Uncertainty is the lack of information about changes in the business context, which makes the future of the company unpredictable.
Managers perceive their environment as very uncertain, when they don’t know:
Uncertain isn't the Same as Unsure
Managers tell me that they see uncertainty as a given. They deal with uncertainty every day. When they feel confident about their skills and when their company has enough slack, uncertainty does not make them insecure.
Slack means that an organization has more manpower, expertise, and capital than it needs for the day-to-day operations. They can use slack as a buffer for the unforeseen effects of change. Very pragmatic, but that may not always work. For instance, when they misjudge the level of uncertainty.
Levels of Uncertainty
Professor Warren Walker of the Delft University of Technology has classified 4 levels of uncertainty. Each level requires its own response.
This environment is stable and static enough to be predictable.
Forecasts project the future as a dot on the horizon. Strategy is a linear, stepwise process.
The change rates in this environment have a broad range.
Forecasts contain several alternatives that are weighted, so that the best strategy can be determined.
This environment can develop in multiple possible directions.
Scenario planning explored the directions. Strategy is based on overlap of the scenarios. This prepares a company for latent changes.
This environment is so turbulent, that it develops in unpredictable ways.
Mapping multiple strategies possible transfer thresholds between them enables rapid adaptation
The pragmatic approach using slack is most feasible on level 1, 2 and 3.
The Unusual Strategic Response to Deep Uncertainty
Deep uncertainty typically triggers several reactions. The first is resistance. When a company resists, it plans for the worst case scenario. This requires lots of slack: simply not possible for today’s lean organizations.
The second answer is resilience. This means that the company expects to encounter deep uncertainty, but that it makes sure that it can recover quickly. Most diversification strategies are based on this idea. The weakness here is insufficient diversification. Two product categories serving the same market, or one category serving adjoining markets, are strategies that will not deliver in situations of sudden high impact changes.
Thirdly, a static robust strategy can reduce vulnerability to change in the largest possible range. A combination of the first and second strategy, that carries the weaknesses of both as well.
Finally, a company can opt for planned adaptation. As you may have gathered from my blog, this is the area I work in. Planned adaptation is a dynamic strategy. Monitoring the environment is key, and adapting when conditions change the fallback tactic. Companies that have embraced this strategy are not working on outcome predictions but on the identification of vulnerabilities. Like IC units that monitor the patients for change.
Assessing Your Response
I would like to leave you with a set of questions:
- Judging by its responses, what level of uncertainty is your company ready for?
- Single strategy – stable, static environment
- Optimal choice – stable, dynamic environment and assessable risk
- Serving multiple scenarios – dynamic environment under uncertainty
- Worst case strategy – resist deep uncertainty
- Quick recovery strategy – undergo deep uncertainty
- Static robust strategy – hedging against deep uncertainty
- Planned adaptation – steering towards positive outcomes in deep uncertainty
- Considering the change rate and predictability in your environment, is your company’s response adequate?