Uncertainty Is An Unlikely Friend

How to successfully navigate the unknown

There’s a chasm of difference between risk and uncertainty. Risk can be mitigated with analysis. With risk comes a known range of outcomes that can be quantified using probabilities. There is no data to mitigate uncertainty fully; the threat has yet to materialize. Apple was not even on Nokia’s list of competitors one year before the iPhone launched and began to erode Nokia’s position in the market.

Uncertainty may be the most accurate word to describe both the mood and context of the Fourth Industrial Revolution. If the most crucial information for an incumbent company’s future is the data that has not yet been created, senior management must grasp the significant difference between risk and uncertainty. An organization adapts and moves its way to the future in response to observed human behavior, which also helps organizations predict human behavior. Uncertainty makes this impossible. This is where leaders of incumbent organizations falter: action must be taken before outcomes are known.
 

However, today’s managers appear weak if they cannot confidently predict the future. This leads to a kind of uncertainty-driven dishonesty, especially when it’s combined with the allure of improving efficiency and profitability. 

If I, as a manager, am not introducing anything new, then I’m taking out of the equation the most significant source of uncertainty. If I’m not innovating and piloting new initiatives, I’m only sharpening the blade; every decision is about marginal cost. If everything is a marginal cost, then short-term profitability will improve. When metrics are tied to capital efficiency measures, the safest play is to improve what I have. 

Iconic brands often rely on their historical success and are slow to respond to the shifting tastes of the consumer. A good example is the dairy industry, where brands like Borden’s and Dean’s never responded effectively to trends of soymilk and other alternatives, resulting in bankruptcy. Kraft relied on zero-based budgeting for years, starving its brands of innovation while boosting profits through cost-cutting. Without reinvesting in innovation (and self-disruption is seen as an enormous risk), profits do not ensure survival.

Measures Matter 

If that’s how managers are evaluated, they can’t take all the blame. They simply mirror the systemic worldview of the leaders at the top of the house, including the board of directors. In general, established firms tend to favor capital allocation metrics like return on invested capital (ROIC) and earnings before interest, tax, depreciation, and amortization The issue is not about running down an alley with bad math. The problem is the deep-rutted thinking that there is only one kind of math tied to short-term profitability. Another recent conversation with an executive captures the essence of the mindset problem: “This is where I struggle,” he said, “because many of the companies that people say are successful, how do we measure those companies?

There is not one kind of business math that fits all. Newer firms tend to favor metrics that are aligned with growth, not profitability. That doesn’t mean that established enterprises can’t become growth companies (and capital markets love growth companies!). Bill Gates grew Microsoft into a $600B powerhouse over his 25 years. Over the next 14 years, the incremental strategies of Steve Ballmer cut the company’s value in half. Enter Satya Nadella, a longtime insider who reinvigorated Microsoft with a completely different mindset. He recaptured Microsoft’s growth company status and supercharged the company’s value over 430 percent to $1.3T by the 6th anniversary of his appointment as CEO. Executives need to be comfortable being uncomfortable. The conversation has shifted from managing ambiguities to developing a strategy at the edge of being wrong.

Alan Amling is a TED speaker and thought leader on harnessing digital disruption for success. Alan helped drive innovation over a 27-year career with UPS and is currently a Distinguished Fellow at The University of Tennessee and CEO of advisory firm Thrive and Advance LLC. He is the author of Organizational Velocity: Turbocharge Your Business to Stay Ahead of the Curve. Visit www.alanamling.com Connect Alan Amling