards strategy consulting and management consulting more generally, the recent article in The Economist doesn’t stand in isolation In fact, there is a continuous stream of critiques on which it stands Illustrative are books about consulting, baring titles such as The Witch Doctors (Micklethwait & Wooldridge, 1996),

Dangerous Company (O'Shea & Madigan, 1998) and Consulting Demons (Pinault, 2009). As you may infer from these titles, these books are not exactly positive about consulting

At the same time, the global strategy consulting industry has been consistently growing over the past decades and is expected to grow substantially further from $44 billion in 2017 to $91 billion by 2025 This adds up to an annual compound growth rate of about 10% and a doubling in volume

This means that, on the one hand, strategy consulting is heavily criticized while on the other hand, it is a market that is still growing substantially each year In combination, these facts suggest that strategy consulting is still very relevant and also perceived as relevant by clients to the extent that they keep on paying significant amounts of money for it. But the facts also show that something is wrong about the way strategy consulting is done The sheer volume of critiques, as well as the tone and broad-fronted attack on consulting that the article and the aforementioned books represent, suggest a deep dissatisfaction with strategy consulting

Whole-Brain, Whole-Person Consulting

This means change is needed. And for finding directions for what kind of change, we don’t have to look far We can just look at what the consulting firms are saying themselves As I summarized in two earlier articles, reports by Accenture and McKinsey plea for a whole-brain, whole-person

approach to leadership. Following their own suggestions, this means we also need whole-brain, whole-person strategy consulting

Rooted in engineering, current strategy consulting is the pinnacle of left-brain thinking It is rational-analytic, focused on decomposing problems into their finest details and then think up solutions of which the client can be convinced to adopt them This is most evident from McKinsey’s approach because it is the best documented. But other consultancies apply it too.

Practiced as such, strategy consulting reflects the way we traditionally think about strategy in general. As we find in our textbooks, strategy is also largely a rational-analytic activity in which problems are analyzed with frameworks and solutions are thought up, which are then supposed to be adopted and executed by the organization But, as argued earlier in an article on The Ten Myths of Strategy, strategy is not like that.

If strategy consulting follows up on the consultancies’ own advice, then a whole-brain, whole-person approach is needed This means first an approach in which also the

right side of the brain plays a significant role This implies there is significant attention to intuition, holistic judgment, creativity, empathy and self-awareness

It also means that not just the brain, but everything else that makes us a person is involved This includes our emotions and conscience as well as our ability to actually do things and create things rather than merely think and talk.

Of course, practically speaking, strategy consulting has always been a whole-brain, whole-person activity. No person can switch off the right side of their brain or completely ignore their emotions or conscience After all, we are all human beings, even strategy consultants. But the methods and techniques of strategy consulting have always had a strong bias towards merely left-brain thinking. Once these open up to whole-brain, wholeperson approaches, strategy consulting can address the critiques it receives, regain its relevance and make a truly positive impact on organizations. So, time for consultancies to practice what they preach

HALF OF COMPANIES LACK THE BASICS FOR DATA RESILIENCE

Even as data becomes essential to companies navigating market disruption, more than half of companies lack the basic data resilience needed to enable accessing the right data at the right moment A skills shortage is not helping matters, either, with more than one-in-seven organisations complaining of a lack of data literacy among their organisation

In a new age gold rush, nearly half of organisations today apply data – and big data – for insights and decisionmaking; manifesting in the creation of data ecosystems worth billions of euros Across every sector, public and private organisations are leveraging data to enhance their customer experience, forge new relationships with customers, and bolster their operations

However, a new report from BearingPoint suggests that many companies still struggle to ensure data resilience. The company’s analysis of over 5,000 client projects reveals that while 20% of organisations identify ensuring the availability of relevant data to be a top challenge for the coming three years, a majority of 58% are not resilient

The finding come back to haunt organisations who also identified being able to transform quickly enough as a top challenge – a 25% chunk, who will possibly struggle if unable to source the right data at the right time

According to BearingPoint’s research, data resilience is underpinned by five key dimensions. These are understanding the data ecosystem; empowering people for change; aligning data centricity with business outcomes; using technology to improve agility; and building effective governance

Jan Henderyckx, a partner at BearingPoint noted, “Our research shows companies will only survive and thrive if they adopt a rounded, well-balanced and progressive approach across five fronts. Only by delivering on all of them, your organisation will become resilient to change As all firms, in all sectors must understand that data needs to be at the heart of their business strategy.”

