Lenny Mendonca, chairman of McKinsey Global Institute, discusses how companies can learn from the current economic crisis and build better businesses for the future.

Question: What is different about business today?

Lenny Mendonca:    One of the things that’s important to understand in this new normal is what has changed and what hasn’t changed.  What hasn’t changed are some of the fundamentals that influence in the longer term the direction of business.

Absent a war, a pandemic or some systemic change in the healthcare system, demography is what demography is, and we can understand how the world’s populations are going to move. It means a lot of growth and developments are going to occur in China and India; Western Europe and Japan are slowing because of the demography; the US is somewhere between those two. 

That hasn’t change because of the crisis.  The march of technology hasn’t changed.  In fact if anything, the application of some of the tools from the internet and particularly web 2.0 are going to be even more important in this environment going forward to understand and adapt to a changing environment. 

That creates important opportunities for people to innovate and to help ensure that they are resilient for the new environment in which we find themselves. 

Question: How else does crisis create opportunity?

Lenny Mendonca:    We’re in an environment where general confidence and general sense of what’s going on is deeply troubled, so it’s not something that anyone looks at and says, this is just incredibly exciting. 

That said, this is an environment where weaknesses are exposed, and strengths have opportunity to spread much more broadly. And so there are going to be extremely interesting opportunities for strong companies to take market share as the capital markets recover to help to do mergers and acquisitions, to really be prepared for an ability to operate in this new normal that will create the next generation of leaders. And there are parts of the economy where that innovation will not only create specific business opportunities for individual companies, but done right, will create substantial new sectors; it will create productivity more broadly across the economy. That creates an interesting and important opportunity for the next wave of growth. 

Question: What can companies do to succeed?

Lenny Mendonca:    There is wide difference in terms of company performance in this environment.  It's partly driven by what business they're in, what industry they are in. It’s partly driven by what their geographic footprints looks like. It’s partly driven by what their product portfolio looks like. It’s also partly driven by a company’s ability to be able to understand and respond more quickly and be able to take all that information and act on it. 

Many companies are not organized to do that in the way that a political campaign might be, in terms of being able to get morning information and respond by the afternoon. That’s not how most companies are set up. They have planning processes and budgeting processes and capital allocation systems, and people processes that are designed to play out over the course of the quarter or a year or depending on the investment cycle, even longer. 

In a fast changing world, those are misaligned with the pace with which the world is changing and so being able to adapt your planning processes, the people processes, the budgeting, capital allocation processes, to be more responsive is what we’re seeing the best companies do.  Some of them do that tactically in terms of their sales force responses, their pricing actions, particularly if it's consumer-related companies that are used to fast changing environments, or internet-related companies; but those sorts of capabilities are going to be important for all sorts of companies. 

Question: How important is business confidence?

Lenny Mendonca:    In times of uncertainty and in times of real crisis, we can sometimes get into a negative spiral of confidence and a negative sense of risk, lack of risk taking, a sense that everything is getting bad and it’s always going to get bad.  We tend to overshoot on both sides of that cycle. 

When things are growing up, we think trees grow to the sky.  When things are challenged, we think the whole world is collapsing around us. 

Well, neither one of those were true and part of the challenge of leadership is to be able to differentiate what is real and what is illusory. And so I think, particularly in this challenging time, part of the role of leaders are to create the narrative that says, “Here’s the way the world could be. Here’s the way we are going to manage in that. And here’s what you need to do to help us ensure that we get to that positive outcome.” 

I do think one of the most important things that leaders can be doing in today’s environment is creating that narrative, being able to tell a story that says, “The world is not going to hell on hand basket and there’s a way that we’re going to get through this, and I want you to be part of that along with me.” 

Question: What will mark tomorrow's most effective leaders?

Lenny Mendonca:    I think there are a few things that are going to be important for leaders in large institutions, going forward, that are important to build skills on earlier in your career.

Clearly one of those is collaborative problem solving.  Being able to take a challenge, dissect it, figure out what to do about it, with others and help accomplish something, is going to very important. The vast bulk of what leaders do today is interact with other people in the organization and outside and make something happen.  Being able to do that across cultures, across geographies, is very important. 

The second thing that is going to be important is understanding that the world is globally connected.  If we thought that before this crisis, that any country or company was decoupled from the rest of the world and isolated from what’s happening, we just found out that’s not true. Being able to understand the global context and operate as a global leader is going to be increasingly important.

And then the last thing I’d say that is going to be important is being able to operate, not just in a business environment, but being able to operate at the intersection between business, government, and this civil society around you.  Leaders, even in traditional businesses, have to understand what their responsibilities are and how to interact with their stakeholders and manage and be comfortable with an expectation that they have a broader social contract with which they have to operate.

Recorded April 17, 2009.