The modern business world is characterized by four factors known as VUCA: volatility, uncertainty, complexity and ambiguity. For companies to survive in this new world order, they must not just have the ability to change and select the right change, but also to create the future while managing the present.
Dr. Hans Mueller *, President of the Advanced Materials Business Unit of Chemie AG, sank into his leather office chair, closing his eyes and taking a deep breath. What a start to the week! His key client had just called him to announce that he would not renew his supply contract for POLYMER 1 beyond the end of the year. POLYMER 1 is the key profit driver of the Advanced Materials Business Unit and its performance and proprietary position is the business unit’s pride and joy – and also Dr. Mueller’s. He even has his name on the key patent. It was not that the client was dissatisfied with the performance delivered by POLYMER 1 or had found a better or cheaper replacement material for POLYMER 1, nor did he have specific complaints concerning quality, supply service, or the performance/cost improvements earmarked by Chemie AG. He had simply told Dr. Mueller that his company had found a way to do the job provided by POLYMER 1 at about half of the current cost without the need to purchase any chemicals. Nor should Dr. Mueller take it personally, he said – there was nothing he could do differently to keep the contract. Dr. Mueller was racking his brain. What should he do now? Why hadn’t he, a seasoned executive in the chemical business, seen this coming? Welcome to the VUCA business world!
VUCA – the new multi-polar business world challenging traditional companies
According to Wikipedia, the concept of a VUCA situation was developed by the U.S. military after the collapse of the Soviet Union to describe a multi-polar world: volatile, uncertain, complex, and ambiguous. Volatility reflects the nature and dynamics of change, and the nature and speed of the forces and catalysts of change. Uncertainty means the lack of predictability, the prospects for surprise. Complexity indicates the vastness of forces, the confounding of issues, the lack of a cause-and-effect chain and the confusion that surrounds the organization. Ambiguity conveys the haziness of reality, the potential for misreading a situation, and the mixed meanings of situational conditions.
The VUCA business world is fueled by three drivers. Firstly, the pace of change is accelerating. Change has changed. As just one illustration, it took radio 38 years to get 50 million users, it took TV 13 years, the Internet 4 years, and Facebook 2 years – a 20-fold acceleration! Secondly, we have the commoditization of knowledge. It is estimated that there are about 130 million books distributed all over the world in all kind of places, some with limited or no access. But 4,500 million webpages are accessible from everywhere by everyone who has an internet connection. Did you ever try to borrow a book from the Tibet University in Lhasa? The third driver is hypercompetition, which is created by globalization and digital transformation.
“The VUCA business world is fueled by three drivers. Firstly, the pace of change is accelerating. Secondly, we have the commoditization of knowledge. The third driver is hypercompetition, which is created by globalization and digital transformation.”
Innovation key to growth creation in today’s challenging environment
How can you create growth in a VUCA business world? “Innovation and more of it” is a proven strategy to thrive in a VUCA environment, because innovation creates new value which was not captured before. Companies got the message: In a survey taken by management consultancy firm Accenture, 93% of the executives surveyed said the long-term success of their organization’s strategy depends on their ability to innovate, and 70% see innovation among their company’s top five priorities.
Time for a brief digression: What is innovation? Everybody seems to know – when you google “innovation”, you get more than half a billion hits. So everybody knows what innovation is. But does everybody agree on the same definition? Innovation is often confused with “invention”, a term which is much easier to define. An invention is a scientific or technical idea which is new to the world, has utility, is non-obvious, and is proven to be workable. You have to spend money, e.g. your R&D budget, to create an invention. In essence, an invention creates knowledge which has potential value. However, an innovation is needed to turn this knowledge into money. Summarized in one line: Inventions turn money into knowledge, innovations turn knowledge into money.