When it comes to meeting those goals, however, many firms seem to lack many of the key skills necessary. Amid a widely reported digital talent shortage, 65% of companies contend with poor data literacy, and 56% face cultural challenges to change from employees resistant to change. Meanwhile, 49% stated they either lacked the relevant skills or staff for the job – meaning their data and analytics teams may be hamstrung before even trying to gain resilience.

Addressing those issues cannot be avoided, though, as the importance of data for businesses is only set to grow. Henderyckx added: “We are living in a world in which it is increasingly more important to be able to adapt to the changing environment.

Your decisions should be based on facts rather than assumptions. Companies that put data centricity at the core of their strategy are going to create value Especially if they apply a comprehensive approach to all dimensions that impact the implementation of a data strategy.”

BLACK SWANS, GRAY RHINOS, AND SILVER LININGS: ANTICIPATING GEOPOLITICAL RISKS (AND OPENINGS)

BY ANDREW GRANT, ZIAD HAIDER, AND ANKE RAUFUSS

Russia’s invasion of Ukraine in February 2022 triggered more than 1,000 companies to curtail their operations in the world’s 11th biggest economy, revealing an imperative for global firms to bolster their ability to anticipate geopolitical risk and build resilience.

The global order still reels from disruptions related to the war in Ukraine, including those in energy, food security, supply chains, and more A central concern among global CEOs who speak with us is whether and how they will contend with additional geopolitical ruptures when they occur As Japan’s prime minister, Fumio Kishida, stated at the 2022 Shangri-La Dialogue global security forum, “Ukraine today may be East Asia tomorrow.”

In between navigating the fallout from Europe and unfolding strategic competition in Asia, multinational corporations must also manage a host of long-tail political risks and conflicts across other geographies, including Africa and South Asia. Even as boards and CEOs work to build capabilities in managing such risks and developing geopolitical resilience, the imperative to lift one’s gaze and look around the corner has become key to strategy and performance Scenario planning is squarely back

In the extensive literature on scenario planning, notably Peter Schwartz’s The Art of the Long View, a core point is the need to develop frameworks, with colorful and gripping language, that help leaders “reperceive” the future and unlock strategic foresight

To facilitate such reperceiving, we outline a framework for geopolitical scenario planning that categorizes geopolitical events in three ways: black swans, gray rhinos, and silver linings

Evolving from scanning to planning across these categories, leaders should develop lookouts as an earlywarning system and full-scale contingency plans for a core subset of geopolitical risks.

The concepts “black swan” and “gray rhino” are widely known and intuitively understood by many corporate leaders we have engaged. We seek to go further, offering an integrated, broadly additive framework for global companies that seek to distill geopolitical complexity and to structure their strategic conversations amid a fragmenting global order

Reperceiving with multiple lenses

In scanning for scenarios, organizations must first purposefully cast a wide net, rounding out their thinking with an appropriate mixture of internal and external perspectives

Internal perspectives may combine expertise in the organization from country team leadership with that from internal public affairs, legal, risk, and security professionals. External perspectives may range from retaining a political risk advisory group that has an arm’s-length view; to scanning public source materials, such as the World Economic Forum’s Global Risk Report or governmental sources such as the US National Intelligence Council’s Global Trends and similar strategic assessments commissioned by EU institutions; to leveraging insights from academic, policy, media, and nonprofit arenas

The resulting scenarios can be viewed through three lenses:

Black swans

Black swans are commonly known as unpredictable events with high impact Notwithstanding Russia’s overt military buildup in 2021, its proceeding to a fullscale invasion of Ukraine was arguably the core case study in 2022 While black swans are inherently unpredictable, pushing one’s thinking to anticipate as wide a range of scenarios as possible is critical for sound planning and preparedness. Potential black swans could run the gamut from the political implosion of a major economy; the forcible removal of a leader or a government; a significant regional military conflict; an unprecedented climate event that results in mass casualties, waves of migration, and famine; to another pandemic

Gray rhinos

In contrast to the unpredictable nature of black swans, gray rhinos are probable events with high impact. We see these risks out there in the distance, but we don’t clearly perceive their full dimensions. We’re sure they will charge at us, causing material damage, but we don’t know precisely when or how much. Organizations must ensure that they have a framework in place to clear out of the way of gray rhinos when they charge. Sometimes, multiple gray rhinos may stampede simultaneously, resulting in an even more appropriately

termed “crash” of rhinos (as a group of rhinos is called)

Among the gray rhinos on the global radar is the risk of regional conflicts in Asia escalating amid broader strategic competition Other imminently charging rhinos may include a major escalation in the Middle East, with cooling relationships and international and domestic pressure against specific regimes that cause an uptick in direct or proxy conflict.

