"To expect the unexpected shows a thoroughly modern intellect," said Mrs Cheveley in Oscar Wilde’s An Ideal Husband. She’d have been right at home in 2018. Rarely has the world seemed less secure, with Donald Trump in the White House and the UK’s exit from the EU, not to mention increasingly sophisticated cybercrime, terrorism and a growing awareness of the potential impact of climate change.
Use of the term ‘VUCA’ has now become so commonplace that we’ll soon be needing a new and improved acronym to describe the current state of the world. But are things really any more volatile, uncertain, complex and ambiguous than they were in previous eras?
In his book Factfulness, Swedish medic and writer Hans Rosling points out that the world has got significantly better in many ways over recent decades. In the past 20 years, global poverty has halved, 90 per cent of children now get vaccinated against at least one disease, and in much of the world, girls and boys get between nine and 10 years of education. Adjusted average earnings may still be below pre-crisis levels, but living standards in the UK are significantly better than they were in, say, the 1970s, a decade of blackouts and industrial unrest.
Despite this, Rosling discovered, when asked to estimate statistics such as life expectancy and literacy rates, audiences around the world almost always get the answers very, very wrong. And the more educated people are, the more pessimistic they are.
High office, high anxiety
Historically, business leaders have always tested low for "neuroticism", but, says Randall Peterson, professor of organisational behaviour at London Business School, the average neuroticism scores for MBA and Executive MBA students has gone up substantially in the past three years. "I think probably everybody has moved up the anxiety scale," he says. "When I’m talking to MBA students I get a question all the time now: ‘How do I manage my individual anxiety as I take on a leadership role and as I go into the world of work?’ I never used to get that question."
What is behind the nervy pessimism? One big effect of the 2008 global financial crisis was that swathes of people felt economically threatened and vulnerable, says Peterson. Research shows that when people feel economic threat they’re more likely to look for dominance in their leaders as opposed to competence. And so strong men have come to power in the US, Brazil, Saudi Arabia, Hungary, Poland and the Philippines. In the UK the Brexit vote was an expression of the same emotion. The constant stream of hyped-up news from social media also plays a part. People’s general anxiety spills into their work lives, and so it affects the way they and their businesses behave. "There is a contagion," says Peterson.
It doesn’t help that while we may, in the West at least, have never had it so good, the world is more uncertain, according to The World Economic Forum’s most recent Global Risks Report, which pointed out that, "The structural and interconnected nature of risks in 2018 threaten the very system on which societies, economies and international relations are based."
Peter Schwartz, senior vice president, strategic planning at Salesforce, agrees. "We now connect environment, economy, politics, technology, society in new ways all around the world," he says. "These interconnections create the opportunity for much greater complexity; and one of the things we’ve learned about complexity is that the results of complex systems are highly unpredictable and uncertain."
For many business leaders the fear of disruption amplifies their uncertainty. "Smaller brands are able to compete with large ones because of the ways consumers are discovering products through word-of-mouth, and the ways those small firms can raise funds," says Hugo Amos, co-founder of Black Swan, an AI-driven market research firm. "They can sell direct to consumers, meaning they can trial small product ranges, or single-product businesses. Customers now change their habits more quickly. All of this unsettles big businesses who can’t do any of these things."
Disruption, adds Bill Fischer, professor of innovation management at IMD business school in Lausanne, is now a feature of the economy. "There is a group of people whose profession is the disruption of industries," he says. "They are graduating from engineering schools and business schools and they’ve decided that, rather than go to work with a well-established industry, they’re going to sit back and look at who’s vulnerable and try to blow them up."
Those newcomers don’t just look for new products, but innovate in business models. Rather than spend years bringing a new product to market, they offer an old product in a new way, as Uber and Dollar Shave Club (which was so successful with its subscription model that it was bought by Unilever for $1bn) have done. The upshot is that businesses are constantly looking over their shoulders, wondering where the next threat will come from. As Fischer says, a lot of businesses don’t even know which sector they are in any more. If you make cars, are you still engineers, or do you need to be computer scientists?
You're not immune to bad decisions
The problem for business leaders is compounded by the fact that their own stress levels can make an already bad situation even worse. There’s plenty of research demonstrating the negative impact of stress on concentration and decision-making. Researchers from Rockefeller and Cornell universities, for instance, used brain scans to demonstrate its impact on male students’ ability to shift their attention from one task to another.
But a recent study showed that if you throw uncertainty into the mix the effects are amplified. A team from University College London discovered that when faced with the prospect of receiving a painful electric shock, participants playing a computer game were most stressed when the chance of receiving a shock was at 50 per cent. In other words, participants were less stressed by predictable negative outcomes than they were by uncertainty.
