Uncertainty, trends and sense-making

Tags: Op-ed
Uncertainty, trends and sense-making
KEPPING TRACK: Managers need to differentiate between a lasting trend and a fad. However, each has an intrinsic value but the timeframes for extracting this value are completely different
In the last couple of articles, we looked at the complex issue of managerial uncertainties and improving predictions. Given human frailties and organisational vulnerabilities, this subject has been a minefield that has attracted the attention of saints, philosoph­ers, scientists, economists and businessmen. Uncertainties exist everywhere — the important point is to understand the context and timeframe in which managerial decisions are made. For instance, in 2008 Rio Tinto —the wo­rld’s largest mining company took over Alcan, a Canadian aluminium company, after a hostile bidding war at an estimated cost of $38 billion. In January this year, Rio announced a total estimated write-downs of around $20 billion related to that deal. Its CEO since then, Tom Albanese, had to leave the company.

Forewarned is forearmed

So how do companies mitigate ‘risks’ and ‘encash opportunities’ arising from uncertainty? The first and foremost task that high-performance companies do is to establish a science-based tr­ends monitoring ‘system’. Its job is to track the macro- and micro-trend signals relating to the broad social, economic, political, and technological developments in future. The company would assess the impact of the identified trends on its industry and businesses at different points of time, thereby creating a matrix of opportunities and emerging challenges, in a dynamic and continuously changing business environment.

Trend-tracking allows managers to spot key opportunities for which decisions can be taken proactively that can provide either first-mover advantage or an early ability to duck. In one sense, this is not rocket science, yet many companies make major mistakes in predicting the trajectory of the megatrends. Misreading of signals is generally a result of strategic commitments, and managerial complacency, arrogance, or hubris. Peugeot, one of France’s and the world’s oldest car makers, is struggling to survive after a series of wrong strategic turns — first, it failed to tackle the effects of a megatrend called globalisation, and remained glued to European markets; second, it invested in hybrids which failed in mass markets; and third, the company has missed out on the lucrative SUV segment. Comparatively, its German competitor Volkswagen has done much better in latching on correctly to these mega- and industry-trends.

From forearmed to foresights

The question to ask at strategic management levels is: how can managers and companies improve their foresights? Of course, they need to have the years close on the ground listening and watching the customer and markets carefully. Yet, increasing consumer behavioural psychology may not help companies towards better prediction models. Companies (specially banks) have developed sophisticated statistical tools and complex set of algorithmic models to understand and interpret the emerging landscapes. Data mining is an effort towards understanding the past, current and emerging patterns. A major task in this approach is to consider the entire ecosystem holistically. Many companies make the mistake of slicing the data and then interpreting it in a fragmented manner. For example, the global oil and gas industry is undergoing major transformations and will not be the same in the next 20 years, as we have known it for the past 50 years. New technological developments would allow oil-deficit nations to become self-reliant in energy. The US and China — world’s two largest consumers of energy — would be major producers of shale gas that will affect the economies of not only the oil-rich West Asian countries, but also countries like Russia and India who either are major producers or consumers of oil.

Managers also need to differentiate between a lasting trend and a fad. However, each has an intrinsic value but the timeframes for extracting this value are completely different. A company like Benetton, for example, must carefully watch the fashion trends on a season-to-season basis by following fashion shows at different parts of the world during different seasons. So for the company, simultaneous production, distribution, advertising, and inventory management within a timeframe of no more than 15 to 20 days, become key success factors. Simple technologies such as barcoding at point of sale can help them to know on real-time basis which colours or patterns are moving fast. They can also quickly determine the discounts or tagging for items, which are slow moving at the retail shelves.

While predicting and developing the capability for forecasting, managers need a special ability to foresee through the clutter of technologies and take a call on which one will become the dominant one. This is easier said than done. Sometimes it may be almost impossible —today, can anyone predict as to which mobile operating system amongst Windows 8, Apple iOS and Android would be able to enjoy the kind of market monopoly, which Microsoft enjoys for its operating systems on desktops and laptops? But the life of hardware manufacturers such as Intel, AMD, ARM, Motorola, Nokia, Samsung, Acer, Asus, among others depends on correctly making the call. Given the stakes, they have either developed internal capabilities or hedging by investing in all three ‘trending’ technologies.

Indian companies must develop a dynamic capability for tracking and monitoring megatrends. The stakes are enormous with extremely high upsides.

arunkumar@mydigitalfc.com

(The writer is a professor of strategy and corporate governance, IIM-Lucknow)

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