Silver linings

In the maelstrom of geopolitical risks, organizations must step back and calmly assess openings and opportunities that allow them to operate in a safe zone and potentially garner competitive advantage. These “silver linings,” as we call them, can be fragile and readily blurred out by storm clouds, and yet they are within the reach of leaders who exhibit strategic courage amid the volatility.

For example, one opening around Russia’s invasion of Ukraine has been a material disruption of Europe’s energy market and the opportunity for an accelerated renewable-energy transition, whereby Europe can potentially lead the world Another silver lining when geopolitical tensions constrain supply chains is the emergence of pivot geographies, such as India and Vietnam, as additional opportunities for investment amid “friendshoring.”

From scanning to planning

A strategic conversation about black swans, gray rhinos, and silver linings should lead to an aligned understanding within an organization of which two to three scenarios have the most material effect on an organization. Teams supporting leadership should develop a set of clear lookouts for tracking the risk scenarios and trends, whether in a positive or a negative direction. The lookouts might include key economic, political, military, and regulatory developments

Equipped with a targeted set of scenarios with key lookouts, we recommend narrowing down to one to two scenarios that fuse thought with action Specifically, the organization should engage in active contingency planning on a host of dimensions that include data and networks, internet protocols, people, partnerships,

repatriation of funds, and security

Shape or be shaped?

Anticipating the environment that can shape an organization is critical, but many leaders we speak with also think about defining their role in shaping the geopolitical environment around them

Indeed, CEOs increasingly expect to take positions on geopolitical matters According to the 2022 Edelman Trust Barometer Special Report: The Geopolitical Business, 59 percent of respondents state that addressing geopolitics is a top priority for business. The point, however, is not simply about taking a stand Leaders within multinational corporations also are reflecting on appropriate ways to inform policy in a more polarized geopolitical environment

The CEO of a leading Asian company, for example, shared with us how his country’s national-security leadership invited him to a briefing where the central point of discussion was “which country poses the biggest threat” to their own country. He shared his bemusement at the question, saying “Armies are always searching for enemies,” but also reflected philosophically on his own role, as one of his country’s top business leaders, in informing the discussion.

As such, an organization should also consider how to employ its voice, whether through its board, CEO, public or government affairs, or business associations and how best to inform policy makers about diligently thinking through the potential consequences of their decisions.

"All the notions we thought solid, all that made for stability in international relations, all that made for regularity in the economy in a word, all that tended happily to limit the uncertainty of the morrow, all that gave nations and individuals some confidence in the morrow . . . all this seems badly compromised. Never has humanity combined so much power with so much disorder, so much knowledge with so much

uncertainty

Paul Valéry, “Historical Fact” (1932)

These words, penned in an essay nearly a century ago by French poet Paul Valéry (and excerpted from the opening of The Art of the Long View), resonate today. Valéry was associated with the Symbolist movement in poetry, a group of late 19th-century French writers who favored imagination over realism in poetry in order to access “greater truths ”

In our era of volatility, the need for board-level strategic conversations on geopolitical risk is vital These discussions should channel all participants’ imagination and analysis.

Doing so, of course, requires not just a compelling framework. It also demands professionals who have the trust of the leadership and a leadership team with a common understanding of the geopolitical context This understanding, refreshed through briefings and policy papers, enables the decision makers to think broadly, creatively, and deliberatively

THE ERP PLATFORM PLAY: CHEAPER, FASTER, BETTER

BY OLIVER BOSSERT, FLORIAN NOCKER, CHRISTOPH SCHREY, AND MURAT SOGANCI

Upgrading an enterprise resource planning (ERP) system is one of the biggest and most expensive decisions IT leaders will make It can often cost as much as $500 million, last several years, and determine important elements of the business operating model for the next decade

Before jumping into that decision, CIOs could benefit from understanding how tech companies approach changes to their system landscape. These tech companies value speed, flexibility, and scale to create value for the business That means they make technology decisions that maximize freedom and independence for their developers by reducing system dependencies and complexities As we laid out in our article “The platform play,” digital-native companies deliver that independence by organizing their tech around modular products and platforms that run as a service This approach enables teams to make the best decisions for the product or platform they manage

Contrast that approach with what happens at many incumbents, which labor under enterprise-wide systems where complex dependencies make independent decision making virtually impossible.

