Managing Business in VUCA WorldStrategy for Transient Advantage

BFI Finance - Executive Sharing Session - May 4th, 2015

Courtney, 2003

• Returns on ‘‘common’’ investments in mature, stable markets

• Customer and competitor reactions to strategies that reposition well-established brands

• Potential regulatory, legislative or judicial changes

• Unpredictable competitor moves

• All-or-nothing industry standards competition

• Demand for new products or services

• New technology performance and adoption rates

• Unstable macroeconomic conditions

• The outcomes of major technological, economic or social discontinuities

• Market evolution in markets that are just beginning to form

Uncertainty

Volatility : Rate of change

Uncertainty : Unclear about the present situation and future outcomes. The inability to know everything, the lack of predictability and likelihood of ‘surprise’ events.

Complexity : Multiplicity of Key Decision Factors. Multiplex of forces, the chaos and confusion that surround an organization or environment.

Ambiguity : Lack of clarity about the meaning of an event. Differences in interpretation when contextual clues are insufficient to clarify meaning.

VUCA

Turbulence strikes more frequently than in the past More than half of the most turbulent quarters over the past 30 years have occurred during the past decade

Turbulence has increased in intensity Volatility in revenue growth, in revenue ranking and in operating margins have all more than doubled since the 1960’s

Turbulence today persists much longer than in preceding periods The average duration of periods of high turbulence has quadrupled over the pas three decades.

Reeves, love and Mathur - BCG, 2012

Turbulence is more common ……

4Winning in a Turbulent World

Executive Agenda

Using publicly available information, we built a prototype cost structure for each industry and calculated the impact from the full range of Index variables—reliance on commodities inputs, exposure to currency fluctuation, energy demand, even holdings in other companies and therefore exposure to stock-market volatility. We then looked at what these meant for specific industries (see figure 2).

2 “What Does it Take to be Australia's Largest PV Retailer?” by Nigel Morris, Renewable Energy World, 8 May 2012

Figure 2Economic turbulence affects industries differently

EBIT %

Aerospace AutomotiveFMCG* Process andchemicals

Professionalservices

Pharma

2011

2001

*FMCG is fast-moving consumer goods.Source: A.T. Kearney analysis

35

30

25

20

15

10

5

0

The impact of turbulence differs by industry. For instance, agribusinesses are subject to the full range of turbulence variables, automakers are sensitive to particular variables such as the price of steel, and a bank has minimal sensitivity to uncertainty because the cost of its principal inputs—labor and real estate—doesn’t fluctuate much, even over extended periods.

All industries are subject to variables they neither control nor influence, putting value creation and earnings at risk. This does not mean there’s nothing to be done.

Prioritizing the PainMost companies have a formal understanding of currency risk. Others with a large commodity bias characteristically have a view of how price movements for a strategic input can affect them. Some model the impact of regulatory or macro-economic scenarios. But only a few understand all their potential turbulence drivers as a complex system.

Suren Chandrajit, CEO of True Value Solar, recently described how pivotal managing volatility has been to his company’s rise as Australia’s largest solar-panel retailer.2 In addition to its agility

The illiterate of the 21st century will not be those who cannot read and write, but those who cannot learn, unlearn and relearnAlvin Toffler

(Sustainable) Competitive Advantage

Transient Advantage

In a world that values exploitation, people on the front lines are rarely rewarded for telling powerful senior executives that a competitive advantage is fading away. Better to shore up an existing advan-tage for as long as possible, until the pain becomes so obvious that there is no choice. That’s what hap-pened at IBM, Sony, Nokia, Kodak, and a host of

rms that got themselves into terrible trouble, LAUNCH RAMP UP EXPLOIT RECONFIGURE DISENGAGE

RETURNS

The Wave of Transient Advantage

McGarth, 2013

Stage Nature People

Launch Identifies an opportunity and mobilize resources to capitalize on it

Capable of generating ideas, comfortable with experimentation and iteration

Ramp up Business Idea brought to scale Capable of assembling right resources, at the right time, at the right quality and deliver on the promise

Exploitation Captures profits and share and forces competitors to react

Capable of analytical decision making, M&A and efficiency

Reconfigure Keep the advantage fresh Capable of radically rethinking business models or resources

Disengagement Resources are extracted and reallocated

Candid ,tough minded and can make emotionally difficult decisions.

