Strategic courage is never more important than in times of high volatility because that is when tomorrow’s winners are decided. In this episode of the Inside the Strategy Room podcast, Michael Birshan, global co-leader of the Strategy and Corporate Finance Practice, and Ishaan Seth, who co-leads McKinsey’s Banking and Securities Practice globally, discuss how to develop three types of competitive edge necessary to lead boldly in today’s uncertain times, based on their recent article co-authored with McKinsey global managing partner Bob Sternfels. This is an edited transcript of the discussion. For more conversations on the strategy issues that matter, follow the series on your preferred podcast platform.

Sean Brown: You open your article with a quote from the late Formula 1 champion Ayrton Senna, “You cannot overtake 15 cars in sunny weather, but you can when it’s raining.” What’s the connection to strategy?

Michael Birshan: It’s certainly raining hard out there in terms of economic upheaval, but volatility is when corporate performance rankings can dramatically change. Today, we have new shocks, such as the tragic war in Ukraine and the return of inflation, layered on top of old shocks that haven’t gone away, namely the overhang from the COVID-19 pandemic in the form of debt, adjustments to hybrid work, and supply chain disruptions. Those come on top of trends we have been wrestling with for a while, such as digitization or the net-zero transition.

All these shocks are amplifying one another, making volatility rampant. You can see it in the economic indicators, whether it’s inflation or consumer confidence hitting historic lows in parts of the world. We have seen periods of volatility in the past, but what our clients find unusual is the number of elements that are outside normal ranges now. Another factor exacerbating volatility is what we call sectors without borders. A company used to operate in one sector and understood what was happening to the left and right or upstream and downstream. Now, more and more sectors are colliding with one other. Take energy: many companies are realizing that they need deeper customer intimacy and to behave more like retailers.

Sean Brown: How do you see business leaders responding to this volatility?

Ishaan Seth: In dozens of recent conversations with CEOs, CFOs, and other C-suite executives, one refrain is common, which is, “We haven’t seen anything like this. This feels different.” And we are beginning to see two leadership mindsets emerge. One group is generally cautious. They are more on the defense, battening down the hatches on balance sheets, doing all the right things on expenses, planning out scenarios, but strategically they are in a “wait and watch” mode. We also see another group that are very much on the offense, thinking about the M&A pipeline given current valuations, planning material resource reallocations, and figuring out how they can pull ahead of the pack, to use that racing analogy. They are conservative on managing the downside but bold and aggressive on capturing the upside.

The value of this ambidextrous leadership has been borne out by our research over several economic cycles. We measured the performance of thousands of public companies before, during, and after prior crises and two things came through strongly (Exhibit 1). First, resilient companies¹ performed much better than the nonresilients, but more importantly, they were firing on all cylinders to achieve that outperformance: on revenue growth, margin enhancement, and preserving strategic optionality, which we define as retained earnings on the balance sheet.

Sean Brown: Did your research find any industries or regions being more resilient to external shocks than others?

Ishaan Seth: We have cut this data five ways from Sunday and at the highest level this has been consistent across almost every sector. Where there is huge variability is in performance between the top 10 or 15 percent in a given industry and everybody else.

Sean Brown: In your article, you say that leaders need to develop three types of edge. What are they?

Ishaan Seth: The concept of an edge is akin to an option. The price of options rises in times of volatility and, equally, the value of each edge grows in times like those we are living through now. The three types of edge are found in insights, in commitment, and in execution. Outperformance, or leadership alpha, on these dimensions can set you apart.

Sean Brown: What constitutes an edge in insights, and why is it particularly critical now?

Michael Birshan: If we all know what will happen, knowing it in a bit more detail is not terribly valuable, but in volatile periods when we are unsure, being 10 percent more right 10 percent more often is a true edge. You can find an insights edge in many places. Think about supply chains: we have all become more acutely aware of the complexity and impact of supply chains, so one element of an insight edge is, do you have true visibility into your supply chain down the tiers—and into our competitors’ supply chains as much as possible—so you can make adjustments to prepare for volatility?

Sean Brown: Do strong technology capabilities in data analytics and artificial intelligence provide an edge?

Michael Birshan: They definitely help. Superior data and analytics resulting from years of investments in sensors and data governance can be crucial sources of insights. A more prosaic source is having a culture that is sufficiently diverse, inclusive, and externally oriented that you get more and better information from a wider range of sources.

For example, a financial services firm trying to develop a perspective on inflation crunched data from rating agencies, governments, and academics, but it also added historians. What can we learn from previous periods of inflation about how today’s inflation may trend? The management team sought out contrarian voices who would have different perspectives. They talked to local market executives. My clients sometimes say, “If only we knew what we know. If only the center knew what is known in the broader organization.” Some of that is about systems and processes; some is about inclusion—creating the conditions where people who have diverging views feel free to voice them.

Ishaan Seth: I recently helped put something along these lines into action at a large bank client, where they brought together about 75 country heads around the world, put them in a room for two days, and had them share observations on everything from inflation to payments and trade flows to regulatory themes. The goal was exactly the notion Michael was describing: how can we tap into the latent knowledge resident within the organization and harness that in a more systematic way?

Sean Brown: How can business leaders determine whether their insights are sufficiently distinctive to constitute a competitive edge?

Ishaan Seth: The provocations we would put forward is to ask yourself, what proprietary, privileged insights and data do you have? How much of a pulse do you have on what your customers are saying and thinking, and how they’re spending? Do you have enough of this external orientation that Michael was describing in terms of your access to different knowledge, moving beyond common sources of wisdom and data to unconventional sources? Reflect on what in your industry would truly define an edge—or outperformance alpha—on insights and work together as a management team to generate it.

Sean Brown: This type of outreach could provide a lot of contradictory information. How do you distinguish the signal from the noise?

Ishaan Seth: You will always get multiple perspectives. Developing a point of view as a management team is one of the prerequisites of strategic commitment, and usually that means creating forums to have a dialogue, ideally in advance, to hear different perspectives and have debates. It is a heck of a lot easier to decide and act when it’s your third or fourth conversation on the topic as a senior team than if it’s the first.