How to Rethink Your Business During Uncertainty

Recessions are a good time to disengage from businesses and practices that are weak and under pressure—but the volatile environment demands that managers let go of old approaches.

Image courtesy of Flickr user cantabrigensis

Image courtesy of Flickr user cantabrigensis.

The depressing headlines are only the latest manifestation of a trend that has been long in the making: the encroachment of Schumpeter’s famous “gales of creative destruction” over what were once relatively stable, even mature, businesses.1 Unfortunately, leaders of many of today’s more mature organizations don’t have the right mindset or practices to help their organizations survive. They grew up with management practices suited to a different age—one with higher barriers to entry, greater transaction costs, fewer capable competitors, growing and increasingly affluent markets and far less information. The environments they are facing now, however, are less predictable, more complicated and more volatile.

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The result is that many of the core businesses—involved with what may be boring old, mainstream, mature products and services that everyone has taken for granted—are themselves becoming more uncertain. As uncertainty increases, companies are finding themselves facing what we call a high ratio of “uncertainty to knowledge.” This is a problem because making decisions based on old assumptions often leads to unfortunate outcomes. Human beings have a tendency to embrace information reinforcing their pre-existing beliefs, while challenging or rejecting information that calls these beliefs into question.2 At the same time, many established management tools, such as net present value, are built on a foundation of assumed certainty—that it’s realistic to forecast likely cash flows into the future and discount them to today. In volatile business environments, such thinking is no longer practical. The good news is that other, more suitable approaches can be adapted from the practices used by successful fast-growth companies, entrepreneurs and corporate new-business-development groups that have always had to navigate unpredictable, resource-constrained and surprising environments. In an unpredictable world, trying to be right can lead managers terribly astray. Therefore, we favor a “discovery-driven” approach that emphasizes searching for the right answers and reducing the assumption-to-knowledge ratio.

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References
References

1. J. Schumpeter, “Capitalism, Socialism, and Democracy” (New York: Harper Perennial, 1942).

2. D. Kahneman, P. Slovic and A. Tversky,“ Judgment Under Uncertainty: Heuristics and Biases” (Cambridge: Cambridge University Press, 1982).

3. M.S. Reisch, “DuPont Gets an Overhaul,” Chemical & Engineering News 80, no.15 (2002): 22-27.

4. “Ellen Kullman to Investors: Growth from Emerging Markets,” September 18, 2008, at www2.dupont.com/Media_Center/en_US/index.html.

5. E. Byron and K. Richardson, “Avon Makeover Isn’t Cosmetic: Multiyear Turnaround Appears Solid, With a Buyback Coming,” Wall Street Journal, Oct. 22, 2007, sec. C, p.1; and E. Byron, “Is Avon’s Latest Scent Sweet Smell of Success? Bold Moves, High-Touch-Meets-High-Tech Business Model Help CEO Andrea Jung Boost Sales of Sluggish Company,” Wall Street Journal, Oct. 15, 2007, sec. B, p. 1.

6. I.C. MacMillan, “Controlling Competitive Dynamics by Taking Strategic Initiative,” Academy of Management Executive 2, no. 2 (1987): 111-118.

7. A spreadsheet for calculating this abbreviated NPV can be downloaded at www.discoverydrivengrowth.com by clicking on the “tools” tab.

8. L. Abboud and A. Lagorce, “SAP Profit Slumps: New-Software Rollout Is Slowed,” Wall Street Journal, May 1, 2008, sec. B, p. 6.

9. R.G. McGrath and I.C. MacMillan, “Discovery-Driven Growth: A Breakthrough Process to Reduce Risk and Seize Opportunity” (Boston: Harvard Business Press, 2009).

10. R. Waters, “Baby Bells Hit by a Series of Wrong Numbers,” April 16, 2002, www.FT.com.

11. “The Phone Call Is Dead; Long Live the Phone Call,” Economist, Dec. 2, 2004, 69.

12. S. Mehta, “Don’t Call Me Baby,” Fortune, April 16, 2001, 162-168.

13. S. Rosenbush, “Verizon’s Gutsy Bet,” Business Week, Aug. 4, 2003, 52-62.

14. S. Ward, “You Can Really Hear Them Now,” Barron’s, Feb. 2, 2009, 24.

i. A.K. Dixit and R.S. Pindyck, “Investment Under Uncertainty” (Princeton, New Jersey: Princeton University Press, 1994); A.B. van Putten and I.C. MacMillan, “Making Real Options Really Work,” Harvard Business Review 82 (December 2004): 134; and I.C. MacMillan and R.G. McGrath, “Crafting R&D Project Portfolios,” Research-Technology Management 45, no. 5 (September 2002): 48-59.

2 Comments On: How to Rethink Your Business During Uncertainty

  • Hanan Weiskopf | January 18, 2011

    Rita, wouldn’t you agree that in dire times, smaller companies are bound to have the best opportunities? In a bad economy, small companies are more agile and respond quicker – and also are familiar with maximizing limited resources.
    I think they specialize in creating enabling structures in creative models can only learn from.

  • Mike Stapenhurst | June 15, 2011

    Companies that use a matrix type of organization are more flexible in nature. In difficult economic times they should do better than those with a standard hierarchical management structure.

    Has anyone studied this?

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