Managing Uncertainty

Introduction

“There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns; the ones we don’t know we don’t know.” (Donald Rumsfeld, US Defence Secretary, 2001-06) Our environment today is one which combines known knowns, known unknowns and unknown unknowns, and the increase in the last category presents leaders with a new management challenge. The need to focus on the challenges of an uncertain world has never been more urgent. The crises experienced in the past few years were different from previous economic downturns. This is because of the speed and abruptness of change in the markets; depth and magnitude of decline in the markets, breakdown of trust in institutions, the global nature of recession, interconnectedness of markets, geographies and institutions, and lack of availability of finance. With regard to speed and propagation one can recall the crisis of 2008. What began as a bursting of the American housing-market bubble increased rapidly into a global financial and economic crisis. Some of the largest banks and insurance companies filed for bankruptcy or had to be rescued financially. By 2008 credit flows had frozen, lender confidence had dropped and the economies of countries dipped towards recession. All this had a knock-on effect on the world market. The crisis exposed fundamental weaknesses in international financial systems. Regardless of coordinated easing of monetary policy by governments, trillions of dollars in intervention by central banks and governments, and large financial stimulus packages, the crises failed to subside. This led governments to borrow excessively to finance rescue packages which quickly led to unmanageable debt. The constant stream of global upheavals that followed the economic crisis shows how events that were previously thought to be unconnected were actually converging. Although the world has always seemed uncertain technology has changed perceptions and emotional reactions to uncertainty. History shows that everybody thought their world was pretty unstable. Each era had its own big issues and somehow or other had to come to terms with the consequences. What has changed, because of technology, is our ability to understand what is going on around the world and the way this influences our own decisions and actions. Interdependence has, without doubt, brought in much more uncertainty. Events like the Arab Spring show how interconnected the world has become. The Arab Spring did not only impact the supply and price of oil but also migration and the composition of Middle Eastern markets. It also made Banks in Malta aware of the volume of business local companies had with Libya. The indications are that the current period of disruption and unusual uncertainty will continue. Managers need to develop new skills and practices and instill a culture which will ensure the capability of managing uncertainty. These characteristics are:

  • Strategic anticipation
  • Navigational leadership
  • Agility
  • Resilience
  • Collaboration
  • Predicative learning

Strategic anticipation

Strategic anticipation is the capability to determine, and the ability to implement, a strategy that is highly responsive to an unpredictable and potentially volatile market. Although most management tools developed today are very good in assisting managers in managing risk they are of very little help when it comes to manage uncertainty. It is very common for people to go into a crisis mode when they are faced with managing genuine uncertainty. We tend to manage a lot by experience and use a set of tools, such as budgets and forecasts, to manage through business cycles. However, when faced with a crisis and an environment of significant uncertainty, it is difficult to throw those tools away and try and develop tools needed for managing uncertainty. Strategic anticipation involves thinking outside the box and not putting numbers into your budgets or tolerance limits such as margin of errors in budgets. For example, the potential collapse, or fragmentation of, the euro zone is not captured by a single number. Performing a sensitivity analysis is not sufficient in such cases. Strategic anticipation is thinking through major qualitative changes in the world. Many local companies, whose main market was North Africa, experienced this wakeup call in February 2011 when they realised that their main market had disappeared instantly in thin air without any trace of when it will return. These Companies had to think immediately outside their current boundaries to implement a strategy to ensure survival during this uncertain period. The need for plans that are adaptable is a necessity. In today’s environment ambiguity is constantly increasing. This has the effect of shortening the strategic cycle, and hence the necessity of more regular reviews of the options under consideration. Sometimes our annual budget needs updating between completion date and directors’ approval.

Navigational Leadership

Navigational Leadership is the capability to instill a collective sense of where the entity is, and the confidence and optimism to move forward into an uncertain future. Strong leadership can make the difference between success and failure at any time, but in times of uncertainty it is an essential necessity. If leadership is not exerted from the top, fear about the future, and an accompanying apathy will undermine the entity’s ability to steer its way through the fog. Traditionally employees and management have looked to business leaders to provide a strong vision of the future. In today’s environment, however, uncertainty results in an unclear vision of the future. This creates a dilemma for leaders because they have two key jobs. One is management and the other is leadership. The output of management is decisions. Ideally, therefore, one has to be rational. In this environment being rational means fully accepting the amount of uncertainty that exists. Leadership demands engaging people and giving them a sense of direction, motivating them, encouraging them and painting a picture of an attractive future. This makes it difficult to achieve especially when we accept that uncertainty is here to stay – a challenge faced by any leader. Navigational leadership has four elements:

  • Inspiring confidence in the company in the context of its current state. This is instilled by honest and clear communication, and by stimulating involvement.
  • Transparency, accountability and good governance ensure that goals and criteria which are set are clearly understood, thus removing the possibility of misinterpretation. They also ensure that resources are properly allocated resulting in a quicker response to sudden shifts in direction.
  • Encouraging speedy and informed decision-making by having a transparent and fully accountable reporting system. The need for speed is the primary factor in making decisions in an uncertain environment. Coupled with this is the need for diversity in the workforce primarily in skills, outlook, attitude and thinking. The ability to frame decisions in the right context and ensure that decision-making at all levels is informed by a diverse but consensual understanding of the priorities facing the organisation is paramount.
  • Involving and engaging staff at all levels. Strategy formulation and execution need to be integrated if goals are to be met and the organisation is to be able to respond more quickly to unexpected events. This cannot be done without the involvement and engagement of employees at all levels. Mission leadership, clarity, and the need for empowerment are delegation practices that entities must implement to ensure involvement and engagement of staff at all levels. This enables businesses to respond quickly to unexpected threats or opportunities, fostering innovation in products, services and management methods. It also ensures that strategic goals are adhered to while leaving staff at all levels free to use their own knowledge and skills to reach these goals and, in the process, everyone acquires a sense of ownership of the solutions that are developed.

Agility

Agility is the capability to move rapidly and flexibly in order to shape or adapt to the opportunities or threats arising from uncertainty within the entity’s environment. Companies should develop the capability to respond to the shocks within their environment. Speed of movement within a Company gauges its level of agility. Companies with a high degree of agility tend to lead rather than respond and, indeed, their surprising actions trigger uncertainty for less innovative rivals. Survival and long term success depend on the ability to act fast, either defensively or opportunistically, as soon as there is a brief opening through the fog of uncertainty. Managers need to be entrepreneurial and aggressive, willing to take risks, mobilise resources, adapt to circumstances and live with uncertainty. Agility within an organisation can be evaluated by reviewing four main areas within the organisation. These are:

  • Financial agility. Liquidity is an immensely reassuring buffer in uncertain and volatile times. During times of crisis cash rich companies can exploit the opportunities that arise in economic downturn such as acquiring competitors. Companies can consider various alternatives to build liquidity including raising equity, bond issuance and sale of assets.
  • Operational agility. Processes within an organisation must be as efficient as possible. Business units within an organisation must be tightly aligned with their market and how it is developing so that they can respond quickly. The more flexible and adaptive an organisation is the more agile it will be.
  • Portfolio agility is the need to reshape, reinvent and reallocate resources with a certain degree of acceptable speed. Companies with large portfolios should have processes in place to allow management to visualise the portfolio. Management need to evaluate the Company’s portfolio to determine whether they have enough start-ups in the pipeline to replace mature business lines which are slowly declining.
  • Organisational agility. This is achieved by having flatter, autonomous organisational structures that are capable to adapt to changes in the external environment. Such culture empowers employees at different levels to make decisions, share critical information and develop close relationship with customers and suppliers. The reason of such structures is to move away from a functional, hierarchical, command and control model.

Any companies achieving high levels of agility will survive and succeed at times of uncertainty. More importantly, once this high degree of agility is achieved one needs to constantly re-evaluate the structures to ensure that they remain in shape, that is, agile.

Resilience

Resilience is the capability to absorb and build positively on adversity, shocks and setbacks. Resilience is the ability to take a knock, dust oneself down and start again. Companies must be resilient if they are to survive in uncertain times. Resilience goes hand in hand with agility. As companies seize the advantage, or neutralise a threat, they must be resilient enough to handle the disruption and uncertainty their actions have triggered. By definition, a crisis has a definite beginning and end. Some form of resolution is reached, whether positive – survival and/or recovery, or negative – liquidation, split up or sold off. In a crisis, management embarks on a high-speed programme of change. Managers swing into action and put all their energy into dealing with the crisis. Periods of prolonged uncertainty lack the immediate intensity of a crisis and therefore require a deeper and more embedded kind of resilience. Uncertainty destroys morale and energy. Managers and staff cannot anticipate how long the uncertainty will continue, when they will need to act, and how the various sources of uncertainty will affect their part of the business. This creates space for doubt and allows anxiety to set in. Managers who are not resilient may lose confidence and become defensive and inflexible.

