Adapt to Uncertainty – Surviving the Techstorm

ADAPT TO
UNCERTAINTY

In recent years, organizations have become more and more aware of the fact that “uncertainty is the new normal”. It is likely that the business world we used to know, where strategic planning was simply extrapolating a trend, based on the past couple of years, has come to an end. Instead we see the emergence of a new understanding and acceptance of the fact that different perspectives on uncertainty and ambiguity are essential for future success.82

As with many other management approaches, this field has its roots in the military. In the 1990s, the acronym VUCA was introduced, short for vulnerability, uncertainty, complexity and ambiguity.83 The original purpose of this approach was to address strategic foresight and insight as well as include a behavioral perspective on groups and individuals.

To give an overview of the field, consider the graph opposite84 where the two perspectives are “understanding of the situation” and “predictability of your own actions”. This will provide four alternative scenarios where the VUCA perspectives fit well.

Volatility, a situation that is unstable and may be of unknown duration, but often with available information.

Complexity, a situation with lots of variables, some predictable but the sheer scope of information is often overwhelming.

Uncertainty, a situation with lack of information and unknown cause and effect. Unclear if the situation is stable.

ambiguity, a completely unclear situation with very limited (if any) information. Also the results of your actions are unclear.

With the above in mind, this section will deal with uncertainty and ambiguity, mainly because these are two of the most relevant perspectives when discussing emerging technologies from a strategic business perspective. Volatility and complexity are also of interest, but more relevant when your own actions are predictable, at least to some extent.

UNCERTAINTY AND AMBIGUITY

Every industry, technology, and investment involves a certain level of risk. Often, though, the exact level of risk involved in a given venture is quite uncertain. With any emerging technology, it is impossible to predict fully what the impact will be. This is true both of the new technology and of the technology being replaced. When a new technology develops and people choose whether or not to invest in it, one of the biggest concerns lies in what will happen to the old technology. For both the new technology and the old technology, there are many possible futures. It is with these potential futures that risk, uncertainty, and ambiguity come into play.

DEFINITIONS OF UNCERTAINTY AND AMBIGUITY

Although uncertainty and ambiguity overlap when it comes to investment decisions, there are clear distinctions between the two terms. The outcome of a sporting event is an example of uncertainty. While we may be able to calculate odds regarding which team will be victorious, this is not a clear cut case of probability. There is certainly risk involved in betting on a sporting match, but the probabilities of the potential outcomes are based on vague factors rather than known factors. Ambiguity refers to a specific type of uncertainty in which there are no clear beliefs regarding the probabilities of any given outcome.

THE RISK OF NEW TECHNOLOGY CAN BE CAUSED BY UNCERTAINTY

Part of the uncertainty involved in a new technology relates to the likelihood that it will succeed on its own, and on how quickly that success will occur. For any business dealing with the old technology, there will come a time when they have to make a decision to continue in their current direction, jump ship and invest in the new technology, or find a balance between the old and the new. Take the music industry, for example. When digital music and file sharing first made a big splash, record companies had to make a decision either to embrace the new technology or to continue to produce and release music in the ways it had done previously. While all companies struggled through this transition, the ones that embraced the newer technology and found a balance between both were the ones that succeeded best. Others held on to the old technology out of fear of the risk and uncertainty of the new.

While digital music is obviously at the forefront of the industry today, when it was first made available, there was plenty of uncertainty. How could anyone have known for sure that digital music would have such a drastic impact on the physical media? The outcome that occurred was one of many possible futures.

TO INVEST OR NOT TO INVEST?

Risk falls when the known probability that something will happen increases, but waiting too long to make an investment could also result in less profit. As the adage goes, the more you risk, the greater the potential reward. The risk involved in an investment relates directly to the probability of any given future and indirectly to the uncertainty that is inherent in anything still in the development stages. The simple fact is that no one is certain that a new technology will “work.” It may function as it is intended, but will it actually work in the sense that society will adopt it?

