In the months ahead, a number of big, uncontrollable external forces could converge to create something like a hundred-year flood in global business. Some businesses will be destroyed by it. But companies that break their rigidities, building operational flexibility into their culture and processes, can swing to the uncertainties faster and take advantage of the change.
Almost all business leaders pay lip service to the idea of flexibility. Still, even some very successful organizations are prone to rigidity, in arenas like budgeting, resource allocation, and organizational structure. Those rigidities can keep companies from adapting well in times of crisis or unexpected change. Fortunately, with effort—and just as important, with sustained practice and rehearsal—those areas of inflexibility can be addressed and improved.
Where rigidity comes from
The best intentions to adapt and change in the face of radically different circumstances will fall short if the sources of rigidity are not clear. Executives who want to combat rigidity should identify three to five of them that could be the biggest drag on the organization.
Reviews, budgets, and KPIs are generally high on the list. If the external environment changes in a big way, the performance targets you’ve set may become impossible to achieve. Sticking to unrealistic targets can be demotivating or lead to cutting corners. That said, in some cases, KPIs should be raised to reflect new opportunities.
Decision-making processes are another common culprit. If too many layers are involved or accountability is unclear, the organization slows to a crawl.
Sometimes a single individual is a source of rigidity. A person in a critical role who is psychologically unable to grasp a new reality can have ripple effects across the organization. They might hold back on moving people, shifting resources, or changing pricing, any of which can mean missing the bend in the road.
How do you overcome rigidity?
No responsible actor or athlete would go out and do their jobs without constant rehearsals and drills. Corporate leaders should take a lesson: Build flexibility through rehearsals and practice. That approach will prepare them to swing the sails of the ship as the wind shifts direction. Here are some of the elements of a rehearsal-driven approach to conquering rigidity:
Envision and prepare for the unexpected: For lack of a better word, socialize the concept of flexibility to deal with surprises. Visualize different scenarios that could come to pass. If they arose, what would you do? Institute a habit of rehearsing for such scenarios, and make the rehearsal more rigorous by thinking through the specific changes the organization would need to make. What would you have to shed, or build quickly? And therefore, what else might have to change? What talent might you need? Repeating this exercise frequently under different scenarios gets people psychologically geared to detect change, adjust their thinking, and act. It trains the organizational muscles to be ready to pounce.
Flexibility in budgeting: You may have 10,000 budget line items, some of which will require more adjusting, some less, depending on circumstances. Your rehearsals will help you identify which ones are likely to require an immediate shift as your organization’s journey moves forward during the year.
Budgeting adjustments should be a part of your rehearsal. For example, picture a drought in the Panama Canal. Your cargo is stuck for months, and you don’t know when it will move. Your logistical people are in agony. Your customers are unhappy, and maybe some of your partners are too.
What should change in your budget allocation? When should the change be communicated? Would it mean a new budget for production, more cash needed for storing inventories, a new commitment to the sales targets and possibly margins, and more price discounts to the customer when you can’t meet commitments?
Rehearsing this level of detail in a war room exercise prepares the team to think it through and answer quickly. Over time the response becomes more intuitive.
One large consumer goods company that I have worked with builds flexibility into its budget by requiring all VPs to free up funds through cost savings in their business lines agreed upon at the start of the fiscal year. Those funds are held in reserve to respond to competitive drivers that might pop up throughout the year, whether it’s for advertising, promotions, or pricing.
Flexible performance assessments: KPIs are a cause of rigidity in most corporations. The KPIs for a number of organizational positions should be designed to swing with the wind. One must realize the truth of human behavior: When managers know that their criteria for evaluation will be adjusted post facto, they begin to act preemptively, with greater speed and more of an ownership mindset. Under their influence, the whole culture becomes flexible, and people are more willing to do the right thing as well as pounce on opportunities.
I observed a situation at General Electric years ago when then-CEO Jack Welch gave the highest bonus to a leader whose division fell short of targets, even as other GE divisions had exceeded theirs. Why? The division had outperformed its competition in the face of extremely tough external challenges. In your rehearsal scenarios, practice which KPIs need to swing, and consider setting a range within which they can do so.
Special challenges for B2Bs: In B2B companies, rigidities in budgets and KPIs can be particularly tough because much of their business is typically locked in by long-term contracts. To enable flexibility, these companies need to make their contracts porous—for example, with clauses to automatically adjust for changes in currency or raw materials costs. Otherwise, their cash flow and profits could get killed by changing circumstances.
Changes in costs have to get passed all the way through the supply chain to the final consumer. Intermediate links cannot absorb them without putting their business and other parts of the value chain at risk.
B2B companies also have to watch for a new competitor with a new product coming into their space, or a government regulation that puts them at a disadvantage, or a bold move by a competitor that changes their relative strength.
In February 2024, Eli Lilly was hit when the parent company of its major competitor, Novo Nordisk, announced the acquisition of Catalent, a contract manufacturer. Catalent works with many pharmaceutical companyies to make and deliver their products, including Novo Nordisk’s popular obesity and diabetes drugs Wegovy and Ozempic. Acquiring Catalent would expand capacity for Novo Nordisk and could give it a pricing advantage over Lilly’s competing drugs, Zepbound and Mounjaro.
Did Lilly anticipate Novo Nordisk’s move? Was it so focused on getting FDA approval for its obesity drug, Zepbound, that it never even considered where the competitor might be going? Chances are, how well the pharma giant weathers this surprise will depend on how well it rehearsed.
Flexibility with human resources: Prepare to move people when the surprise comes. Don’t wait until the end of the year. The company needs to continually adjust to what jobs are not needed, or should be added, or should be combined. Unnecessary baggage reduces flexibility. Responding and adapting may mean creating a new team in an instant, and adjusting the KPIs of everyone affected by their movement.
The readiness is all
Like practices in sports, rehearsals must be disciplined and frequent. The exact frequency will depend on the nature and speed of external change. They might be once a quarter looking eight quarters out. But if a war breaks out, a supply chain is blocked, or a new technology emerges, they might have to be once a month or even once a week, looking out across a shorter time frame—13 months or so. You need somebody in charge to determine what timing is right for your industry and its drivers.
Get the war room ready, and start rehearsing. Fast adaptation gives you a winning-streak mindset. And even if times are tough, you will do better than the competition given the uncertainties.
Ram Charan is an adviser to CEOs and boards of directors worldwide, and a member of corporate boards in several countries. He has written 36 books and numerous articles in Harvard Business Review. His next book is titled: The Confrontation: How to End the U.S. vs. China Economic War to Save Democracy.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
