Lessons From Demonetisation | Navigating Uncharted Waters In VUCA Times

In 2016, two disruptive and one black swan events took place. The referendum in favour of Britain exiting European Union and the election of Donald Trump, both events, known well in advance for months, will make any company planning about the future, wallow in a sea of uncertainty for a long time. In contrast, demonetisation was truly a black swan event, which disrupted the lives of most Indians and the calculations of corporates overnight. It is said that humans have a tendency to see patterns in randomness; on the contrary it surprises most. This randomness at times leads to chaos and has a long term impact. The impact is definite, yet unforeseen in the long run.

Welcome to the VUCA world. A future of volatility, uncertainty, complexity and ambiguity.

Black Swans events are rare or low probability but high impact events that are seemingly unpredictable or deemed as unlikely as to not reasonably warrant preventive or precautionary measures. By their very nature, unpredictable events are impossible to foresee. Last few years have seen many Black Swan events which shook up businesses around the world such as the collapse of Lehman Brothers and the banking crisis, 9/11 and the sharp reduction in the oil price. So what can be done to protect businesses against the unknown?

The Black Swan concept and theory were first developed by statistician and risk analyst Nassim Nicholas Taleb in his books Fooled by Randomness and The Black Swan. He argues that looking for patterns in the normal distribution of numbers, such as a bell curve, misses the outliers that may predict Black Swan events. When Deloitte studied the performance of the world's 1,000 largest companies over nine years, it discovered that almost 380 of them had suffered a "value killer" event - more than a 20 per cent share price decline in one month compared to the average performance of the MSCI All Country World Index. "These events often expose a company's biggest strategic, operational or financial weakness, triggering a further cascade of negative events for the company," notes the Deloitte research.

In a globally interconnected economy, events move more quickly now than it did earlier, so the transmission mechanism between events is shorter and faster. There is less chance to mitigate them before they become bigger. Speed of crafting and delivering mitigation strategies is essential.

Nitin Paranjpe, till recently CEO of Hindustan Unilever Ltd. recently said "As leaders, we must be absolutely clear that the reasons that helped us succeed in the past will not be why we will succeed in the future. The context has changed. We now need to put on a bifocal lens, where on one hand we need to look at the 'here and now' and on the other, look to the future". However, as said earlier, we emphasise that past events cannot be seen as regression to mean and start prognosticating (stating the future, with compelling evidence). We might be fooled by randomness.

The VUCA world offers tremendous opportunity to those who are prepared. The 19th century British banker and financier Nathan Rothschild noted that great fortunes are made when cannonballs fall in the harbour, not when violins play in the ballroom. Rothschild understood that the more unpredictable the environment, the greater the opportunity-if you have the leadership skills to capitalize on it. Thus, leadership must sharpen the competence with added dynamic capabilities. Some investment bankers foresaw the 2008 banking crisis developing and made their millions and others saw the Chinese recession coming and prepared for it. For others, these were Black Swan events.

Let us understand that in a VUCA world, fluttering of a butterfly in one part of the world, can create chaos and over time may storm the world, as depicted by James Gleick in his book Chaos: Making a new science. For centuries, the focus has been to bring order from chaos. Now, one should shift from rigidity to flexibility and adaptability. Scientists and thinkers have narrated how minute differences in data may collectively and eventually lead to massive changes like in weather, natural disasters, human behaviour and economics.

In such a world where business leadership has not yet changed its mind-set to the new realities, failures are bound to happen. Under this gloomy, hostile world, leaders should not only just survive, but also thrive. This requires shedding old assumptions and acquire new mind-sets, be more agile and develop ability to quickly bounce back from adversity. These require more of behavioural changes rather than just acquiring new competencies and skills. Resilience and agility cannot be taught but can be learnt. Some of our suggestions for thriving in an uncertain world are:

Variable growth strategy - Our book The VUCA Company studied 12 organisation failures in India since the liberalisation of economy in the 90s. Their failures were largely due their scorching growth strategy leveraged through high debt. The initial euphoria created by high growth due to unshackling of the economy made many entrepreneurs take more and more risk to grow fast.

Real Estate companies such as DLF, Unitech & DB realty, to infrastructure companies such as Lanco, GVK to hoteliers as Leela, publishers like Deccan Chronicle and sunrise industries such as Suzlon, Kingfisher Airlines , Future Group etc. took on huge debts, beyond all prudent levels to fund expansions, diversifications and acquisitions. When times turned bad, these companies started selling assets which more prudent companies bought.

Let us take the case of Leela Ventures' debacle, as narrated in our article published in Indian Management, November 2016. The problems of this well run hotel chain started when it assumed huge debts to build Hotel Leela Palace, New Delhi. Its debt equity ratio had been steadily rising from 3.9 in March 2011 to a staggering 17.78 in March 2014. The sudden deterioration was, no doubt, due to loss of valuation of equity, but still the ratio was much higher than what prudence dictated. In a stable world, Leela's plans would have led to high growth but it did not take into account the derailment due to global recession, a VUCA phenomenon.

