Monday, March 5, 2012

Coming to Grips with Uncertainty

By Virgil Carter

Since 2008, the economy has been uncertain at best.  Perhaps the only consistent aspect of the economy has been its uncertain volatility—up one day and down the next, with little certainty of which direction the economy may ultimately be headed.  Non-profit organizations are particularly vulnerable to such conditions, since most non-profits operate with annual budgets that are fully consumed each year and may have little financial reserves.  How can non-profits make the most of uncertainty?

Author Hugh Courtney, asks the questions in “Making the Most of Uncertainty”, in a recent McKinsey Quarterly, “Is it better for a company’s competitive position to try to influence, or even determine, the outcome of crucial and currently uncertain elements of an industry’s structure and conduct? Or is the wiser course to scope out defensible positions within an industry’s existing structure and then to move with speed and agility to recognize and capture new opportunities when the market changes?”  In other words, shape or adapt—be proactive or hunker down?

 Courtney offers the view, “The truth is that no dominant solution exists. You might argue that any good strategy should attempt to shape and adapt by specifying actions designed to increase the probability of some outcomes while simultaneously preparing for others. That approach may work in some cases. Yet the actions a company must take to shape the market are often inconsistent with those needed to adapt.”

 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.  Other shapers try to restructure unstable industry environments by making bold mergers and acquisitions.  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.

The author notes four levels of uncertainty, beginning with the least uncertainty and concluding with the greatest level of uncertainty:

·         Clear enough future:  a single view of the future may be possible

·         Alternative futures:  a limited set of possible future outcomes, one of which will occur

·         Range of futures:  a range of possible future outcomes

·         True ambiguity:  not even a range of possible future outcomes

As organizational leaders make shape-or-adapt choices, uncertainty, perceived first-mover advantages, and the company’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, according to Courtney: “leaders 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”
Where is your organization’s level of uncertainty?  How will it shape your decision-making?

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