Is the world growing more or less predictable? The answer for most managers is both obvious and disturbing — the future becomes murkier with every passing year. Yet leaders must act, despite the brute uncertainty about what the future holds. How, then, can managers act with confidence when they cannot know what the future holds?
After last week’s 5-part video lecture, professor Don Sull of the London Business School answers your questions below.
Your series has been wonderful. So thank you. I work in a company practising both Commitment Based Management and Agile Software development so I was absolutely thrilled to see both of these mentioned in the series.
One of the obstacles that I come across time-and-time again when discussing ”Agile” in particular is that people tend to believe that their own work is (as your describe) foggy and unpredictable, but they want predictability from others. For instance, the Agile Software development methods tends to thrill customers because they get to efficiently learn about their software requirements and adapt the software product as they learn throughout a project, rather than be forced to write down and sign-off their requirements near the start of the project before they know what they are doing.
Customers love this because they get better products at the lowest cost. But purchasing departments tend to hate it. Often, but not always, they take a very contractual approach and want a fixed price, fixed scope contract. I can understand their need for predictability, but it doesn’t work - whether it be a big NHS software projects (http://www.clarkeching.com/2005/11/nhs_it_project_.html) or the Scottish parliament, change happens anyway.
A question that is very important to me is: How can we easily communicate to others about this new unpredictable world we live in without them thinking we’re crazy?
Clarke Ching, Chair of Agile Scotland (not for profit) special interest group.
Don Sull: Very glad that you enjoyed the series. The challenges you mention are very real indeed. The bad news is that I don’t believe we can easily communicate this unpredictability. The good news is that there appears to be a broader recognition that the world is unpredictable that will work in our favour. Even then it will take an ongoing effort to educate not only purchasing managers but institutional investors and employees among others that we must proceed into the fog of the future. The Financial Times has enaged in this education effort quite seriously, sponsoring not only this course, but also its recent series on Managing Risk and a forthcoming one on Managing Uncertainty.
We are in for a long haul in educating folks, but I sincerely hope that with time people will recognize that an unpredictable world brings not only risks, but opportunities; not only anxiety, but excitement. If we can convey the adventure of progressing forward into the fog it will, I hope, be easier to inspire others to come along for the ride.
Thanks to all who have taken part in this course and provided such insightful and probing comments and questions. I wish you all the best.
In your final lecture you say the key to leading in an unpredictable world is tenacity - if you keep going long enough you will win. Surely, though, business leaders have to be wise enough to know when they are failing, otherwise they’re just wasting management time. What would you say is the acid test of when to ditch a strategy, admit defeat, and move on to the next thing?
Don Sull: I should have been more clear in my lecture. Perseverance without revision leads to escalating commitment to a failed course of action. Perseverance in the context of regularly revisiting and challenging incoming assumptions is much more likely to lead to success. Tend to think more less in terms of acid test than ongoing process to institutionalise revision of assumptions underlying mental model.
One suggestion on this front, for example, is to charge outside directors with identifying the key handful of assumptions underlying a management’s strategy and then charging them with leading a periodic review of how well these assumptions are holding up in terms of information from the marketplace. If I were to select an acid test, would go with the question attributed to Alexander the Great. In councils of war, as he and his generals were nearing agreement on a course of action, Alexander is said to have asked “What would it take for us to abandon this plan as wrong?”
If managers can agree on that as the develop a strategy or mental model of the world, then the acid test becomes to revisit these assumptions honestly and at appropriate intervals.
All the companies quoted by Prof Sull as examples of reading the future and getting it wrong were started with a clear vision by their founders, which resulted in success. Professional managers who try to take over from the founders can lack this vision. They have come from a different environment and the qualities they use to arrive at the top are rarely creative or visionary or useful when they get there.
Don Sull: Not sure I would completely agree with your assessment of those specific companies, having written cases on two of them. Microsoft founders stumbled around for a while pursuing different options until they hit a golden opportunity with the operating system for PC.
Samsung Group early year growth driven by whatever industries the Korean government targeted in their plans under General Park. Samsung entered these markets to maintain its strong ties to the government. It is true that the founders of Compaq had a clear vision that served them reasonably well for a while, but adherence to this vision endangered the company’s survival until the board brought in a new CEO. It is true that start-ups facing a crystal clear vision sometimes succeed, but they often fail.
Focused long-term vision has benefits, but in my assessment their costs outweigh their benefits in volatile markets. Pragmatic managers who come in without being locked into a long-term vision, often deserve our praise even if they do not incite the same emotional reaction as passionate founders.
