Is the world more turbulent than it used to be? Not everyone agrees[i] but an extract from a major strategy text book suggests the business environment is more turbulent:
“From 1945 to the mid-late 1960’s the economic context was a relatively stable one, simple to understand but expansionary … the role of strategy in such a context was to mobilise economic resources in an orderly fashion … long range planning was … at the heart of any strategy”
Then through the mid 70’s – mid 80’s the language changed. We began to talk about discontinuous change. ‘Permanent white water’ became a metaphor for the business landscape. The 90’s gave us ‘hypercompetition’.
Today it is VUCA (volatility; uncertainty; complexity; and ambiguity). VUCA has its roots in strategy teaching within the military. A catchy acronym, how does it translate to the business context?
The most obvious source of volatility in business is in pricing. Pricing volatility has been with us for at least 50 years. Look at the volatility of metal and agricultural prices over this period[ii]. It's not obvious today is any more volatile.
Pricing volatility remains a challenge. For example, in January 2017 the International Energy Agency (IEA), was forecasting “much more volatility [in global oil prices] … the name of the game is volatility”.
Uncertainty has long been a part of the language of business. In the 1920’s Frank Knight differentiated between risk and uncertainty. He argued that risk refers to an environment where we cannot know the outcome, but we can ‘measure’ the odds. ‘True uncertainty’ is not susceptible to measurement.
Some argue that in practical terms the distinction is overblown. But MIT’s Chair of Economics argues it has practical relevance: when investors realise their assumptions about risk are no longer valid markets see ‘destructive flights to quality’. The GFC demonstrated the inability of the financial markets to effectively judge risk. It is also a reminder of our psychological need to reduce ‘uncertainty’ by assigning risk factors even when they are unknowable.
Hugh Courtney[iii] offers a practical framework for thinking about levels of uncertainty. These impact how we design the strategy process.
Complexity represents another dimension of the VUCA puzzle. But how do we think about complexity? Senge[iv] differentiates between ‘detail’ and ‘dynamic’ complexity. Detail complexity describes a context where there are many variables. Sophisticated planning tools are the analysts friend when it comes to detail complexity.
However, most of the strategic leverage comes from understanding the dynamic complexity.
How do you know if you’re facing dynamic complexity? When cause and effect are subtle, and often separated in time and place. When local and non-local impacts vary dramatically. When actions produce unintended consequences. Arguably, it is dynamic complexity that lay at the heart of the persistent failure of strategy execution.
If we look today at the forces for and against globalisation we see a real-time example of dynamic complexity playing out. Were there interaction effects from Brexit which strengthened the likelihood of a Trump victory? Will the ‘momentum’ of the Brexit/Trump victories bring us closer to the eventual fracturing of the European Union? Or will reactions to these events, both locally and globally, act as a force toward ‘restabilising’ the EU?
And finally, ambiguity. Ambiguity refers to a lack of clarity about the meaning of an event. Again, turning to the recent US elections, what are we to make of Trump’s views on NATO and the alliances. If we take him at his words, these seem destined to be dramatically altered. But if we listen to his Defence Secretary it seems this is not so straightforward. These are conditions of real ambiguity.
So what does this mean for business? How do you respond to the growing levels of VUCA?
We need to create organisations that can thrive and improve in the face of ‘increasing disorder’. Nicholas Taleb[v] calls this ‘anti-fragility’: the opposite of fragile.
Let’s convert this abstract notion into actionable practices for your organisation:
1. Embrace scenario planning as a core tool in your strategy tool kit[vi]. Remember, the scenario process is about creating ‘prepared minds’. It is not about forecasting the future. Shift your thinking to 2nd and 3rd order impacts.
2. In your scenarios, force interaction effects between the macro trends. Explore where these could go. Dramatic events are often the consequence of an exogenous impact on an already fully overloaded system.
3. Develop and build the art of strategic conversations. Great strategies are rarely discovered primarily through analytics but through conversation and reflection. But great conversations demand we move beyond the bureaucratic ritual of strategic planning and produce fresh insight, sense-making and perhaps a hint of inspiration.
DDB … a strategist’s view
[i] Professor Roger Martin argues there is no actual evidence that ours is a more VUCA world than previous generations. And The Economist agrees: “the idea that time is speeding up is plausible. There is just one problem. It is very hard to prove that it is actually happening”.
[ii] You would be hard pressed to make the case that volatility is much higher today.
[iii] Courtney: Strategy under uncertainty (McKinsey 2000)
[iv] Peter Senge: The fifth discipline.
[v] Nicholas Taleb, the inventor of the term 'black swan' and author of Antifragile – things that gain from disorder
[vi] Courtney recommends scenario planning for his ‘level III’ uncertainty