Friday, January 20, 2012

Making the Most of Uncertainty

Virgil R. Carter

Organizational leaders are faced with how best to lead their organizations during times of uncertainty.  For example, is it better for a non-profit organization to energetically research and invest in the outcome of crucial and currently uncertain elements of the organization’s operations and industry or discipline?  Or is the wiser course to adopt defensible positions within the organization’s existing structure and then to move to recognize and capture new opportunities when the economy changes?

A recently republished article by Hugh Courtney, published by the McKinsey Quarterly, “Making the Most of Uncertainty” addresses this issue.

“As globalization, digitization, and unfettered capital markets raise levels of uncertainty and rewrite definitions of opportunities and risks, this basic strategic choice has morphed into a more complex and high-stakes dilemma”, according to the article. “The right strategic bets can return far higher payoffs, far more quickly; the wrong ones carry a much higher risk of systemic failure. Betting big today may fundamentally reshape a market on a global scale to the advantage of a company or quickly produce losses that can throw it into bankruptcy. A company may avoid foolhardy mistakes by waiting for uncertainty to diminish, or it may squander the chance to lay claim to first-mover advantages.”  The parallels for non-profit organizations are obvious.

“The truth is that no dominant solution exists”, is the reassuring conclusion!

 Pursuing the question of how to address uncertainty, the author states, “An essential starting point is understanding your alternatives. Shaping and adapting strategies may take many different forms. Shapers generally attempt to get ahead of uncertainty by driving industry change their way.  Adapters, by contrast, take the existing and future industry structure and conduct as given. When a market is stable, adapters try to define defensible positions within the industry’s existing structure. When high uncertainty prevails, they attempt to win through speed and agility in recognizing and capturing new opportunities as the market changes.”

“Whether a company should attempt to shape or adapt depends largely on the level and nature of the uncertainty it faces. To put things simply, when it faces very high levels of uncertainty about variables it can influence, shaping makes most sense. Adapting is preferable when key sources of value creation are relatively stable or outside the company’s control.”

As executives make shape-or-adapt choices, uncertainty, perceived first-mover advantages, and the organization’s capabilities and aspirations play important roles. No algorithm exists to weigh each factor, nor can a one-size-fits-all answer suit all organizations in all situations. One thing, however, is certain: executives “who develop a thorough understanding of the level and nature of the residual uncertainty their organization faces can develop a richer set of feasible alternatives and make better-informed choices to shape or adapt.”

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