I accept the significance of professor Sull’s most substantive point. The importance of the application of non-stop strategic agility in order to get ahead. The real conundrum is why don’t more organisations follow through on this insight?
Don Sull: Over the past six years, I have studied and advised multiple companies on how to achieve strategic agility. One of the key findings is that strategic agility is simple to grasp in principle and fiendishly difficult to put into place organizationally. Breakdowns occur at each stage in the strategic agility loop. Some common ones by stage below:
• Make sense: Fragmented data collection occurs when units and individuals gather data on different variables, but these are not collected at a single point to inform situation awareness. Crystal clear long term vision, to return to my pet peeve, can distract managers from emerging threats and opportunities in the present. This sense making must be collective, and breaks down when subunits cannot bridge their divergent interests or languages. Also, this exercise is vulnerable to all the normal decision making biases such as attention narrowing (i.e. focusing on a single variable), and choosing an inappropriate mental model to represent an ambiguous situation.
• Make priorities: This often falters when companies struggle for perfect consensus on all decisions. Consensus is of course desirable as it helps implementation, but it also leads to delay. Priorities also tend to proliferate when multiple units all want their pet priorities represented and it becomes a democratic process. Companies also lack in many cases a rigorous process for setting priorities, particularly regarding how to get out of things.
• Make it happen: Basic stuff here. Lack of accountability, companies alternate complacency and crisis, execution is not valued. When firms rely too heavily on processes to get things done they find it difficult to execute on non-routine activities.
• Make revisions: Escalating commitment to a failed course of action occurs when board and top executives fail to identify the key assumptions that would disprove their mental model of the situation, or they fail to revisit them on a regular basis.
Of course executives can take steps to remedy these breakdowns once they have identified them. Building an organization for strategic agility is the topic of my current research. One important leadership task is to lead discussions effectively at each stage. Stay tuned for the Financial Times Mastering Uncertainty series that will come out in March. It will include several useful articles, including one on managing conversations for strategic agility.
Thank you for your free lessons. They provide clear vision to the understanding of strategies for businesses. By the way can we consider Africa (sub Sahara) as an unpredictable world?
Don Sull: My great pleasure. Am grateful to the Financial Times and the London Business School for providing a forum to teach to a broader audience.
Although I am no expert in sub-Saharan Africa, my strong sense is that it very much qualifies as an unpredictable domain. Thus, I hope some of the insights from this course prove helpful there.
Regarding your Wednesday lecture on strategic agility, I envy AmBev’s courage to set only three priorities per year. Is the AmBev example valid only for companies competing in a single market with stable technology? Can an R&D laboratory - which has many constantly changing programs and customers - narrow their priorities to only three per year? Were AmBev’s priorities product focused?
Don Sull: I believe the principle is valid. First to clarify, AmBev does sell multiple products both within and outside Brazil, but you are absolutely right that brewing is a stable production technology and the company is relatively simple. The same approach has been followed by much more complex companies such as IBM and Dell.
These corporate priorities help focus attention, coordinate activity and concentrate resource allocation on a specific threat or opportunity at a point in time. Obviously, these priorities need to cascade down the organisation and be translated into concrete objectives appropriate to each subunit. The overarching corporate priorities, however, provide a useful check to ensure that scarce cash, people, effort and attention are being allocated to the right things.
Mid-term priorities work much better than long-term visions in focusing an organisation on threats and opportunities emerging in the here and now. The content of the priorities are pulled by circumstances, and hence varied. In AmBev, for example, some were operational, some product related, some fixed cost reductions. The priorities were driven by the current exigencies of a fluid situation.
A small number of priorities can be useful at the subunit level as well, including the R&D department. First, they should obviously be aligned with the corporate priorities. In the R&D context it is particularly important to have some mechanism for allocating resources dynamically in light of changing circumstances and new information. In many contexts, it is possible to run multiple experiments relatively inexpensively.
These might be the initial stages of a product exploration, for example. The large investment comes in deciding which research initiatives to develop and scale into full-blown businesses and here is where prioritisation is critical. Its fine to let a hundred flowers bloom in the early research stage provided these initiatives are relatively inexpensive, the prioritisation comes in deciding which bet on.
The Beta Group, for example, has pursued a systematic approach to innovation for over twenty years and see or explore a large number of potential technologies to bring to market. . At any point in time, they are attempting to commercialize a few of these, place go right in the dumster as unworkable, several however go into the refrigerator as potentially interesting opportunities, but not right now.
Given that most companies are answerable to their shareholders, who demand yearly forecasts and expect a return on their investment in the form of dividends, is it realistic for managers to admit that they have little idea what the future holds and instead promote an agile strategy?
