Business model innovation when predictions can’t be trusted
I spent this morning with 14 business owner/CEOs confronting decisions made more challenging by our increasingly uncertain economy. As seasoned entrepreneurs, they’ve mastered measuring risks, making decisions and executing them successfully. Yet the decision-making prowess that generated high business values will not generate tomorrow’s success. How they approach decisions needs to change in today’s turbulent economy.
We made a list of key known attributes of the economy – e.g., deficit, trade gap, aging of the population, high unemployment, China’s rise – and a list of unknowns, this list dominated by policy questions. How will the US resolve its deficit issues? Will China rebalance its economy towards domestic consumption? Will Greek and possibly other European debt defaults create another 2008-type recession, this time originating in Europe? Will US consumers regain their mojo or will growing income inequality (equal to Mexico today and the US in the 1920s) dramatically alter consumption patterns? Will we ever resolve our educational system failures? And that was just page one.
Any CEO/owner who thinks he can fill out probabilities in a decision tree in which economic outcomes impact probabilities had best climb down from that tree and think again. Our markets have moved from complicated to complex, demanding we change how we gather information and make decisions. Complicated markets can be modeled and predicted. Complex markets cannot – distant variables have huge unexpected consequences, making predictions futile. Remember when Lehman’s bankruptcy nearly brought down the world economy in 2008?
Strategist Don Sull argues that investigating today’s markets is akin to looking through a kaleidoscope, a far cry from yesterday’s telescopic views. As a leader, you must understand your mental map, yet at the same time, adjust your eyes to anomalies that indicate your map is no longer the right depiction of reality. Evolve your map steadily and you can capture the upside of turbulence.
So what’s in a map? In Sull’s view it starts with core assumptions behind the business’ design that drive metrics and business boundaries. Blockbuster’s frame was a retail video store versus a provider of movies and games. The map also includes relationships, core values, specialized advantage-building resources and processes that collectively shape how the business operates. Apple could not morph into Dell or vice versa because of different maps. Maps become outdated. For example, Border’s leaders underestimated the speed of e-book adoption and dismissed an opportunity to add Amazon as a strategic partner. They mistakenly stayed stuck in ruts created by an outdated map.
What did I tell my audience evolving their map should look like in practice? First, be more patient with not knowing. In an effort to reduce the anxiety that uncertainty creates, we rush to conclusions that may be false. Spend more time listening to new sources of information and be willing to challenge preconceived assumptions built into your maps. We also need to be aware of confirmation bias – the tendency we all have to only pay attention to data that confirms our prior beliefs. With more open minds and new sources of information, we move from accepting our maps as fact to being open to how they must evolve.
Sull advocates spending time in “sense making” meetings in which the conversation is focused on understanding situations rather than making rapid conclusions leading to hasty decision-making. Bring into these meetings objective data and an open mind and you will develop richer understanding into how your markets are evolving.
The second needed shift is to probe, rather than predict. Probing is any action that generates insights into what is emerging within a complex situation–EBay posts a used car sale ad to gauge interest. Experimentation – trying many things, failing quickly and failing cheaply becomes a vital probing skill in today’s complex economic environment. Experiments reveal what works, ideas you can refine and then take to scale. Strategist Rita Mcgrath recommends discovery driven planning, in which you increase investments in your experiments only as you reduce associated uncertainties.
Scenario-based planning is also a useful tool. Explore the outcome of potential strategies under different future scenarios to unearth no-brainer moves, ideas to avoid as they work terribly in some scenarios and advisable commitments. Scenario planning often points to “options” in which to invest, an investment that leaves possibilities open without requiring full commitment.
Finally, explore strategies that reduce the need for predictions. For instance, modular solution platforms that enable personalized solutions reduce the need to predict demand for pre-defined configurations. They also increase the chances of delighting your customers.
Turbulent markets throw off many opportunities. Leaders can be unseated, new customer needs arise and new markets emerge. Keep your entrepreneurial optimism but adjust your decision-making now that low-risk economic predictions are a thing of the past.