The Wave of Transient Advantage

Companies shore up an existing advantage for as long as possible, until the pain becomes so obvious that there is no choice.

Lesson Learned

I don’t buy my own company’s products or services. We are investing at the same or higher levels and not getting better margins or growth in return. Customers are finding cheaper or simpler solutions to be “good enough”. Competition is emerging from places we didn’t expect. Customers are no longer excited about what we have to offer. We are not considered a top place to work by the people we’d like to hire. Some of our very best people are leaving Our stock is perpetually undervalued

Early Signals for Reconfigure or Disengagement

1. The First mover trap 2. The Superiority trap 3. The Quality trap 4. The Hostage-resources trap 5. The White-space trap 6. The Empire building trap 7. The Sporadic innovation trap

7TRAPS

Belief that first to market and owning assets create a sustainable position. In some businesses like aircraft engines or mining it may be true. But most industries a first mover advantage doesn’t last.

The first mover trap1

Early-stage technology, process or product won’t be as effective as something that’s been honed and polished for years. Because of that disparity, many companies don’t see the need to invest in improving their established offerings—until the upstart innovations mature, by which time it’s often too late for the incumbents.

The superiority trap2

Let Us Watch The Video Clips

Many businesses in exploit mode stick with a level of quality higher than customers are prepared to pay for. When a cheaper , simpler offer is good enough, customers will abandon the incumbent.

The quality trap3

In most companies, executives running big, profitable businesses get to call the shots. These people have no incentive to shift resources to new ventures Nokia developed a product that was remarkably similar to today’s iPad in about 2004. Nokia never capitalize on this groundbreaking innovation. Companies emphasis was on mass-market phones, and resource allocation decisions were made accordingly.

The hostage-resources trap4

When opportunities don’t fit their structure , firms often simply forgo them instead of making the effort to reorganize. For instance a product manufacturer might pass up potentially profitable moves into services because they require coordination of activities along a customer’s experience, rather than by product line.

The white space trap5

Bureaucracy building and fierce defense of status quo. It inhibits, experimentation, learning and risk taking. It causes employees who like to do new things to leave.

The empire building trap6

Many companies do not have a system for creating a pipeline of new advantages. On-off innovation Depend on individual Vulnerable to swings in the business cycle.

The sporadic innovation trap7

1. Think about arenas, not industries 2. Set broad themes, and then people experiment 3. Adopt metrics that support entrepreneurial growth 4. Focus on experiences and solutions to problems 5. Build strong relationships and networks 6. Avoid brutal restructuring : Learn healthy

disengagement 7. Get systematic about early-stage innovation 8. Experiment,iterate,learn

Strategy for Transient Advantage

Untraditional competitors take companies by surprise. Arena : combination of a customer segment, an offer, and a place in which that offer is delivered. Customer’s jobs to be done.

Think about arenas, not industries

Within those themes , they free people to experiment with different approaches and business models.

Set broad themes, and then people experiment

Conventional metrics can effectively kill off innovation

Adopt metrics that support entrepreneurial growth

Many companies are so internally focused that they are oblivious to the customer’s experience.

Focus on experiences and solutions to problems

Evidence indicate that the most successful and sought after employees are those with the most robust networks. Infosys , for instance is choosy about which customers it will serve , but it maintains a 97% retention rate. In GE, the senior leaders spend inordinate amounts of time building and preserving relationships with other firms.

Build strong relationships and networks

A flexible and evolutionary approach

A successful portfolio-of-initiatives strategy involves creating enough initia-tives offering high returns relative to the risks taken to enable a company tomeet its aspirations and outperform the expectations of the capital markets.The process requires the CEO and the management team to keep an openmind about where the company might be headed. Inherent in this approachis the understanding that future decisions and future outcomes are likely tovary enormously from initial hypotheses. The whole process resembles artmore than science. Most of the critical decisions involve subjective judg-ments that, unlike those generated by more deterministic strategies, will beinformed by not just the highest-quality staff work but also the knowledgegained as time passes.