Investing in new technology often involves a relatively short-term risk that blossoms into a longterm reward. It may take months or years before this technology pays off. In the mean time, profits may be minimal or non-existent. However, if the technology does in fact take off and boom in a way that complements the investment strategy, then the long term reward will be plentiful. Of course, if the new technology flops, then the loss increases exponentially.

Investing in the old technology, on the other hand, often produces more of a long-term risk and a short-term reward. As the new technology waits in the wings while society makes its judgment, the old technology may even get a boost. There is often a mentality of gobbling up what we think we might not be able to have any more. However, if the new technology succeeds, the business may fail because it waited too long to invest. Of course, that does not mean that every new technology is a wise investment.

AMBIGUITY

There is also a sense of ambiguity with any emerging technology. It is often unclear exactly what the new technology is and where it might go, which will lead to potential futures that are almost impossible to predict. There is a basic understanding of that technology, but there are many questions about where it will overlap and how exactly it will be used in the future. We may be able to predict futures based on the information available, but there is no way to determine the probability that some of these particular futures will occur. The only thing known is that these futures are possible, or at least we think they are.

When a new technology emerges, the existing technology may not be rendered obsolete. Therefore, choosing to invest entirely in one technology or another may not be the only avenue available. Without a firm understanding of the long-term success and effect of the new technology, it may be difficult to make a full commitment.

During the course of any business’ life, there will inevitably be new technologies that present uncertainty about the future of both that company and the industry as a whole.

STRATEGIC UNCERTAINTY

Every business, or at least every business that wishes to succeed, routinely implements strategies in order to ensure growth and stability. Market research, competitor analysis, and other traditional tools can help a business create a strategy. However, these traditional tools are only effective when the business environment and economy are facing stable conditions. In today’s rapidly developing world, this is hardly the case. Today, technological uncertainty is a major issue that all businesses must face. Therefore, strategic uncertainty has become a necessary factor in order for a business to survive ultimately.

Any new and developing technology creates some level of uncertainty. With a new technology, there are often many different futures for which to prepare. Planning for this uncertainty involves using the right tools to create the right strategy. When probabilities are unknown, creating an investment or business strategy requires innovative thinking. When planning in uncertain conditions, there are many factors that must be considered. In order for a business venture to succeed, resources have to be put into the right areas. A solid strategy in uncertain conditions takes forward thinking, the right tools, and the smartest moves.

DEALING WITH UNCERTAINTY AND SURVIVING DISRUPTION

Strategy under uncertain conditions essentially involves three basic steps: determining strategic options, selecting a strategic posture, and building a portfolio of strategic moves.85 These steps require a thorough analysis of the potential futures, the goals of the company, and the types of moves that can get the company to that point. Of course, in order to deal with uncertainty, one first must gain some idea of the factors involved. In other words, one must determine as much as possible about the uncertain conditions. This may sound on paper like an exercise in futility, but it is a rational process that allows for real strategic thinking and action.

During the course of any business’ life, there will inevitably be new technologies that present uncertainty about the future of both that company and the industry as a whole. Therefore it is important to determine the level of uncertainty involved and to plan how to deal with these technologies that can present a missed opportunity for the current business model.86

DETERMINING THE LEVEL OF UNCERTAINTY

No matter how uncertain a business environment may be, it is typically possible to identify trends that will help to determine more clearly potential future demand. There are also often unknown factors that can become known with the right analysis. While it may be impossible to know everything, using current data on similar technologies may help make things more certain. Even after analysis, there is bound to be some uncertainty, which falls into one of four levels: a single future, alternate futures, a range of futures, and true ambiguity.

In at least half of all cases, there will be multiple future scenarios for which to plan.87 There may be instances where one future seems far more likely than others, and planning for only one future may work in these instances. However, new technologies are rarely this predictable. Instead, most new technologies will fall into one of two categories: “only a few futures” or “a wide range of futures”.

Regardless of the number of futures that seem possible, a business must use the appropriate analytic tools to find the right strategies. Knowing the number of futures is important because it will help shape the types of tools a business uses. While it is not necessary to come up with an exact number of futures, one must be able to gauge the difference between a few and many possibilities.

