Uncertainty in business is not new and by definition it is very hard to measure. However, for many firms it is arguably on the rise. There are three reasons why we face heightened uncertainty today.
The first factor is digital disruption. It is transforming industries ranging from entertainment and retail to travel and finance. The second factor is the rise of China, and in the future other emerging economies such as India and possibly Indonesia, that are already reshaping global competition. These two factors are feeding the last trend, which is the rising populism and anti-globalism that is resulting in protectionist measures by many countries.
In this world of uncertainty, I believe firms need to build organisational capabilities in three core areas: sensing the context; driving the market; and redesigning the business.
1:23 Sense your context
Let me start with sensing context. What does that mean; what does it entail? Companies know that they need to scan their environment for opportunities and threats. But, it is also important to think about different levels of uncertainty that they face in their business.
It is important to understand different levels of uncertainty in your industry, related industries, and various countries where you operate. True uncertainty – unknown unknowns – is very different from known unknowns where companies can project scenarios for dealing with those different developments in the business environment. Uncertainty requires a much more agile approach to strategy.
Let me give you an example. Ecostore is an environmentally conscious producer of household items ranging from detergent cleaners to baby skincare products and they started expanding in Australia a couple of years ago. Now, they sensed a big rise in green consumers in China and a trend toward online shopping there. Within two years they have been able to go from zero in China to 10% of their sales, and they won two awards for being one of the top five green brands in China. They also won a customer experience excellence award on Tmall, Alibaba's shopping platform – the world's largest shopping platform today.
2:56 Drive your market
The second capability that firms need to develop to thrive in this world of uncertainty is driving their market. Let me explain. Firms have been thinking about entering foreign markets or fulfilling customers' needs taking the market as a given. Increasingly firms need to create and co-create markets at home and in foreign countries. In practice, this requires a diverse portfolio of bets, of strategic moves. These range from 'no regret' moves that benefit companies in any scenario, to 'options and hedges' which are targeted at particular scenarios, and 'big bets' which give a company advantages in the prevailing scenario but also give some flexibility in terms of which actual scenario plays out.
Netflix is a great example of a company that employed diverse strategic bets to become the global success that it is today. While a lot of us know Netflix, especially from 2016 when it rolled in a big bet of 130 countries at once, the company has been in the industry from 1997 and actually evolved quite gradually. Even in its international expansion initially it tested its products in markets such as Canada, Latin America, and Scandinavia, gathered data on the customers and scaled up its offerings only after understanding customers quite well.
In terms of the rise of streaming as a medium that we use to watch movies and TV series, they did not roll that out in one go, but first offered it as a free add-on to their online DVD rental service to US customers. Then, after testing the product and adjusting customers to this new way of watching movies and TV, they made it mainstream for them.
5:56 Redesign your business
Redesigning your business is another capability that companies should develop to improve their global competitiveness. This involves possibly reinventing your business model; it could be recombining your resources internationally, in particular through business combinations such as acquisitions and alliances.
Haier is a good example of a company that has employed a number of these tactics in redesigning their business. Acquisition was one pathway for them – acquiring New Zealand's Fisher & Paykel Appliances, an innovative design-led company successful in the white goods sector.
While acquisitions seem to be a good tool for companies to grow and recombine their resources, there are some challenges, in particular related to rising protectionism. While Haier was cleared for its acquisitions in the US and indeed in New Zealand, other companies from China such as Alibaba or telecoms giants Huawei and ZTE recently faced restrictions either on their investments in the US or on their trade with US companies.
Even companies from countries other than China might get entangled in these increased protectionist sentiments and measures by countries such as the United States. The US tariffs on steel and aluminium, initially targeted mostly at China, actually cover a broader range of countries and New Zealand was not exempted from these recent measures.
In summary, digital disruption, the rise of China and India, and increased anti-globalism and protectionism are going to contribute to heightened uncertainty in the world business environment. Companies would be advised to invest in three types of capability to face these challenges: first sensing context; second driving the market; and third redesigning their business – this can be done both internally and externally though partnerships and possibly acquisitions of companies from other countries.
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