In "The Fifth Discipline", the path-breaking work on organizational learning, author Peter Senge says "...The irony is that to do things faster, you often have to go slower." A paradox. "You have to be more reflective. You have to develop the abilities of people to think together. Why? Because it requires you to go through basic redesigns. You need to build a shared understanding of how the present system works". In a VUCA world, since the way ahead is not clear, one has to start slow, build up the necessary speed and use variability of speed as a strategy of growth.

At Leela, a controlled slow growth would have been less taxing on capital requirement and thus low on interest outgo during time of unfavourable business environment. Author and business guru Ram Charan underlines the criticality of cash flow and high management intensity in times of business uncertainty. "First, if you do not have-or cannot generate-cash in the short term, you are not going to have the long term. Second, figure out how much cash you are generating and then restructure your debt. Third, revamp your business and understand that it needs to be more focused. This might even mean becoming smaller, but it will keep you safe; then you can generate extra cash to fund for productivity".

Three processes Foresight-Insight-Action, in series, are essential to looking into the future. Foresight is heavily dependent on sensing and intuition. Insight makes sense of foresight. Action is the desired result. You must hit all three steps, in that order. This required development of critical thinking within the organisation. As Jack Welch said "Don't assume you know it all. Always assume that you can learn from someone else." The current practice of strategic planning assumes one can predict the outcome and control the process. When there is ambiguity and uncertainty, there is no ability to predict and control. Harish Manwani, then Hindustan Unilever CEO said, "As far as businesses are concerned, the most important thing for us to ensure is that we build enough flexibility in our plans to manage and tackle any scenario. The days of long-term planning and plans cast in stone are over." If strategic planning does not deliver, what will?

Here, scenario planning, simulation and war-gaming come into the picture. Organisations should develop these skills and competencies at all levels. Empower employees, especially the next generation of leaders to stimulate boldness and even outrageous, in strategic thinking and dialogue, out of which various alternatives would emerge to challenge the status quo. This allows enlightened management to challenge and change their assumptions, beliefs and mind-set and develop flexibility and adaptability. Breakout growth is not only about launching bold, new initiatives. Many good growth programs begin first with incremental growth and experimentation, which creates investment in learning where big new opportunities lie.

The US Government Enquiry Report on Lehman Brothers brought out the fact that one of the principal reasons for failure was obsolete Risk Management System. Indian businesses are poor in risk management and due diligence. This fact has come to light in several cases discussed in our book. For example, GMR's Male airport debacle, where the new government repudiated the contract is partially derived from a poor assessment of socio-political situation. Most Maldivians who have followed the events over two years say the deal was doomed from Day One. GMR also did not take political risk insurance cover.

Events such as these are the reason why multinational companies buy political risk insurance while embarking on projects in emerging markets. Many investors in Male do buy political risk cover and there is an active market for it," says an insurance official who added that there was not much of a market for it among Indian corporates "as lenders did not insist on this". This reflects how little risk management is understood and practiced by Indian companies and lending institutions.

A 2012 Booz & Co. study found that underestimating strategic risk is the number one cause of shareholder value destruction. For most businesses, a Black Swan event would be a risk, that has not been explicitly considered and that would lead to a major setback for the business and even complete business failure. Traditional risk management relies on identifying risks based on the experience of the teams involved in the enterprise. To focus attention to identify new types of risks, we can use Assumption Analysis. First, we need to identify the assumptions on which our strategic plan is based. These constituent assumptions are the things that need to happen to ensure that the strategy is achieved. There may be 10-20 assumptions and ensure that you consider both internal and external factors as much as possible. Rigorously follow through these assumption, identifying scenarios where one or more of these assumptions do not pan out. This exercise may identify new risks you may not have anticipated. It is our experience that underlying assumptions behind strategic plans are rarely debated upon and accepted as facts.

All unexpected events are not Black Swans. Some take a long time to materialise but one day takes us by surprise as a disruptive event because we had not been tracking and deciphering early trends. Many of the predictions made by Alvin Toffler in his book Future Shock, written 40 years back came true. He was not an oracle but seeing early trends or weak signals. We should also prepare our organisations to make some sense of what's coming-not hard predictions, just possibilities. A disruption like Internet of Things would affect all businesses. Today, it is a slow creeping trend but if we are not thinking and start preparing for it NOW, one day it will hit us hard when we are not ready.

We cannot predict the future but we should make sure the next generation is not overwhelmed by sudden events but leverage its upheavals as strategically as possible to take advantage of new opportunities. That takes embedding learning & experimentation throughout the organisation. Welcome to the world of VUCA!