Consider the case of a large pharma company that used a single ERP system to provide distribution and warehousing despite the fact that distribution was a strong competitive advantage and needed to be

flexible and responsive, while warehouse management was a basic commodity The tight coupling between these two business domains in the ERP system meant that the changes needed in distribution were limited by system dependencies with warehouse management This reality is a significant contributor to the accumulated technical debt

It doesn’t need to be that way. By focusing ERP upgrade efforts on the modules within the system rather than on the entire system and by understanding what matters for driving business value, CIOs can reduce dependencies, spend less, get more, cut back risk, and do it faster

From ERP-centered thinking to a modern platform organization

The first lesson to learn from digital natives is that they set strategy first and design their platform architecture second With the strategy clear (for example, increase the number of new customers and reduce customer churn), they follow a relentless logic in identifying “products,” such as customer journeys (buy the product, find a store, get info on a product), that can drive the strategy.

With those in place, they then identify the platforms (such as user authentication and product comparison) needed to deliver those products. For each of those platforms, companies then set up a team that is in charge of the platform’s outcome and performance and will ultimately also decide if it uses functionality that

already exists in the ERP system

This product and platform approach underscores two clear principles: first, treat the ERP system as a sum of capabilities rather than a monolithic stack, and second, the product drives the decision about what parts of the ERP system to use, not the other way around

Taking the step toward a product and platform operating model is significant and requires a mindset shift for most IT organizations. Traditionally, companies have been focused on buying ERP solutions and managing the vendor and the system integrator to do the customizations While this is still good enough for areas where one relies mostly on standard processes, it is not sufficient for areas where companies require something tailored to their needs Most ERP vendors understand this and have themselves started to push for more modularity and a lean core In the meantime, legacy IT has typically addressed the issue by building on top of the ERP system, leading to significant complexity in managing any changes

The implication of this shift is that IT will need to be more hands-on in managing their ERP systems. This means developing deep engineering skills, actively managing system complexities and dependencies, and working closely with the business to ensure changes generate business value

Determine what parts of the ERP system add value

With clarity around the strategy and a focus on a product and platform operating model, the next crucial step is to determine which elements of the ERP system directly support the business’s strategy. At a high level, this value analysis divides the functions and capabilities within the ERP system into two buckets:

In one bucket are the differentiating elements that deliver value to the business For a retailer that wants to provide the fastest delivery, for example, that would mean prioritizing fulfillment and logistics capabilities In many cases, those capabilities are delivered through microservices and are fully independent of the ERP system

In the other bucket are commodity functions that are not core to driving competitive advantage In many cases, these functions include legal or property management The ERP advantages in providing stability, tracking, and capabilities-management functionality are sufficient. If industry standards are applied, the company is often benefiting from innovations of the vendor and creates value without deviation from the standard. Any customizations created by IT need to contribute enough value to offset the work needed to maintain them

The result of this sorting exercise is a capability map of differentiating and non-differentiating ERP capabilities and how they are organized (see interactive). While most of the classifications can be made at the highest level, there are some areas that have to be split up even further. As shown in the interactive, for example, the majority of assortment management is considered a commodity function, but the demand forecasting is where this company wants to differentiate itself from its competition.

SUCCESS IN THE M&A REBOUND: RIDING THE COMING WAVE OF UPSTREAM DEALS

BY ROBERT BELANGER, JEREMY BROWN, AND TOM GRACE

The oil and gas industry has a long and storied history of M&A transactions and strategic deal making. Inorganic investment decisions have shaped the portfolios of industry players and determined the ultimate success and long-term growth trajectories of these companies. With the industry on the precipice of historically high cash flows, we expect another wave of M&A to dominate near-term actions.

This article explores the cash-flow landscape and major cash-flow deployment levers and shows how the stage has been set for an upstream M&A wave We introduce the M&A strategies driving consolidation and what it takes to succeed in the coming M&A wave.

Cash flow is king

Long gone are the days of “growth at all costs” with expanding capital budgets, acreage acquisition campaigns, and associated negative cash-flow realizations funded by inexpensive debt.1 Over the past few years, investor sentiment has driven the oil and gas industry to practice capital discipline and prioritize financial resiliency and cash-flow generation above growth When prices surged in 2022, upstream companies maintained their strategy of “no-to-low” capital growth. This focus on capital discipline and cash generation has resulted in record cash flows

