DSI Newsletter

FRESH PERSPECTIVES: EMBRACING UNCERTAINTY
Uncertainty is not an obstacle but an opportunity

When we asked a large group of managers at Wharton if they thought there would be at least one significant disruption to their business in the coming year, most felt there would be. They couldn't be specific about what it was, but all accepted the notion that there is far more uncertainty now than ever. These uncertainties range from technological to economic to social and political. Here is a partial list managers need to worry about in the years to come:

Mega terrorism in the US, Europe or Asia
Outbreak of major infectious disease, such as SARS, shutting down borders
Cyber attacks that violate the security and smooth functioning of the internet
Killer apps in info technology spawning new services, products and markets
Breakthroughs from genomics, first in diagnostics and then therapeutics
Leaps and bounds in nanotechnology, automation and intelligent devices
Continued turmoil in the Middle East involving Iraq, Iran, PLO and Israel
Political stalemates in the European Union, United Nations and China
Social turmoil from under-funded pension plans, health insurance and other aid
Natural disasters, ecological calamities, and rising health concerns
Devastating effects of AIDS, especially in Africa, Russia and the Far East
Religious extremism fuelling deep conflicts, intolerance and discrimination
Global turmoil stemming from poverty, disease and skewed income distributions

While this list is hardly complete, it illustrates the formidable challenges facing managers. In each industry, many additional uncertainties loom relating to customer preferences, competitor behavior, technological standards, regulation, etc. And yet, most organizations simply do not have the management systems, capabilities and skill sets to do a good job managing their numerous uncertainties. Most managers are all still in the grip of single-point forecasting and tight budgets, creating a single, fictional point forecast and planning for it. This forecast is almost always wrong. This approach of "guess, aim, pray and adjust" is increasingly difficult because there is just too much uncertainty out there. Instead, we should heed Louis Pasteur's observation that chance will favor the prepared mind.

Under the flawed old approach, uncertainty is viewed as an enemy; it is seen as an obstacle that gets in the way of boosting revenues or meeting milestones. Managers work hard to reduce uncertainty as much as possible and insure against the risks that remain. This is why the point forecast is so attractive, because it implies a degree of certainty about what lies ahead. But while turning away from uncertainty may be an understandable human reaction, it means managers also turn away from the opportunities presented by uncertainty as well. Too many companies are paralyzed by uncertainty.

We should have a much kinder view toward uncertainty and learn to embrace it. Exploiting uncertainty is what creates opportunities and value for business enterprises. Smart strategy is, at its root, a trade-off between flexibility and commitment in the face of the unknown. If you never commit, then you're not in the game. And if you commit too strongly, you are essentially gambling. As in Russian roulette, chances are very good that you will not survive such a risky game. The key is knowing when and where to commit and also when and where to stay flexible to keep your options open.

So, how do you build the capacity in an organization to deal with uncertainty? First, the whole notion that you can command and control your way through uncertainty needs to be abandoned. The best we can do in today's world is to get better at navigating uncertainty . The root metaphor here is that of the captain of a ship. In calm waters, you can talk about precise navigation around buoys and cliffs to get to the harbour on time. But when a storm is coming, you must embrace the notion that you cannot control things precisely anymore. Perhaps you need to delay your journey, take a detour or find an even better harbor. For many executives, that's a very uncomfortable realization because it shatters a deep-seated illusion of control.

Fortunately, there are good tools out there for dealing with uncertainty, as I summarize in my book Profiting from Uncertainty (Free Press, 2002). These include scenario planning, options thinking and benchmarking how other companies deal with uncertainty. The problem, though, is that these tools must be used in an appropriate strategic context. To do that, you need a fundamental shift in mindset and mentality. That's number one. And then you need to select an intellectual framework for how you want to deal with uncertainty. What's your strategic or operational approach? It must be based on a sound conceptual framework, such as that shown in Fig. 1. Only then are you ready to experiment with tools that fit.

That's what we call the ABCs of managing uncertainty:
A is accepting it,
B is building the capacity to deal with it--training people to use these frameworks,
C is choosing the right tools for the right projects.

That's the way to embrace and eventually profit from uncertainty. We have used the framework shown in Figure 1 (explained in more detail in Profiting from Uncertainty ) in our consulting work with companies in diverse industries. They have used it to face the uncertainties in their environments and developed robust capabilities and strategies for succeeding across multiple futures. In contrast to the approach of avoiding uncertainty, this direct engagement with uncertainty has allowed them to be more proactive in finding opportunities to profit from it. It also offers more resiliency and flexibility - and better chances for success - than placing a risky bet on a single future. As Alberto Ibargüen, publisher of The Miami Herald , commented, "It teaches you a broad-based approach that will keep you from being surprised by change."

Source: Paul J. H. Schoemaker, Profiting from Uncertainty: Strategies for Succeeding No Matter What the Future Brings , Free Press, 2002.