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Managing Business in VUCA World

Strategy for Transient Advantage

BFI Finance - Executive Sharing Session - May 4th, 2015

Uncertainty

Returns on common
investments in mature,
stable markets

Potential regulatory,
legislative or judicial
changes

Customer and competitor


reactions to strategies that
reposition wellestablished brands

Unpredictable
competitor moves

New technology
performance and
adoption rates

All-or-nothing industry
standards competition

Unstable macroeconomic
conditions

Demand for new products


or services

The outcomes of major


technological, economic or
social discontinuities
Market evolution in
markets that are just
beginning to form

Courtney, 2003

V
U
C
A

Volatility :
Rate of change

Uncertainty :
Unclear about the present situation and future outcomes. The
inability to know everything, the lack of predictability and
likelihood of surprise events.

Complexity :
Multiplicity of Key Decision Factors. Multiplex of forces, the chaos
and confusion that surround an organization or environment.

Ambiguity :
Lack of clarity about the meaning of an event. Differences in
interpretation when contextual clues are insufficient to clarify
meaning.

Turbulence is more common


Turbulence strikes more frequently than in the past

More than half of the most turbulent quarters over the past 30 years have occurred during the past decade

Turbulence has increased in intensity

Volatility in revenue growth, in revenue ranking and in operating margins have all more than doubled since
the 1960s

Turbulence today persists much longer than in preceding periods


The average duration of periods of high turbulence has quadrupled over the pas three decades.
Reeves, love and Mathur - BCG, 2012

therefore exposure to stock-market volatility. We then looked at what these meant for specific
industries (see figure 2).

Figure 2
Economic turbulence affects industries differently
EBIT %
35

30

2001
2011

25

20

15

10

Aerospace

FMCG*

Automotive

Process and
chemicals

Pharma

Professional
services

*FMCG is fast-moving consumer goods.


Source: A.T. Kearney analysis

The impact of turbulence differs by industry. For instance, agribusinesses are subject to the
full range of turbulence variables, automakers are sensitive to particular variables such as the

The illiterate of the 21st century will not be those who


cannot read and write, but those who cannot learn,
unlearn and relearn
Alvin Toffler

(Sustainable)

Competitive Advantage
Transient Advantage

ople on the
ng powerful
dvantage is
ting advanin becomes
s what hapd a host of
ible trouble,

The Wave of Transient Advantage

RETURNS

LAUNCH

RAMP UP

EXPLOIT

McGarth, 2013

RECONFIGURE

DISENGAGE

The Wave of Transient Advantage


Stage
Launch
Ramp up
Exploitation
Reconfigure
Disengagement

Nature

People

Identifies an opportunity and


Capable of generating ideas, comfortable with
mobilize resources to capitalize on it experimentation and iteration
Business Idea brought to scale

Capable of assembling right resources, at the right


time, at the right quality and deliver on the promise

Captures profits and share and


forces competitors to react

Capable of analytical decision making, M&A and


efficiency

Keep the advantage fresh

Capable of radically rethinking business models or


resources

Resources are extracted and


reallocated

Candid ,tough minded and can make emotionally


difficult decisions.

Lesson Learned
Companies shore up an existing advantage for as long as possible,
until the pain becomes so obvious that there is no choice.

Early Signals for Reconfigure or Disengagement


I dont buy my own companys products or services.
We are investing at the same or higher levels and
not getting better margins or growth in return.
Customers are finding cheaper or simpler solutions
to be good enough.
Competition is emerging from places we didnt
expect.
Customers are no longer excited about what we
have to offer.
We are not considered a top place to work by the
people wed like to hire.
Some of our very best people are leaving
Our stock is perpetually undervalued

TRAPS
7
1.
2.
3.
4.
5.
6.
7.

The First mover trap


The Superiority trap
The Quality trap
The Hostage-resources trap
The White-space trap
The Empire building trap
The Sporadic innovation trap

1 The first mover trap


Belief that first to market and owning assets
create a sustainable position.
In some businesses like aircraft engines or
mining it may be true.
But most industries a first mover advantage
doesnt last.

2 The superiority trap


Early-stage technology, process or product wont be as effective as
something thats been honed and polished for years.
Because of that disparity, many companies dont see the need to
invest in improving their established offeringsuntil the upstart
innovations mature, by which time its often too late for the
incumbents.

Let Us Watch The Video Clips

3 The quality trap


Many businesses in exploit mode stick with
a level of quality higher than customers are
prepared to pay for.
When a cheaper , simpler offer is good
enough, customers will abandon the
incumbent.

4 The hostage-resources trap

In most companies, executives running big,


profitable businesses get to call the shots. These
people have no incentive to shift resources to
new ventures
Nokia developed a product that was remarkably similar to
todays iPad in about 2004.
Nokia never capitalize on this groundbreaking innovation.
Companies emphasis was on mass-market phones, and
resource allocation decisions were made accordingly.