25J U S T- I N -T I M E S T R AT E GY F O R A T U R B U L E N T W O R L D

E X H I B I T 1

Managing the portfolio

• Knowledge surpassedby competitors’

• Attempt small tomidsize investmentsto gain familiarity

Risk

Familiar

Unfamiliar

Uncertain

Timing

Initiativescontribute to

current earnings

Initiativesmature in2–3 years

Initiativesmature in3+ years

1

4

7

2

5

8

3

6

9

Clustering here mayindicate too littleinvestment inbuilding long-termgrowth options

• Probability of successdifficult to estimate

• Attempt smallinvestments to gainfamiliarity

• Distinctive knowledgesurpassing that ofcompetitors

• Invest in initiativespossessed by companyor easily acquired

Initiatives

Adapt corecapabilities

Build newbusinesses

Shape corporatebusiness portfolio

Size indicates potential market capitalization at stakeSize of circle reflects relative economicimportance of initiative; typically,amount of market capitalization atstake if successful

All significant actions mapped:adapting, building, shaping

• Displays timing, economics at stake, risks inherent in each initiative• Provides framework to highlight changing effects of:

– Timing– Altered levels of familiarity or uncertainty– Launch of new initiatives or termination of unsuccessful ones

The 9-cell grid

Clustering here mayindicate insufficientfocus on oppor-tunities to adapt corebusinesses

016-027_Lowell_V4 6/24/02 2:58 PM Page 25

Lowell, Bryan, 2002

Get systematic about early-stage innovation

Planning new ventures with the same approaches they use for more established businesses. They need to focus on experimentation, iteration and learning

Experiment,iterate,learn

The Three Strategic Postures

Strategy Under Uncertainty

harvard business review • november–december 1997 page 8

they can identify at least a subset of the vari-ables that will determine how the market willevolve over time—for example, customer pen-etration rates or technology performance at-tributes. And they can identify favorable andunfavorable indicators of these variables thatwill let them track the market’s evolution overtime and adapt their strategy as new informa-tion becomes available.

Managers can also identify patterns indicat-ing possible ways the market may evolve bystudying how analogous markets developed inother level 4 situations, determining the key at-tributes of the winners and losers in those situ-ations and identifying the strategies they em-ployed. Finally, although it will be impossibleto quantify the risks and returns of differentstrategies, managers should be able to identifywhat information they would have to believeabout the future to justify the investmentsthey are considering. Early market indicatorsand analogies from similar markets will helpsort out whether such beliefs are realistic ornot.

Uncertainty demands a more flexible ap-proach to situation analysis. The old one-size-fits-all approach is simply inadequate. Overtime, companies in most industries will facestrategy problems that have varying levels ofresidual uncertainty, and it is vitally importantthat the strategic analysis be tailored to thelevel of uncertainty.

Postures and Moves

Before we can talk about the dynamics of for-mulating strategy at each level of uncertainty,we need to introduce a basic vocabulary fortalking about strategy. First, there are three

strategic postures

a company can choose totake vis-à-vis uncertainty: shaping, adapting,or reserving the right to play. Second, thereare three types of moves in

the portfolio of ac-tions

that can be used to implement that strat-egy: big bets, options, and no-regrets moves.

Strategic Posture.

Any good strategy re-quires a choice about strategic posture. Funda-mentally,

posture

defines the intent of a strat-egy relative to the current and future state ofan industry.

Shapers

aim to drive their indus-tries toward a new structure of their own devis-ing. Their strategies are about creating new op-portunities in a market—either by shaking uprelatively stable level 1 industries or by trying tocontrol the direction of the market in indus-tries with higher levels of uncertainty. Kodak,for example, through its investment in digitalphotography, is pursuing a shaping strategy inan effort to maintain its leadership position, asa new technology supersedes the one currentlygenerating most of its earnings. Although itsproduct technology is new, Kodak’s strategy isstill based on a traditional model in which thecompany provides digital cameras and filmwhile photo-processing stores provide many ofthe photo-printing and storage functions for

The Three Strategic Postures

Shape the futurePlay a leadership role inestablishing how the industryoperates, for example:

– setting standards– creating demand

Reserve the right to playInvest sufficiently to stay in thegame but avoid premature commitments

Adapt to the futureWin through speed, agility, andflexibility in recognizing and capturing opportunities inexisting markets

Shape the future Play a leadership role in

establishing how the industry operates, for example: setting standards or creating demand

Adapt to the future Win through speed, agility, and

flexibility in recognizing and capturing opportunities in

existing markets

Reserve the right to play Invest sufficiently to stay in the game but avoid premature commitments

Courtney, Kirkland, Viguerie, 1997

The Three Strategic Moves in Uncertainty

No-regrets moves Strategic decisions that have

positive payoffs in any scenario

Options Decisions that yield a significant

positive payoff in some outcomes and a (small) negative effect in others

Big bets Focused strategies with positive payoffs in one or more scenarios

but a negative effect in others

Courtney, Kirkland, Viguerie, 1997

Strategy Under Uncertainty

harvard business review • november–december 1997 page 9

the consumer. Hewlett-Packard also seeks to bea shaper in this market, but it is pursuing a rad-ically different model in which high-quality,low-cost photo printers shift photo processingfrom stores to the home.

In contrast,

adapters

take the current indus-try structure and its future evolution as givens,and they react to the opportunities the marketoffers. In environments with little uncer-tainty, adapters choose a strategic position-ing—that is, where and how to compete—inthe current industry. At higher levels of uncer-tainty, their strategies are predicated on theability to recognize and respond quickly tomarket developments. In the highly volatiletelecommunications-service industry, for ex-ample, service resellers are adapters. They buyand resell the latest products and services of-fered by the major telecom providers, relyingon pricing and effective execution rather thanon product innovation as their source of com-petitive advantage.

The third strategic posture,

reserving theright to play,

is a special form of adapting. Thisposture is relevant only in levels 2 through 4; itinvolves making incremental investmentstoday that put a company in a privileged posi-tion, through either superior information, coststructures, or relationships between custom-ers and suppliers. That allows the company towait until the environment becomes less un-certain before formulating a strategy. Many

pharmaceutical companies are reserving theright to play in the market for gene therapyapplications by acquiring or allying with smallbiotech firms that have relevant expertise. Pro-viding privileged access to the latest industrydevelopments, these are low-cost investmentscompared with building a proprietary, internalgene-therapy R&D program.

A Portfolio of Actions.

A posture is not acomplete strategy. It clarifies strategic intentbut not the actions required to fulfill that in-tent. Three types of moves are especially rele-vant to implementing strategy under condi-tions of uncertainty: big bets, options, and no-regrets moves.

Big bets

are large commitments, such asmajor capital investments or acquisitions, thatwill result in large payoffs in some scenariosand large losses in others. Not surprisingly,shaping strategies usually involve big bets,whereas adapting and reserving the right toplay do not.

Options

are designed to secure the big pay-offs of the best-case scenarios while minimiz-ing losses in the worst-case scenarios. Thisasymmetric payoff structure makes them re-semble financial options. Most options in-volve making modest initial investments thatwill allow companies to ramp up or scale backthe investment later as the market evolves.Classic examples include conducting pilot tri-als before the full-scale introduction of a new

What’s in a Portfolio of Actions?These building blocks are distinguished by three payoff profiles – that is, the amount of investmentrequired up front and the conditions under which the investment will yield a positive return.

No-regrets movesStrategic decisions that havepositive payoffs in any scenario

OptionsDecisions that yield a significant positive payoff in some outcomesand a (small) negative effect in others

Big betsFocused strategies with positive payoffs in one or more scenarios but a negative effect in others

Scenario

1.

2.

3.

4.

Value

++++

We are moving from a world of problems, which demand speed, analysis and elimination of uncertainty to solve - to a world of dilemmas, which demand patience, sense making

and an engagement with uncertainty

Characteristics of Effective Dilemma Management

1.Flexible, decentralized, empowered networks within a structure of strategic intent.