We examined historical cash flows and projected operational and financial performance for 25 leading North American exploration and production companies (E&Ps), and the results are impressive: operating free cash flows (FCF) reached approximately $85 billion in 2022, with a year-end cash balance of $70 billion to $100 billion (Exhibit 1) 3 This industry turnaround is dramatic, given negative cash generation the previous three years Free cash flows are projected to remain high, with levels of between $70 billion and $90 billion in 2023 and between $50 billion and $70 billion for the following four years even if oil prices drop to around $65 to $70 per barrel over the coming years

Making all the right moves

. . .

until there’s only one option left

Operators are taking advantage of their high cash flows by pulling all the traditional levers of capital management, shoring up their balance sheets, and returning value to shareholders (Exhibit 2). However, there is so much cash coming in that many of these levers are hitting a natural cap or are already exhausted. We analyzed how these companies are using operating cash flow across key levers, including:

Capital expenditure (capex) re-investment E&Ps across the sector have explicitly announced their intention to maintain capital discipline going forward, only increasing in line with inflation, even if prices remain high. If this trend continues, capex will likely be constrained to current guidance issued by these companies, indicating a cap on future cash flow allocation for this purpose

Debt reduction. Debt load for the 25 E&Ps decreased by $25 billion from 2021 to 2022 and is forecast to decrease by another $15 billion to $20 billion by 2027. Forecasted net debt for many operators may approach zero an outcome unthinkable just a few years ago. Payments are expected to be capped at expiring notes only, reaching up to $10 billion in 2023.

Shareholder returns. With debt burdens reduced, direct returns are expected to be the priority Share buybacks tripled from 2021 to 2022, reaching a high of $21 billion for 25 leading independents and representing approximately 5 percent of total outstanding shares Likewise, dividends doubled over this period to reach an all-time high of $23 billion, and are expected to climb to between $30 billion and $40 billion over the next year However, direct returns will likely also have a natural ceiling in the range of 25 to 30 percent of total sector operating cash flow.

Energy transition Many operators are investing to reduce their Scope 1 & 2 emissions or make early moves to participate in energy-transition value chains However, we expect a ceiling of 5 percent of operating cash flow to be allocated to these efforts.

Even after these uses of cash have been exhausted, the industry is likely to remain cash-flow positive in 2023 and beyond, with a “war chest” of hundreds of billions of dollars in 2023 alone for the 25 North American E&Ps analyzed, including estimated current cash balances The primary tool left in the corporate finance toolkit is deployment of cash through M&A

Who’s coming to dinner?

The oil and gas industry is, in many ways, the epitome of competition and free-market capitalism. A common refrain from industry veterans discussing M&A is, “You are either at the table, or you’re on it.” This is a harsh reality, but companies with strong M&A capabilities and bold strategies often exit the cycle fully fed and healthy Dealmaking in the North American upstream sector in 2022 generated relatively low upstream transaction value compared to previous years, due to a range of factors in the upstream sector, such as high oil prices and macroeconomic factors impacting all sectors, including geopolitical instability, inflation, and the possibility of recession (Exhibit 3) However, our analysis of the fundamentals indicates that a new M&A wave is coming

Industry trends suggest that multiple M&A strategies are driving this next wave of consolidation activity Basin consolidators (such as Colgate and Centennial) will likely look to add scale and leverage operational advantages to achieve outsized returns. Integrators (like EQT with the acquisition of Tug Hill) may seek to add assets in

adjacent portions of the value chain to expand margins and increase resiliency. The bold (for instance, BP and the acquisition of Archaea) will probably use a portion of their cash stockpiles to seed businesses to reshape their portfolios and position for the energy transition Overall, consolidators (eaters at the table) will likely be those that have pulled the operational levers to have better cash flows than their geographically proximate competitors.

The oil and gas industry is entering a period of unprecedented uncertainty characterized by the energy transition, evolving investor sentiment, and mounting concerns around energy security While our industry should be proud of recent performance, now is not the time to bask in the glow of success. As in the past, successful industry players will work tirelessly to define and deliver a strategy rooted in sound M&A investments honing their evaluation skills and integration capabilities to accelerate their future growth and performance

THESTRATEGYANDCONSULTINGCLUBOFIIMROHTAK

snc@iimrohtak.ac.in

SWASTIKBADERIYA

DHRUVBANSAL KIRANP

MADHUMITAKUMAR

NISHANTGUPTA

PANCHAMOZA

SATYASINGH

UTKARSHNIGAM

DISCLAIMER: THE VIEWS AND OPINIONS EXPRESSED IN THIS MAGAZINE ARE THOSE OF THE AUTHOR AND DO NOT NECESSARILY REFLECT THE OPINION OF THE STAKE HOLDERS OF IIM ROHTAK

Follow us on: @snc_iimr