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 had surprising outcomes. In contrast, demonetisation was truly a Black Swan event, which disrupted the lives of most Indians and the calculations of corporates overnight. This randomness at times leads to chaos and has a long-term impact.
Welcome to the VUCA world. A future of volatility, uncertainty, complexity and ambiguity.
Black Swans events are rare or low probability but have a high impact. Seemingly unpredictable, these events warrant precautionary measures. 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 oil price. So what can be done to protect businesses against the unknown?
The Black Swan concept and theory were first developed by quant analyst Nassim Nicholas Taleb in his books Fooled by Randomness and The Black Swan. 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. “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 they did earlier, so the speed of crafting and delivering mitigation strategy is essential.
The VUCA world offers tremendous opportunity to those who are prepared. 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 the rest, these were Black Swan events.
In this gloomy, hostile world, leaders should not only just survive but also thrive. This requires shedding old assumptions and acquiring new mind-sets; being more agile and developing ability to quickly bounce back from adversity. For this, more behavioural changes are required rather than just 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. The failures were largely due to 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 faster.
In The Fifth Discipline, author Peter Senge says “...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.” In a VUCA world, one has to start slow, build up the necessary speed with variability as a growth strategy.
Business guru Ram Charan underlines the criticality of cash flow 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 productivity.”
Three Processes: Foresight, insight, and action are essential to look 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 requires development of critical thinking and dialogue within the organisation. Jack Welch said, “Don’t assume you know it all. Always assume that you can learn from someone else.” When there is ambiguity and uncertainty, there is no ability to predict and control. If strategic planning does not deliver, what will?”
Here, scenario planning, simulation and war-gaming is must. Organisations should develop these skills and competencies at all levels. Empower employees, especially the next generation of leaders, in strategic thinking and dialogue, out of which various alternatives would emerge to challenge the status quo. This leads to enlightened leaderships challenging and changing their assumptions, beliefs and mind-set to develop flexibility and adaptability.
The US Government Enquiry Report on Lehman Brothers brought out the fact that one of the principal reasons for failure was its obsolete Risk Management System. Indian businesses are poor in risk management and due diligence. Traditional risk management relies on identifying risks based on the experience of the teams involved in the enterprise. To focus attention on 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, both internal and external, are the things that need to happen to ensure that the strategy is achieved. 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, take us by surprise as a disruptive event because we had not been tracking and deciphering early trends. We should also prepare our organisations to make some sense of what’s coming — not hard predictions, just possibilities. Today, it is a slow creeping trend, but if we don’t 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 and experimentation throughout the organisation.
Guest Author
Dr. Manoj Joshi is a Fellow Institution of Engineers, Professor of Strategy, Director, Centre for VUCA Studies, Amity University, with 30+ years of experience in industry & research. He has authored 100+ articles, co-authored four books “VUCA in Start-ups” “The VUCA Company”, “The VUCA Learner”, “Technology Business Incubators” and is also on the Editorial Board of several international refereed Journals.
Guest Author
Suhayl Abidi, is an MBA from FMS Delhi and Information Management from Leeds Polytechnic, UK. He is a consultant with Centre for VUCA Studies, Amity University & a practitioner in Organisational Learning and Knowledge Management with 25+ years of corporate experience including Reliance Industries, Essar and Piramal Group. He has co-authored two books “The VUCA Company”, “The VUCA Learner” and several articles