Graeme Minto, Cambridge
Don Sull: Great question. How can CEOs and CFOs provide predictability to investors in an unpredictable world? In the past, many companies have resorted to massaging their earnings to provide more regularity - not necessarily the most productive approach. One alternative is to tell capital markets that you have limited visibility into the long-term future. Take Royal Bank of Scotland (RBS), less than twenty years ago the second largest bank in Scotland, today one of the top ten in the world measured in market capital. RBS top executives have steadfastly avoided the temptation to be transfixed by a vision of the future.
Instead, they focus on creating call options for future growth. In their analyst presentations and communication to investors they have pointed out that these options are conditioned on external circumstances and are thus subject to change. They have also been clear that these are options not promises. This approach undoubtedly takes some courage and investment to educate institutional investors, but would not be surprised to see more firms adopt it in the future.
Another approach is to forego public markets altogether and rely on private equity. This of course already happens for many technology-intensive start-ups, which tap venture capitalists (VC) for funding. VCs live and breathe uncertainty, and they know better than to insist on precise long-term projections in an uncertain world. Increasingly, this is also true with established firms. Leveraged buyout (LBO) firms have traditionally pursued investments in firms with very predictable cash flows required to service debt. Increasingly, LBO firms have bid on firms in more uncertain markets - witness the recent bid for Denmark’s telecom service provider TDC and software maker SunGard.
One of the advantages that sophisticated LBO investors could bring is an understanding that revenues, earnings and cash flows will not be perfectly predictable in uncertain markets. Relaxing the constraint of high predictability may allow the acquired firms to pursue opportunities they might forego as too risky under public ownership. Tom Eisenmann, a professor at the Harvard Business School, studied media companies and found that those firms controlled by a strong entrepreneur were more likely to take risks than public firms run by professional managers.
Global organisations today can make a much more informed decision than they could have done in past. They can, in fact, to a large extent influence their external environment to make future more predictable for them. Is the future really becoming unpredictable or is it just our narrow view of middle management?
Don Sull: In my experience, most CEOs and top executives are more, not less, concerned about market unpredictability than the middle managers who work for them. Top executives deal with the myriad variables that influence a firm’s performance, while middle managers running a specific product line, function or geography generally face only a subset of these variables.
To be honest, I am agnostic on the question of whether the world is becoming more or less unpredictable. Its hard to find an executive or consultant who doesn’t think the pace of change is accelerating and the world growing more uncertain, but I’m not convinced. The academic evidence of increasing unpredictability is far from conclusive.
Large-sample statistical studies of companies produce mixed results: Some find volatility has increased across the board, some find turbulence increased only in certain sectors across brief time periods, while others fail to detect any increase in volatility whatsoever. The Austrian economist Joseph Schumpeter coined the memorable phrase “creative destruction” not in the 1990s but in the 1940s, while management guru Peter Drucker has been describing the transition from a stable past to an uncertain future for decades.
I think executives have always faced the fog of the future, and always will. Not convinced it is helpful or necessary to speculate on changes in level of volatility. Of course, economies have enjoyed periods of relative stability, such as the decades of the planned economy among communist countries in the Post-War era and the United States’ boom years between 1950 and 1970. These pauses in the action, however, represent the exception rather than the rule of economic development.
And at any point in time, of course some countries or industries are messier than others. But these are differences of degree, not kind. If unpredictability is inherent in business, I think a different question arises: Why do so many theories assume the opposite? Much of current strategic theory assumes that markets tend to a stable equilibrium, that managers can envision the future with considerable accuracy, and that firms can sustain their positions into the indefinite future.
Why do the theories that exaggerate our predictive ability enjoy such wide currency? Management ideas, like any other product, have a supply side and a demand side. On the supply side lie management academics and consultants. Much of the influential thinking in strategy emerged from research conducted in the United States in the decades following World War II, a relatively stable era in the history of the global economy. Many of the prominent strategy models that emerged during this period minimized the role of uncertainty, by modelling major changes as rare “disruptions,” “jolts,” or “punctuations” to the assumed equilibrium state.
Alternately they penned in uncertainty by limiting its scope to a single source, such as technological innovation or competitors’ moves in game theory. These models’ sharp focus provided powerful insights, but the unintended consequence was a systematic underestimation of the unpredictability arising out of the interactions of multiple unpredictable variables. On the demand side, business students and practioners embraced models that downplayed the role of unpredictability because these theories increased their sense of control and hence willingness to act.
Action based on a false sense of security about how the future will unfold, however, can result in dangerous decisions.
How can managers act with confidence when they cannot know what the future holds? Join the online debate here