Optimizing Organizational Performance in an Uncertain World - Part 2 - Measure and React

In a January 2011 report, the Economist Intelligence Unit published results from a survey of 300 senior executives from around the globe. The report highlighted a number of key challenges that businesses are grappling with as they face increasing complexity in the business environment. According to the survey, much of this complexity is driven by the increasing expectations of the customer. Global businesses serving diverse markets are expected to provide tailored products and more responsive customer service. Meeting these specialized needs while adapting to constraints within each marketplace has complicated decision-making. Meanwhile the timelines for comprehending the risks and making decisions have only grown shorter. How can organizations perform more effectively when faced with these challenges?

In Everything is Obvious, Duncan Watts highlights the work of Michael Raynor in The Strategy Paradox in which Raynor states that business leadership often spends too much time focused on execution as opposed to managing strategic uncertainty. Raynor suggests that business leadership should focus solely on planning to mitigate strategic risks while managers are left to focus on day-to-day execution. Raynor recommends a variation on traditional scenario planning which he describes as strategic flexibility. In this approach, planners devise an expansive set of hypothetical futures along with optimized strategies tailored to each hypothesis. Then the set of strategies is dissected to identify the elements that are common across the set. Strategic flexibility involves devising strategy that incorporate the common elements while hedging the risks that are specific to the various hypotheses.

Strategic flexibility, along with more traditional forms of scenario-based planning, requires predictions about the future. Often such predictions are made by a small number of individuals reasoning about environments they mistakenly believe they understand. Due to ever-present uncertainty in complex environments, these predictions, no matter how well-conceived, leave businesses vulnerable to high consequence events that cannot be foreseen (Taleb’s black swans). As Watts explains, comprehending the black swan a priori would involve not only successfully predicting its occurrence but also predicting the environment in which the black swan unfolds. Only then would the significance of the black swan be understood. When faced with these constraints and others, alternative approaches are needed to avoid misguided overconfidence that rests on predictions of the future.

One alternative that Watts advances involves shifting focus from the future to the present. If the future cannot be reliably predicted, one should focus instead on rapidly adapting to changes in the present environment. On the Web, the implementation of measure and react strategies by companies such as Google, Yahoo! and Facebook is now routine. Watts provides the example of the fashion company Zara as a non-Web technology company capitalizing on this strategy. Instead of attempting to anticipate fashion trends, Zara observes what people are wearing now and generates a range of ideas that are variations on the current trends. Then they make a series of small batches of garments to sell in a variety of markets. Based on the responses they observe in stores, Zara rapidly produces more of the successful garments and drops those that fail to gain a significant response. What makes this all possible is Zara’s agile production which allows them to move from a design to selling a garment in stores in a little more than two weeks.

Zara is an example of an organization that is able to efficiently test hypotheses in the marketplace with relatively minimal investments of capital and time. By shrinking the cycle time associated with hypothesis testing, an organization can explore a larger range of possibilities prior to committing to a course of action. This type of agility and adaptation is routine within the startup world; yet it is far from commonplace in larger organizations. We tend to ascribe this lack of agility to the burdens of communication, coordination and decision-making in large-scale organizations. Although it is unclear how well we understand the underlying factors at play. How do we more routinely break from the current status quo that seems to emerge as organizations scale? How much can social media improve the dynamics of the organization? Is the status quo at organizational scale mainly driven by fundamental human tendencies? Ones that are difficult to comprehend due to complex dependencies and unobserved forces? Social psychologists are uncovering the complexities within the self and how much our unconscious minds drive our behavior. How those processes affect outcomes in group settings will likely be the subject of research for some time to come.

While research continues to explore the emergence and impact of social and cultural constraints on organizational performance, experimentation can continue along the social media dimension to explore improved ways to minimize the cost of communication, coordination and decision-marking. Social media within the enterprise provides new opportunities to connect employees with one another and with ideas emerging from varied quarters of the organization. The enduring challenge is how to provide the user capabilities to manage the cost-benefit tradeoff. The cost to the user comes in terms of time and attention. The benefit of a particular attention portfolio is more challenging to assess, especially when attempting to engineer serendipity. Defining the cost-benefit tradeoff more explicitly is the first step in the design of systems to improve the user experience.

By building social media infrastructure that adapts to the changing needs of the enterprise, one hopes to expose decision-makers to people who are closer to the problems that they are trying to address. Too often, the decision-makers are distant from the realities on the ground and therefore lack the appropriate context to understand the ramifications of a course of action. Watts highlights the idea of planning as knowledge aggregation and discusses the many forms that this can take. Leveraging local knowledge that may lie within or external to the organization first requires one to accept that context matters and those close to the problem are best positioned to define the solution. It seems clear that we can develop technology to reduce the cost of knowledge aggregation. The most daunting challenge may be to convert traditional strategic planners to this uncommon mindset.