Uncertainty is like the weather. It’s always there, part of the atmosphere, and a condition over which individuals and organizations have very little control. The severity of uncertainty, like the severity of the weather, can rise and fall. At the moment, around the world, CEOs are operating under a series of severe uncertainty alerts.
Most prominent among these is the sudden onset of the COVID-19 virus, which has created a series of rolling demand, supply, and health shocks whose length and long-term impact remain difficult to judge. Underlying this, there are sources of uncertainty that existed before the appearance of the new coronavirus, and that will persist after it abates. There is great uncertainty surrounding the geopolitical context in which companies operate: the continuing saga of Brexit; trade conflicts between the U.S. and China; tensions in the Middle East and Eastern Europe. There is structural uncertainty — namely, the disruption to many business models brought about by technological change, the rapidly changing nature of work, climate change, the drop in oil prices, and tectonic shifts in consumer needs and tastes. Many of these trends will be accelerated in the wake of COVID-19 as industries transform into a new normal. Regulatory uncertainty, another omnipresent factor, is also at a high, as businesses grapple with shifting patterns of regulations such as tariffs, evolving data privacy regimes, structural shifts in tax policy and the regulation of technology transfers, and international investment. In the wake of COVID-19, governments are proposing and enacting far-reaching policies to respond to sudden social and economic crises.
And for the first time in 11 years, there are widespread worries overgrowth itself. There have been only two years in the last 75 (1944 and 2009) in which the global economy didn’t grow. But it is likely that the global economy will struggle to expand in 2020. In PwC’s 23rd Annual Global CEO Survey, conducted before the coronavirus outbreak, some 53 percent of CEOs said they thought that the economic growth rate would be lower in the following 12 months than in the past 12 months — up from only 5 percent saying that just two years ago. What’s more, there are no signs that the clouds of uncertainty will simply dissipate if a few outstanding issues are resolved. Few people are under the illusion that bringing the coronavirus under control, a decisive move on Brexit, or the repeal of some of the tariffs that China and the U.S. have levied on each other will lead to a swift restoration of the status quo and smooth sailing.
Leaders — being humans — are wired such that they have difficulty coping with uncertainty. When these different sources of uncertainty occur at once, exacerbating one another, the level of general emotional uncertainty rises. People tend to forecast by extrapolating recent experience and trends endlessly into the future. Once it becomes uncertain if expected growth will materialize, people can easily become unmoored. When they receive information that muddles the view, they tend to react in predictable ways that are not always constructive. Economist Herbert Simon won the Nobel Prize for his work on what he called “bounded rationality,” pushing back against the conventional wisdom that leaders are rational decision-makers. Instead, he argued, they use judgment shortcuts, called heuristics — rules of thumb that simplify things — to make decisions.
Consider the heuristics that appear during periods of heightened uncertainty. Leaders reflexively reduce investment, slash marketing, and brand investments, avoid entering new markets, and sometimes stop making decisions altogether. Such defensive moves are understandable. And in previous periods of uncertainty, they may have been both necessary and sufficient for survival. But they can be counterproductive in the short term. Acting in a procyclical manner — pulling in the reins when things are already slowing down — has the effect of aggravating the situation. (As John Maynard Keynes’s paradox of thrift holds, when households and companies cut spending amid a recession or in its aftermath, it reduces demand and makes everybody poorer.) More significantly, given the underlying dynamics of change, purely defensive reactions can leave companies poorly positioned to benefit from the next stage of the cycle, when things start to improve.
How should leaders manage in the face of uncertainty? The good news is that we know, from theory and practice, the right approach and mind-set to adopt. Sailors navigating tricky winds, shifting tides, rogue waves, and mercurial weather systems prepare their vessels so they can sail on safely and purposefully. And companies can do the same. Rather than simply reacting instinctively and responding to the informational noise detected by their instruments, leaders can move swiftly and proactively to alter their course, capitalize on dislocations in the market, and chart a new course that positions them for longterm success.
The interlinked and mutually reinforcing attributes required to succeed in uncertainty are clear. Whether the topic is strategy or workforce, operations or deals, tax, and regulation, or finance, the same message applies. Once they mobilize resources to stabilize operations in the short term, organizations must have a strategic bias toward action. As a baseline, companies must strive to be Fit for Growth*, by aligning costs with priorities and strategy, investing in differentiated capabilities, and using traditional and digital levers to execute. In times of heightened uncertainty, the range of possible outcomes widens. So rather than setting on a single fixed course, they must continually engage in scenario planning, constructing and evaluating an array of options that offer a broader view of the landscape and possibilities for success. They must build the capacity to be agile — possessing the balance and capability that enable them to shift focus, priorities, and resources to meet changing circumstances. And they must evolve to become more resilient and stronger — able to withstand tougher external forces, quickly recover from setbacks, and stay in a position to benefit from new opportunities (see diagram on the next page).
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