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August 19, 2019

Embracing Uncertainty

Business Advisory

JankaKringsKlebe

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European industry is under threat from massively growing uncertainty. Trade tariffs, technological disruptions and fast-moving competitors on digital steroids cut deeply into predictions about business development. German managers report that their decisions can’t keep up with the pace of change in their business environment; they feel as if they have lost control. Uncertainty is so pervasive that it turns their former strengths, namely meticulously planning, organizing and controlling resources for highly efficient value creation, into a fundamental weakness.

Mainstream management practices aimed at intensifying the levels of planning and control don’t work in conditions of high uncertainty. In fact, they often lead to analysis paralysis, making the situation worse while the business environment accelerates away. In today’s dynamic markets, they appear as outdated as Soviet-type economic planning.

If managers cannot overcome their predisposition for detailed planning and control, this habit will kill European businesses more reliably than anything competitors or customers might do. In the face of the kind of uncertainty businesses experience today, established best-practice management has no answers. Budgeting, accounting, resource allocation and reporting practices still work in yearly cycles, rendering rapid reallocation of resources to emerging business opportunities next to impossible. Current governance norms rule out engaging with risks that appear to be unpredictable. Together, these practices make it impossible to adapt to new customer needs fast enough, spelling death for innovation. We need to reinvent them for the more dynamic and uncertain world opened up by business ecosystems.

Companies like Haier and Amazon have already demonstrated that it can be done, developing new management and governance practices aimed at creating highly dynamic structures inside their companies. This approach has transformed their companies step by step into open ecosystems where market-based structures fluidly balance available resources and capabilities with customer needs. Now their internal dynamism is so great that structures and business operations can rapidly adapt to emergent customer and market needs.

Business ecosystems such as theirs are built on principles of local autonomy, redundancy, diversity and constant experimentation. They use management and governance practices very different from those of mainstream management. Comparing their decision-making processes illustrates the differences.

In business ecosystems, the majority of decisions are made at the edges, at the point with the biggest impact, usually very close to customers – especially in uncertain or new situations. Governance models ensure that decisions in these ecosystems can and are always made as close to the edges as possible.

This is very different from today’s management mainstream, in which all but the most trivial decisions are concentrated at the top of hierarchies, far removed from customers. Only top management is permitted to take decisions involving risk. Unfortunately, in dynamic situations such as those we increasingly experience today, this course simply leads to paralysis.

Business leaders cannot hope to compete in and with dynamic ecosystems unless they take steps to make their own companies much more adaptive. The secret is to give up control at the edges, and to learn from constant experimentation how to make the most of each new challenge and opportunity.

This article is one in the Drucker Forum “shape the debate” series relating to the 11th Global Peter Drucker Forum, under the theme “The Power of Ecosystems”, taking place on November 21-22, 2019 in Vienna, Austria #GPDF19 #ecosystems
It was first published on the GPDF Blog

Blog image: pixabay.com

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