Developing More Resilient Managers And Companies

Managers can learn to become more resilient. Natural skills relating to building resilience can be developed. Negative thinking and persistent negative self-talk can be reframed. Individuals can become more resilient by recognising how they think about and respond in difficult circumstances. Individuals can reshape their responses to ensure they develop the capacity to respond quickly and constructively to future uncertainty or crises. Helping managers to become more resilient is not about wrapping them in cotton wool. Resilience comes through the crucible experience. Experiencing tough times and successfully dealing with adversity do have an upside. Personal growth and development occur most when one is in unfamiliar territory, when comfort levels are breached, and when one is out of one’s dept and struggling. The more resilient managers become the better chance they have to turn threats into opportunities. During the Arab revolution, and precisely in 2011Medserv passed through a tough period as its main market, offshore oil and gas activity within the central Mediterranean, was virtually wiped out albeit temporarily. This experience made the management team see how important it was to be more resilient to market shocks. Organisations can also develop collective resilience. Companies can develop these capabilities by having its leaders focusing on areas where they can take action and indentifying cases of wait and see. This can ensure that employees do not become unnecessarily anxious but remain positive and focused. Resilience within a company is strengthened by building trust between leaders and employees even when there is an unclear strategy for the future as well as by using people to change people. Peer employees within the organisation need to instill confidence to their colleagues especially at times of uncertainty. Other contributors to enhancing resilience within the company are making sure that employees engage with the strategy, be open with employees about the uncertainty facing the business, viewing crises or setbacks as valuable learning opportunities and reviewing management development processes. A strong sense of identity can provide staff with stability and purpose especially during turbulent times. A collective sense of corporate identity is a powerful means of motivating staff and connecting with customers. Resilience should be seen as a capability in its own right. This capability ensures that individuals and an organisation collectively remain positive and focused during prolonged uncertainty and when the time comes to act effectively, there will be enough energy and commitment for successful performance.

Collaboration

Companies are operating in an increasingly complex and interconnected world. The forces of globalisation and technology are removing boundaries in markets making it even harder for companies to define what is their external environment. Faced with this complexity, no company can afford to go it alone. Through collaboration, a company can reach beyond its boundaries and link with others to understand and anticipate sources of uncertainty and their potential impact. Collaboration can help a company absorb new ideas and perspectives from a diverse array of partners. Local companies experience such growth development when collaborating with foreign companies. This enhances a company’s ability to spot sudden shifts in customer or competitor behaviour. The ability to collaborate will help a company to keep learning and innovating. During times of uncertainty companies benefit significantly by staying close to stakeholders, such as employees, key customers, bankers, government organisations, strategic partners and suppliers. Collaboration does not just entail close links with other organisations within or beyond a company’s industry. Collaboration keeps individuals, and the business as a whole, open to new ways of thinking and encourages new ways of drawing in knowledge and insights. Collaboration can take various forms, including:

  • Informal collaboration.
  • Temporary alliances to share a limited set of skills or resources.
  • Joint activity- e.g. joint tenders.
  • Equity investments.
  • Franchising.
  • Outsourcing.
  • Technology licensing.
  • Technology and know-how transfers.
  • Research and development consortia.
  • Industry standard groups.
  • Innovation networks.

Companies use these different mechanisms as a way of adapting to intensifying competition and rapid change, often when moving into new sectors or new geographic markets. Such as in some emerging markets collaboration with local partners is obligatory. Some of these collaborations reduce risk and uncertainty. Companies should build such relationships to assist in overcoming uncertainty. For example, a company can supplement gaps in its capabilities and know-how by teaming up with more specialist companies. Such collaborations depend on trust and mutual respect and the sharing of concerns and challenges as they move forward in an uncertain environment.