Now the differences between inventions and innovations become clearer. Firstly, not all inventions create innovations: Think of all the patents sitting on shelves collecting dust. Secondly, not every innovation requires a new invention. Think of the i-Pad: an innovation for music on-the-go for sure, but not an invention, because the MP-3 player and its technology existed beforehand. Thirdly, inventions are made by individuals or groups of any kind. Innovation requires a multi-functional team (R&D, marketing, manufacturing, finance…) to succeed. But how can you become more innovative? You need to have three pillars in place.
Ability to change must go hand in hand with choosing the right change
The first pillar is the ability to change. Innovation is founded on challenging the status quo and creating change. But you need to be able to change quickly – meaning there can be no slow, incremental steps to gradually adapt to a new situation. You need to be able to adjust quickly or – even better – anticipate relevant changes in order to lead change rather than follow it. Your company needs to become more agile, otherwise you’ll pay the price like Kodak, Nokia, Henschel and all the others did. Remember the old saying: “Ignore change and die, adapt to change and survive, but lead change and thrive.” But not just any change will do. Only some will work, but which ones?
The second pillar is the capability to select the ‘right’ change – not just change for the sake of change, but change which will create new value for your business. There are many choices to be made: (i) which part of your business you want to innovate, (ii) what kind of innovation you choose, and (iii) how this fits into your business strategy. This process takes time. You may have to rethink your strategy. You will have to ponder on future scenarios, trends, emerging technologies. On the bottom line, you have to step out of your current world and look at it from the outside. As the saying goes: ‘If you are inside the jar, you can’t read the label.’ But how do you implement it, how do you make it work? You have a business to run. And what is the third pillar? Let’s define the problem better first before we discuss the solution. Remember Einstein’s phrase: “If I had an hour to solve a problem, I’d spend 55 minutes thinking about the problem and 5 minutes thinking about solutions.”
“Summarized in one line: Inventions turn money into knowledge, innovations turn knowledge into money.”
Creating the future must be balanced by managing the present
Here the real problem: We have to explore the future to lead change. But at the same time, we have to run our current business and pay our employees, suppliers and taxes, and finance the investment in our future. We need to create the future while managing the present. This is the third pillar. We will expand more on this later.
Why is this so difficult to do? In the end, we all can do two different activities at the same time – like walk and chew gum. You may bite your tongue, though! Let’s look back in time. One of the leading economists of his time, Karl Marx, wrote: ‘The past lies like a nightmare upon the present.’ So let’s have a look at the history of management.
“You need to be able to adjust quickly or – even better – anticipate relevant changes in order to lead change rather than follow it.”
Centuries of industrialization still shape modern management thinking
In the past (before the 18th century), craftsmen and farmers were the backbone of the economy. Production was essentially limited by the amount of physical manpower (or animal power) available. Then the industrial revolution happened, and suddenly power was available at practically any scale. Any manufacturing process could be scaled in volume. But you needed to organize human manpower to serve the production chain (think of an assembly line) and to finance the capital for building and running the machines. That was the hour when the modern enterprise and its associated management systems were born.
Today, we are still living with the rules from back then for how to organize and manage big enterprises. Most large corporations are still following those tried and trusted principles: Focus on process control, in particular quality control – small mistakes could produce lots of waste; focus on efficiency – optimization provides great benefits because of economies of scale; apply financial discipline – capital was scarce and return-on-capital needed to be ensured. This required detailed planning, predictable processes, and rigid organization structures. The second industrial revolution (electrification and assembly line) anchored these principles even more deeply. They became part of the DNA of the big enterprises of the early 20th century, like General Motors or IG Farben. Look at their headquarters –they are silos for employees!
Reliability, reproducibility, predictability, and control are the mantras of the modern enterprise. And they worked. Global GDP exploded (quintupled per capita!); the cost of goods dropped dramatically, sometimes more than 90%, and the world population grew from about 1 billion (1804) to 7.5 billion (2017). Two additional boosters were ignited in the 20th century: rebuilding economies after two world wars and globalization combined with the internet. This created the big company culture best summarized by Mark Twain: ‘I Love Progress but I Hate Change!’