Behavioural psychologists differentiate between "risk" situations, where you clearly understand your options, the probabilities of certain events occurring, and their consequences, and "uncertainty", where you do not know any of these. "The world is much scarier in the land of uncertainty," says Kelly-Ann Schmidtke, a behavioural economics researcher at Warwick Business School. "In business there are risk-like choices, but uncertainty is far more common."
One problem with uncertainty is that it can trigger unconscious biases. Schmidtke points to loss-aversion, the phenomenon whereby people prefer avoiding small losses to acquiring equivalent gains, while psychologists from Bangor University discovered that stress triggers biases which favour previous rewards – when stressed we are more likely to "overlook information predicting negative outcomes".
Biases can also cause people to see the world as more random than it is. In a new book, Beyond the Hockey Stick, a trio of McKinsey consultants argue that the real reason businesses don’t understand why some strategies succeed and others fail is that they assess their strategies all wrong. They might think they are making hard-headed decisions about what strategies to fund, but in reality their decision-making process is riddled with biases, wishful thinking, politics, desire for promotion and managers’ desire to boost their own budgets.
In many cases, people are fully aware of the risks, but the "social side of strategy" prevents them from being realistic. Social pressure prompts them to champion their own ideas, even if they know that the real odds of success are lower than they are willing to say.
Think of a marriage proposal, says one of the book’s authors, Sven Smit. "It should actually sound something like this: ‘I love you. I see a bright future. I’m committed. I calculate there is about a 50 per cent chance that we will still be together in 12 years. Would you marry me?’ But that’s not very romantic," he says. "You’d get hit with a champagne bottle."
So how can leaders learn to deal with such high levels of uncertainty and ensure their decision-making is not compromised by it? By their very nature unconscious biases are difficult to tackle, but acknowledging they are there is a good start. Randall Peterson from London Business School says there’s much to be learned from businesses that have faced genuine upheavals. He worked with an Egyptian bank during the Arab Spring. When other banks closed and stopped lending, it stayed open and tried to reassure customers that they could rely on the bank remaining in business.
"You know that things are going to have to change, but what you do is fall back on your core values. You just say, we’re not changing the basic idea of who we are and what we do. What we’re changing is the tactics around how we achieve that, because the world is changing," says Peterson. Try to keep everybody’s eyes on a fixed point, and the world might stop spinning.
There are lessons to be learned from those businesses that have already faced disruption too. "If your business hasn’t been disrupted by innovators already, the chances are it soon will be. Your instinct will be to defend your business, attack your disruptor, or both," says Costas Markides, professor of strategy and entrepreneurship, at London Business School. "But tackling an attacker head-on will rarely succeed. You need a smarter strategy. To outflank your disruptor, you need to take a different path."
That path, he writes for the London Business School Review, is to play the third game, just as Swiss watchmakers did after Japanese firms, which used quartz technology to offer new functions and features at a lower price, entered the field in the 1970s. Swiss market share plummeted from 48 per cent of global production in 1965 to 15 per cent by 1980. But, rather than continue with their existing strategy (accuracy) or fight the disruptors at their own game (cutting-edge technology and a cheaper price), the Swiss fought back on style and fashion and the Swatch watch was born.
Planning and perspective
Scenario planning, says Salesforce’s Schwartz, is another effective method for managing uncertainty. Trying to assign probabilities to certain outcomes only prepares you for high-probability events, he says. "You look at multiple scenarios and see if any of them are fatal. Those you wish to avoid by all means."
Leaders should rehearse the future. "You’re trying to manage risk rather than trying to predict the future and plan on a single possibility," he says. "Think through various scenarios, examine the consequences and be prepared for the risks. Make the choices in the present based on an assessment of the real risks of the future by having considered multiple scenarios." Preparation builds confidence that "you are capable of dealing with the risks that you see in front of you".
Ultimately, says Will Butler-Adams, CEO of Brompton Bicycle, the trick is to keep calm. "You have to put things in perspective," he says. "There is always uncertainty. But you have to understand the real problems. For us, Brexit is probably eighth or ninth on the list of priorities. We’ve planned for the ports getting clogged up by buying £1m of extra stock. But that’s not a crisis. It’s just a normal part of normal business. If there is FX uncertainty, we buy forward."
The things that cause people to become anxious are to be "managed," says Butler-Adams, while a manager should mainly concentrate on what they can proactively affect. "If there is a problem, then work out the worst-case scenario and mitigate for it. Then you can get on with running the business," he says. A trade war, for instance, might sound catastrophic but what does it mean in practice? Supply chain disruption, and finding suppliers to replace the old ones. "I spend a lot of my time telling people not to panic," he concludes.
We may never have had it so good – but it would be wrong to say that disruption is all in the mind. Our biases and anxieties about change – as well as general worries about the state of the world – can all add up, making businesses feel that the threats they face are insurmountable. ‘Keep calm and carry on’ is probably not a line that would pop up in an Oscar Wilde play, but in the current climate it’s a sensible business strategy.
Image credit: White House/Flickr