The US military coined the acronym VUCA in the late 1990s to signal a profound shift in its operating environment toward Volatility, Uncertainty, Complexity and Ambiguity. During the Cold War era, military leaders were accustomed to long-term, multifaceted conflicts with clear enemies of known strength.  But after the collapse of the Soviet Union, the environment changed toward diffuse, asymmetric warfare, with agile, dispersed opponents motivated by ethnic and religious causes not always fully understood--consider the "War on Terror."

Similarly, businesses may be seeing the end of a relative stability period, in which chip advances reliably followed Moore's Law, peaceful trade relations were stable, and the dominance of OECD economies appeared unassailable.  Business leaders today function in a multi-polar environment that is threatening the liberal world order (think Brexit or Trump), tariff wars are well afoot, China's economic power is growing, and nationalism--inflamed by immigration-- is causing turmoil in many nations.

 

These changes may require a quantum shift in how leaders  approach strategy, innovation and competition, with VUCA being an apt label for the  environment they encounter as well. The acronym's four letters refer to conditions that may be closely related, but they are conceptually distinct. The V of volatility applies when external variables, such as the stock market or interest rates, exhibit high amplitude. Volatility usually entails risk but not always-; a sine wave flashing on an oscilloscope, for example, exhibits highly predictable volatility.  The U of uncertainty applies when filing a new patent or predicting an election outcome in politics. Uncertainty usually entails unknown likelihoods and need not imply volatility per se. In a patent application, for example, there may be just two outcomes--approval or rejection--but the chances of either occurring may be very unclear. The C of complexity applies when variables are highly interconnected, as seen in weather systems or a modern open economy.  Finally, the A of ambiguity refers to lack of clarity about the nature of the problem overall, or about the key components such as the options, their outcomes and probabilities.

 

Even though VUCA has become a widely used acronym, its underlying components often overlap in real world cases, be it war, business, politics or science, and this makes it hard to connect the letters one-to-one with unique strategies.  Furthermore, leaders may not know what situations lie around the corner for their companies, so they need to develop capabilities that can handle multiple combinations of the four letters. 

This transformative skill is not easy, as Blockbuster, Kodak, Nokia, Philips, GE, Samsung and many others have experienced firsthand.  One  strategy is to cultivate ambidextrous leadership, the ability to manage a stable business as well as one in the midst of upheaval. Researchers have examined how some firms and leaders manage to thrive in high velocity environments like Silicon Valley. The key is to operate in real time, with relatively simple decision rules, explore options in parallel (not just sequentially), and consensus building. Another important strategy for VUCA environments is to systematically build organizational capabilities that enable managers, and not just leaders, to sense change sooner, seize opportunities ahead of rivals, and transform the organization when and where needed.

 

Few managers in business, public administration, education, science or the arts deal with VUCA environments daily, and neither does the military, except during times of combat and other crisis situations. Still, senior leaders must take a longer view that very much includes VUCA conditions, to avoid being ill prepared when surprising events occur. Leaders who came of age during more stable times often struggle with how to handle the kind of turbulence common in our digital age. They are accustomed to gradual changes by known rivals within clear industry boundaries, rather than rapidly scaling businesses relying on light assets, novel business models and  little respect for traditional market boundaries (think Amazon or Uber). Old timers will continue to cling to extrapolative planning, which limits their line of sight to steady projections emanating from standard planning and budgeting systems. They may also continue to manage for risk (quantifiable) when they should manage for deep uncertainty (unfathomable).  Companies that successfully navigated waves of technological disruption include Adobe, when it moved to the cloud and Netflix, when it shifted from a video mail order business to on-line streaming and original content, which fueled its exponential growth.

 

Successful leadership in VUCA worlds is less about developing detailed plans and more about testing various hypotheses about emerging technologies and changing markets. MasterCard did this stealthily, while operating in the shadow of Visa, by exploring growing market segments ignored by its main rivals. It zeroed in on consumers wedded to cash, recognizing that at times they still wanted mobile payment options, for example when barely catching the tube or bus in London.  Amazon elevated such broad exploratory strategies to high art, from its humble start as an online bookseller to a retailer of nearly everything, while breaking the trillion dollar valuation ceiling.  In its wake, more than 60 companies became collateral damage including such well-known names such as Barnes & Noble, Costco, Best Buy, GameStop, Macy's, Nordstrom, Sears, Target, CVS Caremark, Rite Aid and even Walmart.

 

Disruptive strategies generally call for different kinds of leaders, ranging from highly visionary entrepreneurs to operationally focused managers who can bring about practical change when necessary. VUCA conditions typically require a hybrid form of entrepreneurial leaders who can devise new organizational capabilities that stimulate innovative offerings and streamline new business models geared toward the next big upheaval. As such, VUCA should not be used to slice and dice the external environment but to determine whether you are entering a game-changing future that will require new strategies, leadership models and organizational capabilities.      

Published on: Sep 27, 2018