Thought Leaders
Profiting From Uncertainty: Great Fortunes Are Made When the Cannonballs Are Falling in the Harbor
Some managers work to reduce the uncertainty of their businesses, based on the belief that if you can measure it, you can manage it. They seek engineering precision in an environment rocked by constant and often unpredictable changes. "Others realize, like Rothschild, that the more uncertain the environment, the greater the opportunity — if you know how to capitalize on it," said Dr. Paul J.H. Schoemaker, author of Profiting From Uncertainty: Strategies for Succeeding No Matter What the Future Brings and co-academic director of a new 2-day Wharton program on this theme, which will be launched in November.
How do you capitalize on uncertainty? One very risky approach is to try to predict where the future is headed and then place your bet on that one future. "This approach is very often a result of foolhardy overconfidence — something all of us are prone to," said Schoemaker. "More often than not, our bet is on the wrong number when the roulette wheel comes to rest. Some of these bets will pay off big, but others will be a complete bust. And, as in Las Vegas, the house usually wins." Schoemaker, who also serves as Research Director of Wharton's Mack Center for Technological Innovation, has studied numerous cases of where, for example, emerging technologies brought fortune to some and misery to most incumbents who bet big on the wrong technologies.
Based on his academic work, as well his extensive experience in industry involving a hundred organizations (including being a scenario planner with Royal/Dutch Shell in London), Schoemaker proposes a less risky way to profit from uncertainty. Instead of placing one big bet on a single future, he recommends using scenario planning, robustness analysis, and options thinking to sketch out multiple, plausible futures. And then you need to design a strategy that is as robust as possible across these different futures and remain flexible where robust solutions cannot be found. You should try to place a number of systematic bets designed to help you succeed no matter what the future brings. In roulette, this is not possible — but in real life, it can work. "Of course, you cannot control or even predict the future," he said. "But you can anticipate multiple futures and develop strategies that allow you to succeed across most of them."
With a future bounded by a set of plausible scenarios, the company can then analyze and build flexible strategies and new capabilities for enduring success. The most important capabilities will generally be the ones that are robust across different scenarios. For example, if sailors setting out to unknown lands do not know if they will end up in the searing desert or the freezing polar regions, they might first pack those resources that would be useful in either climate, such as food and water. The next items might be assets that can be flexibly redeployed, such as canvas that could be used for Arctic boats or shelter in tropical storms. Identifying which parts of your strategy are robust and which need to remain flexible lies at the heart of Schoemaker's approach.
Siren Song: An Internal Focus Leaves Half the Business to Fate
This kind of process helps counter an internal bias in many organizations by forcing managers to look at the opportunities of the outside environment before they slip away. It helps managers see threats before they become life-threatening and hopefully turn them into opportunities.
Many companies suffer from such an internal focus that they leave too much of their profits to chance. "Because many managers assume the external environment is a given that they cannot affect or control, they focus primarily internally," Schoemaker notes. "What can they do about the economy? Unless it is a technology company, what can they do about the progress of genomics?" Managers assume that because an economic downturn or upturn is driven by the Fed or factors beyond their control, they should just focus on the factors they can directly "control," namely their internal operations.
In viewing the outside world as beyond control and concern, they leave half their business to fate. Research shows that only about 55 percent of profits are the result of firm-specific actions. The rest is due to industry factors or other external effects.
Schoemaker advocates a very different approach. "Even if you cannot affect this environment — although there often more ways to shape it then you may realize — you can prepare to take advantage of its changes. By focusing too much internally, companies often miss tremendous opportunities or shifts that require new capabilities," Schoemaker said. "Were pharma companies prepared to take advantage of breakthroughs in biosciences? Were music companies prepared for the changes in music delivery? While these changes were clearly on the horizon for decades, many companies did not take them seriously enough and failed to prepare a coherent strategy for meeting the future in whatever way it unfolded. They became so focused on the current business or the next quarter that the big picture was lost in the process. If you look at the declining revenues of the music industry, you see that the big picture often is the place where great profits are won and lost in the long term." Entire industries can suffer from major blindspots.
Be Prepared
While you may not be able to change the future, you can be better prepared for it when it arrives by developing a set of plausible scenarios, creating multiple capabilities for succeeding, and monitoring closely to recognize where the world is heading.
"It is true that a rising or falling tide does raise or lower all boats," Schoemaker said, "but some of these boats will be designed to sail well in low water or will have the navigation capabilities to seize the opportunities of the tides and winds. An expert sailor does not control the winds but is prepared to profit from them. As the expression goes, "the ablest navigators always have the wind on their side." This is the key to profiting from uncertainty in the business world as well, where high waves and gale winds toss companies like ships on the high seas. Foresight, flexibility, and investing in robust capabilities are the keys to success in Schoemaker's view of strategy. |
