[Opinion] Seismic Management in an Era of Uncertainty

Published 06 Apr.2021 15:33(KST)

Kim Kyung-jun, Vice Chairman of Deloitte Consulting

Uncertainty intensifies during transitional periods. American economist Galbraith named the 1970s the "Age of Uncertainty," a time when the guiding principles that led society disappeared. As time has passed, uncertainty has tended to amplify rather than be resolved overall. Looking back, the 1970s were a period when things were relatively more certain compared to now.

Recently, uncertainty itself has become a fundamental environment for businesses. Amid the turbulence of digital transformation, last year's COVID-19 pandemic instantly shattered the basic premises of business. In March, a large cargo ship ran aground in the Suez Canal in Egypt, delivering a sudden shock to the global shipping and logistics network. Although a one-time incident, it is an example that vividly demonstrates how a localized event in a specific region can impact the entire world, highlighting the reality of uncertainty.

In an age of uncertainty, it is difficult for corporate management to survive by drifting in an uncertain world. It is a fate to pursue certainty even in uncertain environments. Therefore, corporate systems must be designed to withstand uncertainty. The essence of a response structure, analogous to earthquake-resistant design that enables buildings to endure seismic shocks, is the reduction of fixed costs and the increase of variable costs.

Chaseok Yong, Vice Chairman of LG Household & Health Care, regularly sent CEO messages to employees starting in 2005. Among the widely discussed contents was the "earthquake-resistant design prepared for foreseeable external shocks." After the 1923 Great Kanto Earthquake, only the Imperial Hotel in Tokyo, which was reduced to ruins, did not collapse. The core of earthquake-resistant design was twofold: minimizing fixed parts and enhancing structural flexibility through lightweight construction. Taking this as a lesson, he urged employees to "reduce fixed costs that occur regardless of the business's rise and fall as much as possible."

Just as earthquake-resistant design absorbs external shocks through the flexibility of building structures, the more volatile the business environment, the more important it is to secure flexibility in the cost structure. This is the most crucial virtue for companies navigating the sea of uncertainty. Cash flow, the basic measure of a company's survivability, is ultimately based on the cost structure. Companies are ultimately models of cash flow inflows and outflows. Even glamorous visions, strategies, and corporate cultures can only exist on the foundation of sound cash flow and cost structure.

Economic activity is ultimately an interaction between sellers who provide value and buyers who pay money. Those who receive money always want to receive more, while those who pay try to give less if possible. Also, recipients prefer fixed pay, while payers naturally prefer variable pay. Ultimately, the exchange of value and money is the essence of economic relationships, and various transactions appear as a game of securing fixed income for the receiver and expanding variability of payment for the giver. When the environment is relatively stable, the difference between fixed and variable costs is small, but when external shocks like the 1997 IMF bailout occur, fixed costs often determine a company's fate.

The fundamental strength to cope with the age of uncertainty is the conversion of fixed costs into variable costs. In the digital era, this is not simply a change in expenditure methods but should be approached from the perspective of strategically utilizing the socio-economic environment. Recently emerging trends such as the subscription economy, gig economy, and platforms use digital technology to convert fixed costs into variable costs. The starting point for the flexibility and adaptability needed to respond to the amplification of uncertainty in the digital age is the variable nature of the cost structure.