May 31, 2017
Huge Opportunity in Today’s Uncertainty
by Colin Price and Sharon Toye
Only 55% of earnings stem from factors that businesses can directly control -- and there's a huge opportunity in that other 45%.
A landmark study into the profits of businesses found that only 55% stemmed from factors they could control. A full 45% of a business’s earnings was determined by external factors – the growth rate of the economy, political changes, movement in oil prices, etc. That study was done 20 years ago, so the part of earnings now determined by uncontrollable factors may well be higher, given that technology, politics and other factors have added so much uncertainty to today’s business environment.
Executives don’t like things they can’t control, so many focus 100% of their effort on that 55% (or less) of earnings that is in their hands. But focusing on only roughly half the sources of profitability leaves an enormous opportunity for those who are willing to embrace uncertainty and find better ways to sense and react to those external, uncontrollable factors.
Because of regulation and capital requirements, financial services have been largely protected from the digital disruption that has rewritten the rules for retailing, music and so many other parts of the economy. But uncertainty is picking up because financial services firms are now having to confront new kinds of information, at much higher speed, and must learn how to quantify new types of risk.
For instance, some fintech startups are granting loans based on analyses of social media — one theory being that, if your friends are solid citizens, you’re likely to be a better risk than your credit score suggests. The jury is still out on how effective these startups will be, but they show the need to be able to analyze “unstructured” data such as that coming from social media and from the cameras and sensors that increasingly blanket the world.
See also: Change Management Is Not About Change!
Meanwhile, although technology is typically described as addressing humanity’s problems, it also creates whole new types of risk. How do you figure out how to insure a driverless car? There’s never been one before. When the Internet of Things essentially connects every device to every other device in the world, what risks come along with the benefits? They won’t just relate to cybersecurity issues such as how to protect personal information either; people will also hack into systems to sabotage equipment, to make cars crash into each other and who knows what else.
History shows that many companies will wait and watch to see how the business environment evolves and only then start to react, but research for our new book, “Accelerating Performance,” found that the best firms have a fast, yet low-risk way of responding to change. We can summarize that approach as: “mobilize, execute and transform with agility.” Our study of these factors is based on decades of work and years of research, included a survey of 20,000 global leaders, investigation into the performance of 3,000 teams and deep research into the FT 500, including interviews with senior executives at 23 top performers we call “superaccelerators.”
Here’s what they do – and do well.
Embracing uncertainty. Some 60% of the respondents in a major survey of ours said high-impact events had repeatedly blindsided their organization, and 97% said their organization lacked an adequate early-warning system. To avoid ugly surprises, companies need to embrace uncertainty. That means building a deep understanding of the highest-impact forces that are shaping the future of an industry and preparing for a range of alternatives, rather than just addressing operational pressures.
Pressure-tested decision making. Often, context needs to be broadened so that new options can surface. What seems to be a harsh, either/or choice can become a much easier decision. Continually reframing business challenges must become a best practice. It is human nature to have mental filters – they help us to efficiently manage information overload and to make many routine decisions without hesitation — but these shortcuts often lead people to see what they expect to see rather than what is actually there.
Overconfidence can also cloud judgment. We need to constantly recognize and work to overcome our biases, while still making swift decisions.
Shared vision. Uncertainty can lead to divisiveness, as everyone has his or her own opinion of how the business will develop. But extensive research shows that companies that have a shared vision of where they are going, and why, do remarkably better than those that do not. Most visions are incremental and stifling, limiting change to minor investments in new capabilities that support the core, existing business. But a bold vision is often a bridge too far, creating a state of paralysis by presenting the prospect of radical changes to the business model. Most successful strategies find the elusive sweet spot between incremental and bold, balancing the familiar with a distinct “North Star” for the future.
Core competencies. Today’s winning capabilities may become tomorrow’s table stakes. Organizations must identify what capabilities world-class competitors will possess in the future and begin to invest in them now.
Execution feasibility. Many attractive strategies exist. However, not all are possible for every organization. Investing in strategies with low feasibility is a sucker’s game. Leadership needs to recognize that how they will win may be different than the path for their competitors. Before making any moves, organizations should inventory the principal strategic decisions for the near term and long term, and then evaluate their readiness to execute.
Adaptive playbook. Relentless testing of alternative strategies is imperative. Organizations need more than one strategy at the ready, as market conditions often change and new threats and opportunities emerge, and must be acted on quickly. Most firms plan as if the world were predictable, developing point forecasts, budgets and initiatives that will succeed as long as the external environment cooperates. Organizations must become intimately familiar with their competitors’ inner workings, regularly employing role-playing exercises to simulate the competition’s strategic intents.
Balanced portfolio. A well-constructed portfolio balances investments with knowable return on investment (ROI) in the short term along with investments that have long-term potential and can’t be evaluated with such traditional financial metrics. Portfolios need to incorporate varying levels of risk and multiple time horizons.
Failing fast. Every organization has limited resources, so it must objectively assess which strategies are working and which are not, pull the plug on those that are failing, double down on those that are working and invest in new ideas. A firm burdened with too many stagnant strategic initiatives quickly faces a drag on overall performance.
Rapid response. Rapid response requires the ability to sense threats and opportunities in the market, while relentlessly pursuing improvement in how to respond when signals emerge. Responding to a threat or opportunity more quickly than competitors, based on less-than-perfect information, can make all the difference. Most organizations struggle to act swiftly and commit resources because the near-term risks of being wrong outweigh the long-term reward of being right.
See also: Group Benefits: the Winds of Change
Foresight. Most companies are skilled at sensitivity analyses of one issue in isolation, but few can conduct deeper-level examinations of how issues interact in a complex system. The current volatile, uncertain, complex and ambiguous environment demands that firms re-evaluate their strategies and strengths and improve the ability to anticipate.
Learning. You must continuously test assumptions about yourself, your market, your customers and your competitors. It’s important to understand which assumptions might be vulnerable and to “unlearn” associated behaviors. Operational excellence is increasingly becoming commonplace in many industries, with true differentiation stemming from a learning culture that is externally focused, experimental and innovative, collaborative and comfortable with risk.
Adaptability. Existing strategies and processes, even if successful in the past, might need to be changed dramatically to ensure continued performance in the future. Organizations must adjust to changing circumstances by applying existing resources to new purposes and modifying actions and behaviors accordingly.
Resilience. Many companies have too narrow a view of the plausible range of outcomes, and often a disruptive event turns into something that is crippling rather than a small setback or even an opportunity. Organizations must surface and examine mental models. By considering which assumptions might be vulnerable and looking at a broader range of outcomes, leaders can combat overconfidence and prepare for challenging operating environments.
Even addressing all 13 of these factors won’t guarantee that you’ll win. The business world will remain a harsh place full of formidable competitors. But becoming expert on these issues will give you a much better chance of mastering uncertainty, while your competitors continue to focus just on the factors they can control.