Three ways of coping with uncertainty

Although I like my writing to stay pragmatic and jargon-free, much of my reading is anything but: there’s masses of useful stuff in disciplines far away from “management” that hasn’t yet been translated or transferred.

So, I was reading a fascinating (to me!) article (about second order cybernetics if you must know) which pointed out that there are three ways, singly or in combination, to deal with uncertain disturbances to any system’s ‘vital signs’.

How does this translate? For a business, disturbances could include competitor actions, key staff departures, economic shocks, etc. Vital signs could be profitability, cash, demand for your products, decision making speed, or indeed all manner of measures idiosyncratic to your business.

The three ways are:

1) Increase the buffering against unwanted disturbances. This is the approach of the boxer who builds fitness and strength in order to survive external punishment without internal damage. It is probably indispensible, and certainly works up to a point, although it won’t stop you from getting bloody. In business terms, this might mean having strong enough reserves of one sort or another (Jamie Dimon’s ‘fortress balance sheet’ has helped J P Morgan survive its admittedly self-inflicted beating).

2) Build your general flexibility so that you can neutralise the widest possible range of unbufferable disturbances. Taking hits is hardly an adequate defence on its own. This second approach is like the Aikido strategy of being able to flow with and around attacks or shocks. Some of this is about physical capability, but a large part is about mental flexibility. In business terms, the physical or structural aspect might be about having sufficiently devolved local decision-making rather than imposing too many central strategic or policy imperatives, while at the mental level, it’s all about improving your ability to realise when your assumptions are past their sell-by date (as Fujifilm did and Kodak didn’t).

3) Figure out what certainly can’t happen, and use that knowledge to safely prune the required flexibility. Too much flexibility is a recipe for anarchy, but too little is a recipe for a rigid lack of adaptability – both threaten survival. This can get too technical for a short blog post, but for example, the best scenario planners (the original HBR articles by Pierre Wack of Royal Dutch/Shell are great on this) spend a good portion of their time figuring out what simply can’t happen. This is quite different from forecasting, which is notoriously unreliable, and it can be used to prune down your flexibility building to more manageable proportions.

Any system that has survived has, at least implicitly, developed strategies for buffering against shocks, building general agility, and figuring out what can be intelligently ignored. Rather fewer I suspect have done so explicitly. It makes sense to gives these three categories explicit consideration, and to keep them under review, since the likely challenges to your business’s vital signs, and best balance among the strategies, will certainly change over time.

© 2012. Andrew Bass. All Rights Reserved.