A new approach to managing uncertainty

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Today innovation has become a task that many companies must tackle to keep up their competitive edge. Even though good ideas are generated every day, only a few progress from paper to reality. This is mainly due to wrongly validating during the development process the most uncertain aspects of new initiatives.

Any idea is initially based on a series of assumptions and opinions on various aspects. For the idea to succeed, it is key that these assumptions are true—unless you are willing to turn this process into a guessing game to ascertain whether or not these assumptions are or aren’t, true—it’s essential to validate the key assumptions as soon as possible, and revise the initial idea if necessary.

Ostensibly companies often want to believe that they can control uncertainty, yet in reality all they can do is to manage it. Some disciplines and professions uncertainties by adopting iterative development processes. They believe prototyping and experimentation is the best way to respond to uncertain and unpredictable environments.

Across scores of diverse fields, there are new tools and perspectives coming out for validating new ideas characterized by high uncertainty. Whether they be what we call lean start-up, design thinking or agile development, these new methods are revolutionizing the way companies develop and launch their new initiatives.

But I often ask myself this question: do these approaches have a place in today’s prevailing business cultures?

Indeed, the creation of organizational cultures that boost discovery of new opportunities, creation of prototypes and experimentation become decisive for competing in the age of uncertainty. The way companies are managed must be reinvented, especially when it comes to developing new ideas.

However, companies, as we know them today have been designed to run under conditions of low uncertainty. Their logic is based on the principles of traditional management, which emerged to meet the challenges of the industrial revolution. In 1911, Frederick Taylor wrote, “The Principles of Scientific Management”, which pulls in together various studies that commenced in 1878, and which is one of the pillars of business logic in the 20th century.

Other names contributing to the conception of the origins of traditional management are Alfred Sloan and Henry Ford. In particular, Henry Ford began producing in 1908 the legendary Ford T by applying principles such as the one for assembly lines, and making efficiency become the principle that guided his business decisions. That’s how the Ford T was only available in black.

It was also in 1908 when the first MBA was created at Harvard. This program’s purpose program was to train corporate leaders to respond to the challenges in those times. The industrial revolution created new organizations, new workers, and as companies grew, the need to manage them prompted the creation of these programs and management as a discipline.

While it is true that organizations and the management discipline itself have undergone major transformations since those years, it is no less true that many of these principles are still shaping the basis of the prevailing corporate logic. For example, the functional division of companies into departments such as marketing, finance and operations is based on the task specialization as proposed by Taylor.

The contributions from traditional management and business schools have undoubtedly been highly positive in guiding entrepreneurs and executives over several generations and their principles are still valid in many cases. The problem is that this discipline was created for specific situations, in which it was necessary to manage large numbers of workers and seek maximum efficiency under conditions of low uncertainty.

Precisely these conditions of high uncertainty make it necessary to complement traditional management with new principles. There must be a shift towards the construction of dual or ambidextrous companies able to lever the core business, which is usually present low uncertainty conditions, and explore future business ventures under high-uncertainty conditions.

Next, I present a list of some of the main differences between the two approaches.

Operational:

  • Run in low uncertainty environments
  • Defend the existing competitive advantages
  • Make the most of existing resources
  • Vertical structures
  • Efficiency in execution
  • Homogeneous culture and uniformity
  • Vertical structure.

Exploratory:

  • Experiment in environments of high uncertainty
  • Create new competitive advantages
  • Discover and build new resources
  • Horizontal structures
  • Flexibility to discover
  • Heterogeneous and diverse culture
  • Horizontal structure.

I don’t mean to say that one approach is better than the other. Suitability will be marked by the uncertainty of each situation. Besides, most companies will face situations of all kinds, so it is important to embrace both approaches and to learn to discern when one, or the other, is more appropriate.

When a company or an entrepreneur wishes to develop a new solution, traditional management suggests starting the process by developing a business plan that identifies the client’s need, describes the product or service, estimates market size and does financial forecasts. When the problem is familiar to the company or there is information, this approach may be suitable.

However, under conditions of high uncertainty, this way of doing things doesn’t work. There is already much evidence of cases in which due to ignorance of many factors related to the market and technology, the initial business plan fails. In such situations, planning and analysis aren’t the best way to reach the final solution. Hence the need to create methodologies that enable learning by experimentation and to iteratively progress towards the final solution.

Innovation and uncertainty management require new way of managing. For this, new principles must be set down and innovators must be equipped with tools that allow them to take on new problems under conditions of uncertainty. But above all, a profound cultural change in the business field is necessary, as well as the development of new capabilities to fast track this change and prepare the leaders of the future to be able to create organizations that integrate both approaches.

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ESCRITO POR

HR Blogger

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