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The One Year, Thirty Minute Challenge :: Week 44 :: Strategic Planning :: Absorptive Capacity

One of the most disconcerting things any business leader contends with is “disequilibrium”. Disequilibrium is that queasy feeling when what you think you know for sure is, all of a sudden, in question. One moment, your world is tidy – all the pieces make sense – and now, suddenly, it doesn’t. Disequilibrium happens in all parts of life, not just work – faith, relationships, health, and the list goes on. But for this week’s One Year, Thirty Minute Challenge, we’ll discuss work.

Sales are humming along. Everyone loves your product. You have to beat customers off with a stick. And then, a little-known competitor introduces a product that upends your industry. Customers flock to your competitor and your revenue plummets. Yesterday, revenue projections for the next couple of quarters looked stellar. Today, with the money on hand, you’ll only be able to make payroll for 8 more weeks.

Now what? Disequilibrium – that situation when new information comes into your world and throws everything you know out of sync – reveals your Absorptive Capacity. Absorptive Capacity is the ability to synthesize the new information you’ve received, reconcile it to what you knew before, and respond in a way that reflects your new understanding – all while pushing towards your vision and fulfilling your mission.

Before jumping into this week’s exercise, let’s illustrate with an incredibly over-simplified example. You sell cameras and the film that goes inside those cameras. People point the camera at an image, push a button and the image is etched on the film. After those people have taken a few dozen of those pictures, they send the film to a third party that puts the film through a process and prints the images from the film on special paper. That’s how pictures are made. Everyone knows that. Then, one day, you learn of a new camera. People point that camera at an image, push a button and the image is translated into millions of electronic picture elements (pixels) organized on a grid and saved on a silicon chip. No film. No third party. No printing on paper. The little chip holds hundreds of images. And the images are completely portable and can be sent to other people using a variety of electronic devices. You’ve just experienced disequilibrium. What you thought you knew about taking pictures has been disrupted with new, confusing information.

What you do next determines what your business will look like going forward. You can deny the new information – “the way we do pictures is what customers will want forever”, “this is a passing fad”, “this will never be commercially viable”. Or, you can demonstrate your Absorptive Capacity by synthesizing the new information and begin making positive progress towards your vision armed with an updated understanding of the environment in which you compete.

Let’s jump into this week’s exercise. It’s not possible to engineer a moment of disequilibrium. That’s part of the reason they’re so jarring. They come out of the blue. So, for this week’s exercise, we want to create a framework that you can use to lead yourself and your team through these events when they come. In that framework, we want to strengthen your organization’s Absorptive Capacity so you emerge from disequilibrium stronger and more prepared to reach your vision.

Understand exactly what’s threatened by the new information – Is your entire business model in jeopardy (like the camera illustration above)? Is your workforce in danger of being poached (a large employer with deep pockets is building a new plant in your city and will be hiring thousands)? Are your customer’s expectations likely to radically change (better product available, better pricing for a competing product)? What problem is being solved now more effectively than you were solving it before? This is no time to “whistle while you walk through the graveyard”. Instead it’s time for radical truth-telling. Get your most trusted team members together and ask hard questions. Talk to current and existing customers to gauge their response to the new information (depending on the information, it might or might not affect them). Define the breadth and depth of the impact from the new information.

Identify the downstream effects – What’s the impact on revenue? Does existing equipment become obsolete? Do existing core competencies become meaningless? Does customer acquisition messaging need to be reworked? Is your cost of goods sold or customer pricing impacted?

Envision the new reality – Clearly, no one has a crystal ball, but using your best judgment, envision the new world created with the new information. Who will win? Who will lose? What will the winners have done to win? What will the losers have done (or not done) to lose? What vendor resources will become important? What will be important to employees? What will be important to customers? What will be important to other stakeholders – shareholders, regulators, vendors?

Create alternatives – With your new, expanded understanding create multiple scenarios that make sense in the new reality. For each scenario, push towards effective value creation and push towards fulfilling your vision. Can new, capable competitors become strategic partners? Can new, capable competitors become acquisition targets? Should you become an acquisition target for a new, capable competitor? Can you successfully emulate a new product or service offering? Can you move up or down in the value creation chain? Is there talent you need to acquire now? Are there assets you need to jettison now? What becomes the new, valuable core competency?

Leverage existing knowledge and experience – When faced with a challenge, your gut reaction is to do what you already do except to it faster, with more intensity, and with higher quality. I get it. But, if you’re riding a bicycle, you’ll never go faster or farther or carry more than your new, capable competitor who’s driving a delivery van. That’s where your knowledge and experience become your competitive advantage. You know the limits of your current team, your current model and the needs and wants of your customer base.

Leverage existing relationships – Tap the collective genius of employees, vendors, and even customers. If you don’t have one already, establish a true idea meritocracy – an environment where the best idea wins the day – no matter whose idea it is. Beware of the HIPPO (the Highest Paid Person’s Opinion).

Look for meaning in adjacent areas – Does the new information or the new reality it produces allow you to pivot to an adjacent area? Many years ago, during a downturn in general aviation sales, manufacturers of small planes become subcontractors for commercial airline manufacturers (whose business was booming) building wings, tail sections and other subassemblies for them. Can you leverage existing capabilities into new opportunities?

Look for meaning in other industries – Are there other industries that were faced with a similar situation? How did the players in those industries respond? How did the actions of the winners differ from the actions of the losers?

Fire bullets – When you’re ready to test your responses, as much as possible, fire bullets – small, controlled, cheap tests to evaluate the promise of that response. Tweak and test again until you have an effective response to the new reality. You can read about firing bullets in an earlier One Year, Thirty Minute Challenge.

Measure and adjust – As you roll out your new response, measure the factors that accurately indicate that you’ve successfully reacted to the new environment. It might be things like no decrease in customer retention, no loss of revenue, no increase in cost of goods sold, stable customer satisfaction scores or, depending on your unique situation, a whole different set of measurements. Whatever the metric, continue to evolve your response as the metrics dictate.

The speed of change in the competitive environment continues to accelerate. And the magnitude of the changes continues to increase. Increasing your Absorptive Capacity is a critical skill to ensure that your business continues to not only stay relevant but prospers in an increasingly turbulent business environment.