Big companies now dinosaurs in modern business – powerful, but slow
Life is good – so why change a winning horse? Because the big, successful corporations ruling the business world in the 20th century are no longer racehorses winning races. They have become dinosaurs – they are slow, and sometimes too slow to adapt to the challenges and changes in a VUCA business world. But they are still very powerful, and they have a lot of muscle and mass.
What about the innovation created by big corporations, what about their pillars for growth? Let’s review how strong their pillars are. Pillar one – ability to change: Yes, but only in small, incremental steps – like a snail sprinting. Pillar two – ability to select the right change: Yes, they make choices on change, but because of their incrementalism they stick to their guns – they stay close to their familiar business territory. Thus, on the bottom line, they are like the dinosaurs ruling the Mesozoic. And then the famous meteorite hit. Its impact was dramatic – like 1 million Hiroshima atomic bombs going off at the same time. It caused a crater with a width of 200 km. It abruptly changed the environment. The dinosaurs were not prepared or agile enough to adapt to the new environment – and became extinct. An estimated 70% of plant and animal species perished at this time.
So did anybody win? Yes, we won. We – the mammals who could adapt to the new environment and thrive on change. Who are the mammals of the business world? They are the startups. They love change and thrive on it. If not, they die prematurely. And indeed, the vast majority of startups do not survive the first years and do not become profitable companies. This is not a good option for an established business. It is like betting your farm with a very high chance of losing. This is not even Russian roulette – it is reverse Russian roulette: a gun to your head with five chambers loaded with live ammunition and only one loaded with a blank. Not a healthy game to play!
“You may have to rethink your strategy. You will have to ponder on future scenarios, trends, emerging technologies.”
Traditional companies must become agile enough to survive rapid environmental change
Let’s re-state the problem: The dinosaurs died out because of the impact of a meteorite, the mammals thrived in its wake. So our key question becomes: How can a dinosaur become a mammal agile enough to survive a dramatic environmental change? Companies normally do not know when a meteorite will hit them until it is too late to prepare for it. So they need to continue to be a successful dinosaur ruling the Mesozoic – the old business world. After the impact, they need to continue as mammals to win in the dawning Cenozoic – the new business world. And use the carcasses of the dinosaurs to feed themselves.
So this is the answer and at the same time the third pillar we were looking for earlier: We need to create the future while managing the present. Live as dinosaurs but at the same time evolve like mammals! Sometimes this capability is called ‘ambidexterity’ – the capability to follow two very different activities at the same time. This is already a challenge at a personal level: Only 1 percent of people are naturally ambidextrous, meaning that they are equally adapted in the use of both the left and the right hand.
Equal focus on present and future vital to success
Developing the ambidextrous competence of a company is an even bigger challenge. The main difficulty executives have to manage is that it is very difficult to focus on two disparate dimensions, the present and the future, at the same time. If you focus too much on the short term, the competition will soon catch up as technology and markets evolve. On the other hand, if you put too much effort into changing the business, you risk harming your present business in the hope of a better future. This is illustrated well by taking a closer look at the character of pillars one and two in the two worlds:
Pillar One: Ability to change
- Set goals
- Move towards them
- Start moving to learn and survive
- (Re)define goals as you learn
Pillar Two: Make the right change
- Optimize the core
- Transform the core
- Create new core
The Romans were the first to solve this dilemma: Be a god! The Roman god Janus had two sets of eyes—one pair focusing on what lay behind, the other on what lay ahead. But executives do not possess divine powers; they need to make do with more mundane tools like theories and models. And indeed there is a well-known and proven innovation model which can be used to manage this tricky situation: the model of the 3 horizons of innovation.
It groups innovations into 3 types: incremental innovation, transformational innovation, and disruptive innovation. Incremental innovation is about improving the current core business and staying competitive – the classical relaunch on a ‘NEW: Now better/faster/cheaper’ basis. Transformational innovation redefines the gold standard in existing businesses and thereby enables it to grow significantly or enter new markets by leveraging current competencies and capabilities. A typical example is the replacement of granular detergents by liquid detergents. Disruptive or radical innovation is about replacing existing businesses by a radically new, superior value proposition (like digital cameras replacing chemical photo film) or creating completely new markets that did not exist before (like many internet-based businesses).