5 The white space trap


When opportunities dont fit their structure ,
firms often simply forgo them instead of
making the effort to reorganize.
For instance a product manufacturer might
pass up potentially profitable moves into
services because they require coordination of
activities along a customers experience, rather
than by product line.

6 The empire building trap


Bureaucracy building and fierce defense
of status quo.
It inhibits, experimentation, learning and
risk taking.
It causes employees who like to do new
things to leave.

7 The sporadic innovation trap


Many companies do not have a system for
creating a pipeline of new advantages.
On-off innovation
Depend on individual
Vulnerable to swings in the business cycle.

Strategy for Transient Advantage


1.
2.
3.
4.
5.
6.
7.
8.

Think about arenas, not industries


Set broad themes, and then people experiment
Adopt metrics that support entrepreneurial growth
Focus on experiences and solutions to problems
Build strong relationships and networks
Avoid brutal restructuring : Learn healthy
disengagement
Get systematic about early-stage innovation
Experiment,iterate,learn

Think about arenas, not industries


Untraditional competitors take companies by
surprise.
Arena : combination of a customer segment, an
offer, and a place in which that offer is delivered.
Customers jobs to be done.

Set broad themes, and then people experiment


Within those themes , they free people to
experiment with different approaches and
business models.

Adopt metrics that support entrepreneurial growth


Conventional metrics can effectively
kill off innovation

Focus on experiences and solutions to problems


Many companies are so internally focused that
they are oblivious to the customers experience.

Build strong relationships and networks


Evidence indicate that the most successful and
sought after employees are those with the
most robust networks.
Infosys , for instance is choosy about which
customers it will serve , but it maintains a 97%
retention rate.
In GE, the senior leaders spend inordinate
amounts of time building and preserving
relationships with other firms.

Provides framework to highlight changing effects of:


Timing
Altered levels of familiarity or uncertainty
Launch of new initiatives or termination of unsuccessful ones

Get systematic about early-stage innovation


Size of circle reflects relative economic
importance of initiative; typically,
amount of market capitalization at
stake if successful

Distinctive knowledge
surpassing that of
competitors
Invest in initiatives
possessed by company
or easily acquired

Risk

Knowledge surpassed
by competitors
Attempt small to
midsize investments
to gain familiarity

Probability of success
difficult to estimate
Attempt small
investments to gain
familiarity

Familiar

Unfamiliar

Uncertain

All significant actions mapped:


adapting, building, shaping

Initiatives
Size indicates potential market capitalization at stake
Adapt core
capabilities

Build new
businesses

Shape corporate
business portfolio

Clustering here may


indicate too little
investment in
building long-term
growth options

Initiatives
contribute to
current earnings

Initiatives
mature in
23 years

Initiatives
mature in
3+ years

Clustering here may


indicate insufficient
focus on opportunities to adapt core
businesses

Timing

Lowell, Bryan, 2002

Experiment,iterate,learn
Planning new ventures with the same approaches
they use for more established businesses.
They need to focus on experimentation, iteration
and learning

Uncertainty demands a more flexible approach to situation analysis. The old one-sizefits-all approach is simply inadequate. Over
time, companies in most industries will face
strategy problems that have varying levels of
residual uncertainty, and it is vitally important
that the strategic analysis be tailored to the
level of uncertainty.

an effort to maintain its leadership position, as


a new technology supersedes the one currently
generating most of its earnings. Although its
product technology is new, Kodaks strategy is
still based on a traditional model in which the
company provides digital cameras and film
while photo-processing stores provide many of
the photo-printing and storage functions for

The Three Strategic Postures


The Three Strategic Postures

Shape the future


Shape the future
Play a leadership role in
establishing how the industry
Play a leadership role in
operates, for example:
setting standards
establishing
how the industry
creating demand

Adapt to the future


Adapt to the future
Win through speed, agility, and
flexibility in recognizing and
Win through
speed, agility,
capturing
opportunities
in and
markets
existing
flexibility
in recognizing and

operates, for example: setting


capturing opportunities in
standards
or creating
demand
existing markets
harvard
business
review novemberdecember
1997

Courtney, Kirkland, Viguerie, 1997

Reserve the right to play


Reserve the right to play
Invest sufficiently to stay in the
game but avoid premature
Invest sufficiently to stay in the
commitments

game but avoid premature


commitments

page 8

tion, through either superior information, cost


structures, or relationships between customers and suppliers. That allows the company to
wait until the environment becomes less uncertain before formulating a strategy. Many

volve making modest initial investments that


will allow companies to ramp up or scale back
the investment later as the market evolves.
Classic examples include conducting pilot trials before the full-scale introduction of a new

Whats in a Portfolio of Actions?