THE RIGHT STRATEGIC POSTURE

Figuring out how to analyze for the type of uncertainty faced is only the first step, but it is certainly an important step. Whenever uncertainty is involved, the strategic thinking must be flexible and tailored to the level of uncertainty.88 A one-size-fits-all approach will often render a plan unresponsive and result in failure.

Once the right approach is used to analyze the uncertainty, it is time to select the right strategic posture. The term “posture” refers to the intent of the strategy as it relates to the current and future states of the industry. When trying to combat uncertainty, there are two different strategic postures that are available for a business to adopt: shaping and adapting. Before developing the actual strategy, it is necessary to choose which posture or intent to use.

The strategic posture of shaping will be adopted by companies looking to shape the future. In other words, this posture is selected by those companies looking to be a leader in the industry. With this posture, the intent is to drive the industry forward and establish new ways of operating. Shapers look to create new opportunities by shaking up the current status quo of the industry or by attempting to control the areas where the market is uncertain. By investing heavily in digital photography in the late 1990s, Kodak demonstrated that its preferred strategic posture, at least in this particular instance, was shaping. Shapers often hold the opinion that the best way to survive a new technology is to develop their own disruption to the industry before it is too late.89 A second strategic posture is adapting. When using this posture, the intent is to adapt to how the future will be shaped. Rather than pushing forward a new technology, this posture relies on watching the industry carefully and taking advantage of existing opportunities. This is a reactive rather than a proactive strategy, and it depends on quick responses in order to work. An example of adaptation can be seen in Barnes and Noble’s decision to implement its own e-reader in response to the dominance of Amazon’s Kindle and e-book sales.90 This decision to respond to the changing market allowed Barnes and Noble to survive while other bricks and mortar book stores did not, at least for the time being.

CREATING THE STRATEGY PORTFOLIO

Having a strategic posture is not in itself an answer to any new investment, technology, or other uncertainty. The posture is just a skeleton of a strategy. It does not provide any methods or actions by which a business can reach its aims. Once the posture is determined, usually corresponding to the level of uncertainty, then a portfolio of actions is the next move.

There are three types of moves that are most relevant to implementing a strategy when conditions are uncertain: big bets, options, and no regrets moves.91 A portfolio may only consist of one type of move, or it may use more than one. Regardless of the different types of moves, it is important to have more than one option available.

Big bets, as suggested by the name, are major investments or other moves that will typically result either in large payoffs or significant losses. Most companies using the shaping posture will include big bets within the strategic portfolio. These moves are often not utilized in the other two postures.

The next type of move for the strategy portfolio consists of options. These moves are designed to yield big payoffs in best-case scenarios, while minimizing losses in worst cases. Options typically seem far less risky than big bets, and they allow a company to make modest investments up front while still affording the opportunity to make big investments later on. As one might expect, options are typically used by adapters. Since they allow for more time before making the investment, options usually work well.

No regrets moves are ones that are designed to pay off no matter what. Regardless of the outcome, these decisions will have positive payoffs. The payoffs might not be huge, but they minimize risk while still providing a guaranteed gain. Reducing costs and building skills are obvious no regrets moves that will produce a positive result in the end, no matter what happens.

Creating a strategy portfolio is highly dependent on the level of uncertainty a business is facing. Each step of strategic uncertainty is interconnected, and it is vital to go through each step thoroughly before attempting to implement any strategy.

PLANNING FOR UNCERTAINTY

Today’s markets and technologies are too volatile for traditional business planning. In order to plan for uncertainty, a business has to rely on some innovation. Planning for uncertainty is not about trying to guess the one outcome that will occur. Rather, it is about being prepared for multiple outcomes while trying to create an understanding of how likely each outcome is. By looking at the most predictable elements of an industry or technology, it may be possible to reduce some uncertainty.

The right strategic planning takes an approach that evaluates uncertainty thoroughly before choosing the tools or moves that a business will make. No matter what tools you use or what moves are in your portfolio, you must be willing to adapt to changes in the industry. If you are not aware of how the future is shaping up, then you will not be able to respond quickly enough for your strategy to have a chance.