“We need to create the future while managing the present. Live as dinosaurs but at the same time evolve like mammals!”
Most of the successful big companies are good at innovation of type one and two; most startups focus on the disruptive ones. Very few organizations master the art of progressing all three types simultaneously and in parallel – although that’s what would brace them best for the unexpected threats and huge opportunities of a VUCA business world.
Now we can describe the missing third pillar very accurately: Ambidexterity – the right balance between running the business versus changing the business. A balance between exploration and exploitation; the capability to exploit existing competencies while simultaneously to explore and develop new opportunities.
“Reliability, reproducibility, predictability, and control are the mantras of the modern enterprise. And they worked.”
New giants in business show the way
Here are some examples: Three companies from very different industry sectors which are successfully using all three pillars to their full extent to adapt and keep growing in business sectors where normal companies struggle to adapt in order to survive:
Google has developed from an internet search engine to an engine of global digital transformation. Its core is an internet search engine and related advertising services. It achieved incremental improvements by extending internet search realm by Google Maps, Google Books, etc. At the transformational level, it developed strategic software (email, browsers..) and services (cloud, etc.). In the disruptive sphere, it has Google Glass, Google Wallet, Google Deepdream (psychedelic image creation based on convolutionary neural software), and AutoDraw (AI). DSM (Royal Dutch State Mining) is a mid-sized chemical company which transformed over a century from a coal mining firm into a health, nutrition and materials company. Amazon revolutionized the retail world by disruption (e-commerce) and transformation (grocery stores redefined).
Comparing these very different companies and their strategies to secure growth in a VUCA business world yields the following insight: Each company is developing and leveraging its ambidextrous capabilities in a different way. Google is leveraging the disruptive power of digital transformation. DSM is using chemical science and engineering expertise as a transmission belt for reinventing its business. Amazon is putting a laser focus on how to better serve the customer in all aspects of business.
These different approaches reflect the different business strategies which the companies chose to follow. Thus there is not one but many answers to the obvious questions: How can I develop the third pillar for my company? What kind of ambidexterity does my company need to thrive in a VUCA business world?
“Life is good – so why change a winning horse? Because the big, successful corporations ruling the business world in the 20th century are no longer racehorses winning races.”
United, committed leadership team must lead journey into uncharted VUCA territory
Creating an ambidextrous-capable company is one of the hardest top management responsibilities and challenges. And it takes time. Executives and consultants are still learning how to best achieve this. There is no royal road to glory or best practice yet. Time and again, three areas have been proven to create serious crises which can derail the whole journey to achieving the competence of ambidexterity: Firstly, there are crises of commitment. Company leadership needs to reassure the dinosaurs and to encourage and nurture the mammals. Secondly, there are crises of conflict. Leadership needs to protect the mammals against the dinosaurs. If not, the dinosaurs will kill these small, irritating little competitors jockeying for company resources and management attention. Shareholders, stakeholders and government often behave like dinosaurs too. Thirdly, there are crises of identity and transparency. Leadership needs to capture and repeatedly communicate the essence of the reasons for and the results of this endeavor.
On the bottom line, this is a journey to the company of the future. A firm which will thrive in a VUCA business world requires the consistent and persistent commitment of the entire leadership team. Otherwise, it will fail (remember, Kodak, RIM, Nokia….).
One question I often get asked is: Where do I start? Answer: Start somewhere and keep going. It’s a journey, and every journey starts with a first step. Part of the journey is to find out where you want to get to in the end. As Vivek Wadhwa, a leading scholar of technology and innovation (Carnegie Mellon University, Duke University, Singularity University) and syndicated columnist of the Washington Post on innovation observed: ‘The choice that leaders face is to disrupt themselves or to be disrupted.‘ So: Never stop and never give up!
* Fictitious name invented by the author.