2.Learning through immersive experiences, scenarios and rapid prototyping

3.Acceptance of uncertainty with intuition as a valid contributor to clarity

4.Strategic sense making beyond operational problem solving

5.Engagement with complexity

Denise Caron, 2009

1. Maker Instinct Ability to exploit your inner drive to build and grow things, as well as connect with others in the making. Leaders need this basic skill to make and remake organizations.

2. Clarity Ability to see through messes and contradictions to a future that others cannot yet see. Leaders must be clear about what they are making but flexible about how it gets made.

3. Dilemma Flipping Ability to turn dilemmas—which, unlike problems, cannot be solved—into advantages and opportunities. 4. Immersive Learning Ability Ability to immerse yourself in unfamiliar environments, to learn from them in a first-person way. 5. Bio-empathy Ability to see things from nature’s point of view; to understand, respect, and learn from its patterns. Nature has its own clarity, if only we humans can understand and engage with it.

Johansen, 2012

FUTURE LEADERSHIP CAPABILITY

6. Constructive Depolarizing Ability to calm tense situations where differences dominate and communication has broken down and bring people from divergent cultures toward positive engagement.

7. Quiet Transparency Ability to be open and authentic about what matters—without being overly self-promoting. If you advertise yourself, you will become a big target.

8. Rapid Prototyping Ability to create quick early versions of innovations with the expectation that later success will require early failures. Leaders will need to learn from early setbacks and learn to fail in interesting ways.

9. Smart-mob Organizing Ability to create, engage with, and nurture purposeful business or social change networks through intelligent use of electronic and other media.

10. Commons Creating Ability to seed, nurture, and grow shared assets that can benefit all players—and allow competition at a higher level. This is the most important future leadership skill and it grows from all the others.

Johansen, 2012

Are you trapped on your current competitive advantage?

McGarth, 2013

Focused on extending existing advantages

Capable of coping with transient advantage

Budgets, people, and other resources are largely controlled by heads of established businesses 1 2 3 4 5 6 7 Critical resources are controlled by a separate

group that doesn’t run businesses

We tend to extend our established advantages if we can 1 2 3 4 5 6 7

We tend to move out of an established advantage early, with the goal of moving on to something new

We don’t have a process for disengaging from a business 1 2 3 4 5 6 7 We have a systematic way of exiting businesses

Disengagements tend to be painful and difficult 1 2 3 4 5 6 7 Disengagements are just part of the normal business cycle

We try to avoid failures, even in uncertain situations

1 2 3 4 5 6 7 We recognize that failures are unavoidable and try to learn from them

We budget annually or for even longer 1 2 3 4 5 6 7 We budget in quick cycles, either quarterly or on a rolling basis

We like to stick to plans once they are formulated

1 2 3 4 5 6 7 We are comfortable changing our plans as new information comes in

We emphasize optimization in our approach to asset utilization

1 2 3 4 5 6 7 We emphasize flexibility in our approach to asset utilization

Innovation is an on-again, off-again process 1 2 3 4 5 6 7 Innovation is an ongoing, systematic core process for us

It’s difficult for us to pull resources from a successful business to fund more uncertain opportunities

1 2 3 4 5 6 7It’s quite normal for us to pull resources from a successful business to fund more uncertain opportunities

Our best people spend most of their time solving problems and handling crises 1 2 3 4 5 6 7

Our best people spend most of their time working on new opportunities for our organization

We try to keep our organizational structure relatively stable and to fit new ideas into the existing structure

1 2 3 4 5 6 7We reorganize when new opportunities require a different structure

We tend to emphasize analysis over experimentation 1 2 3 4 5 6 7 We tend to emphasize experimentation

over analysis

It isn’t easy to be candid with our senior leaders when something goes wrong 1 2 3 4 5 6 7 We find it very easy to be candid with senior

leaders when something goes wrong

To seize transient advantages, companies need a new mode of operations. The diagnostic below can help pinpoint areas where change is required. Simply position your organization’s current way of working between the two statements in the assessment. If you score in the lower part of the range in an area, you might want to take a hard look at it.

Is Your Company Prepared for the Transient-Advantage Economy?

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June 2013 Harvard Business Review 9

Deddi Tedjakumara Prasetiya Mulya Executive Learning Institute

dedditedja@me.com deddi@pmbs.ac.id