Predicative learning

Predicative learning is the capability to sense, query and analyse previously hidden patterns and trends in order to anticipate sudden or disruptive change. Knowing what happened and why it happened is no longer adequate. Organisations need to know what is happening now, what is likely to happen next, and what action should be taken to get the best results. Predicative learning is a complex blend of technological expertise, new learning approaches and a willingness amongst employees to develop vision, where tiny shifts in the external market are investigated. Equally important, companies need to act on this intelligence in a timely manner, which of course requires knowing when various subtle signs fit together to form enough information for the business to move. Managers will make mistakes as they try to anticipate market transitions and disruptions, but the only way to build capability in predicative learning is by being willing to take risks and act on incomplete and ambiguous intelligence. Companies can nurture predicative learning in several ways including:

  • Senior managers must champion the need for staff to probe the unknown and the uncertain.
  • The business case for predictive learning must be explained to employees.
  • Information and tactical knowledge must move across the organisation and not be withheld.
  • Training and development must emphasise learning and provide employees with tools to reflect on their experiences, ask questions, share their perspectives with colleagues and contribute to formal learning or knowledge of management processes.
  • This culture must encourage debate and speculative and opportunistic learning, hence enabling the informal sharing of ideas and having time and space to look beyond their day-to-day concerns and hence thinking about the future.

As companies accept the reality of increased uncertainty senior managers must communicate openly the uncertainty and potential volatility and turbulence their business faces to investors, stockbrokers, other stakeholders and to their employees. Senior managers must also display confidence in tackling the unknown and the unpredictable, and be ready to revise their plans and strategies when changing circumstances demand it. Managing uncertainty needs to be recognised as a crucial leadership and management skill. There must be a learning and development strategy in place to prepare tomorrow’s leaders to work comfortably in highly fluid, complex business environments. There are a number of changes which are essential for an organisation to take onboard to manage uncertainty. These can be grouped in the following headings: Strategic Planning

  • From management by objectives to scenario and Contingency planning.
  • From “seeing it as you wish it” to “seeing it as it is”.
  • From long-term strategic cycles to shorter strategic cycles.
  • From fear of the future to finding the future attractive.
  • From working with perfect information to a willingness and ability to cope with diverging bits of information and opinion.

Risk Management

  • From risk management focused on managing the downside to managing the upside as well as the downside.
  • From risk management as a procedure to managing uncertainty as an ongoing process.
  • From risk management as an analytical process to managing uncertainty as an intuition.
  • From crisis as a threat to crisis as an opportunity.

Leadership

  • From a communication strategy based on saying nothing and leaving employees to feel less certain of themselves and less likely to take action to a strategy that engages in constant communication, creating confidence and a positivity that pervades the organisation.
  • From top-down leadership to providing some level of comfort, leadership and direction even when you are not sure what that direction is going to be in a year’s time.
  • From decision making based on a purely internal perspective to adopting an external perspective. Building resilient leaders means building people who are comfortable with ambiguity.
  • From a homogeneous leadership and mindset to a diverse and collaborative mindset across the business.
  • From imposing good practice from above to releasing and capturing good practice from the staff.

Operational management

  • From centralised decision making to a collaborative approach to making strategic decisions.
  • From seeing knowledge as a personal power to sharing best practice, getting people to network.
  • From cutting overheads to reduce costs to cutting overheads to create the foundation for future work.
  • From centralised decision making to getting people to make decisions and lead in their own market as a whole.

Stakeholder management

  • From narrowly based shareholder management to holistic stakeholder management.

Talent management

  • From traditional succession planning to looking at the changing skills that will be required in the organisation in the future.

Exploring the uncertainties of the current and future business environment is critical for long-term success and managing uncertainty should be high priority for senior management. Employees also have a responsibility to engage with uncertainty. They should expect clarity and focus about their organisation’s direction and they cannot expect to be shielded from the reality of an uncertain world. Uncertainty creates both opportunities and risk. Organisations that ignore uncertainty are in danger of being made extinct by unforeseen and potentially destructive forces. The alternative is to engage with uncertainty and have the confidence and vision to seize the initiative and turn uncertainty into opportunity. The organisations that learn to manage uncertainty will be those that succeed in the coming years.

References

  • Michel Syrett and Marion,”Managing Uncertainty, Strategy for surviving and thriving in turbulent times”, The Economist, 2012
  • Warner R., “Seven principles of Building Resilience” People Dynamics, 2009
  • Eric D. Beinhocker, “The Origin of Wealth”, The Radical Remaking of Economics and what it means for Business and Society, 2007.
  • Rumsfeld on February 12, 2002, at a press briefing where he addressed the absence of evidence linking the government of Iraq with the supply of weapons of mass destruction to terrorist groups.
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