These building blocks are distinguished by three payoff profiles that is, the amount of investment
required up front and the conditions under which the investment will yield a positive return.

The Three Strategic Moves in Uncertainty

Scenario

Value

1.

2.

3.

4.

No-regrets
movesmoves
No-regrets
Strategic decisions that have
positive
payoffs
in any that
scenario
Strategic
decisions
have

positive payoffs in any scenario

Options
Options
Decisions that yield a significant
positive
payoff
some
outcomes
Decisions
thatinyield
a significant
and a (small) negative effect in others

positive payoff in some outcomes


harvard business review novemberdecember and
1997 a (small) negative effect in others

Courtney, Kirkland, Viguerie, 1997

Big bets
Big bets
Focused strategies with positive
payoffs
one or more
Focusedin strategies
withscenarios
positive
but a negative effect in others

payoffs in one or more scenarios


but a negative effect in otherspage 9

We are moving from a world of problems, which demand


speed, analysis and elimination of uncertainty to solve - to a
world of dilemmas, which demand patience, sense making
and an engagement with uncertainty

Characteristics of Effective Dilemma


Management
1.Flexible, decentralized, empowered networks
within a structure of strategic intent.
2.Learning through immersive experiences, scenarios
and rapid prototyping
3.Acceptance of uncertainty with intuition as a valid
contributor to clarity
4.Strategic sense making beyond operational
problem solving
5.Engagement with complexity
Denise Caron, 2009

FUTURE LEADERSHIP CAPABILITY


1. Maker Instinct
Ability to exploit your inner drive to build and grow things, as well as connect with others in
the making. Leaders need this basic skill to make and remake organizations.
2. Clarity
Ability to see through messes and contradictions to a future that others cannot yet see.
Leaders must be clear about what they are making but flexible about how it gets made.
3. Dilemma Flipping
Ability to turn dilemmaswhich, unlike problems, cannot be
solvedinto advantages and opportunities.

4. Immersive Learning Ability


Ability to immerse yourself in unfamiliar environments, to learn
from them in a first-person way.

5. Bio-empathy
Ability to see things from natures point of view; to understand, respect,
and learn from its patterns. Nature has its own clarity, if only we humans
can understand and engage with it.
Johansen, 2012

6. Constructive Depolarizing
Ability to calm tense situations where differences dominate and
communication has broken down and bring people from divergent
cultures toward positive engagement.
7. Quiet Transparency
Ability to be open and authentic about what matterswithout being
overly self-promoting. If you advertise yourself, you will become a big
target.
8. Rapid Prototyping
Ability to create quick early versions of innovations with the expectation
that later success will require early failures. Leaders will need to learn
from early setbacks and learn to fail in interesting ways.
9. Smart-mob Organizing
Ability to create, engage with, and nurture purposeful business or social
change networks through intelligent use of electronic and other media.
10. Commons Creating
Ability to seed, nurture, and grow shared assets that can benefit
all playersand allow competition at a higher level. This is the most
important future leadership skill and it grows from all the others.
Johansen, 2012

Are you trapped on your current


competitive advantage?

Focused on extending
existing advantages
Budgets, people, and other resources are largely
controlled by heads of established businesses
We tend to extend our established advantages
if we can

Capable of coping with


transient advantage
1

Critical resources are controlled by a separate


group that doesnt run businesses
We tend to move out of an established
advantage early, with the goal of moving on
to something new

Disengagements are just part of the normal


business cycle

We recognize that failures are unavoidable and


try to learn from them

We budget in quick cycles, either quarterly


or on a rolling basis

We like to stick to plans once they are


formulated

We are comfortable changing our plans as


new information comes in

We emphasize optimization in our approach


to asset utilization

We emphasize flexibility in our approach to


asset utilization

Innovation is an on-again, o-again process

Innovation is an ongoing, systematic core


process for us

Its quite normal for us to pull resources from


a successful business to fund more uncertain
opportunities

Our best people spend most of their time


working on new opportunities for our
organization

We dont have a process for disengaging


from a business
Disengagements tend to be painful and dicult
We try to avoid failures, even in uncertain
situations
We budget annually or for even longer

Its dicult for us to pull resources from a


successful business to fund more uncertain
opportunities
Our best people spend most of their time
solving problems and handling crises

We have a systematic way of exiting businesses

We reorganize when new opportunities require


a dierent structure

We try to keep our organizational structure


relatively stable and to fit new ideas into the
existing structure

We tend to emphasize analysis over


experimentation

We tend to emphasize experimentation


over analysis

It isnt easy to be candid with our senior leaders


when something goes wrong

We find it very easy to be candid with senior


leaders when something goes wrong

McGarth, 2013

June 2013Harvard Business Review9

Deddi Tedjakumara
Prasetiya Mulya Executive Learning Institute

dedditedja@me.com
deddi@pmbs.ac.id