Food for thought
Surviving in the VUCA World
by Karsten Drath
Concealed behind all the dynamic and sometimes rather chaotic developments in society and the economy, many people hope to find a higher structure or systematic order that – with enough effort – can be deciphered. After all, the human being is always seeking to understand and handle his environment, and to try – as best he can – to anticipate future developments in order to be as best prepared as possible for the imponderabilities. But it is precisely this which is becoming increasingly difficult to do, as a glance at the last 70 years shows. Following the end of World War II, the world was divided into a two-front system, known as the ‘Cold War’. There were two main geopolitical camps: the USA and the USSR, with their respective allies, who aligned themselves – politically, militarily and economically – towards their respective hegemonic power. The enemy images on both sides were clear, making it relatively easy to predict future developments. Following the collapse of the USSR, the two-front system has developed into a four-front system. At the US Army War College in Carlisle,
Pennsylvania, future generals are trained in strategy and warfare. This was also where, at the end of the 1990s, the acronym for this new and much more complex world order was coined: VUCA, standing for volatility, uncertainty, complexity and ambiguity. It was initially used mainly by the college lecturers employed there. The term was then adopted by management pioneers, who recognized the increasing complexity not only in the military and power-political realm but also in the development of the globalized economy.
If we take a look at a broad range of companies, it is remarkable, for example, that the number of company insolvencies in Germany since World War II has never been as high as in the past five years.
Nevertheless, the German share index, which is a leading indicator of the German economy since 1987, is today at its highest level ever. How can this be explained? The answer is volatility.
What has also increased is the frequency and intensity of the fluctuation of share values of German companies – that is the volatility of the DAX, as can clearly be seen in the figure below.
Internationally, the volatility trend is even clearer. According to a study by the Boston Consulting Group from the year 2012, half of all turbulent financial quarters of the last 30 years have occurred since 2002. The fluctuations of corporate revenues and profitability have more than doubled since the 1960s. By contrast, the duration of turbulences has increased by a factor of four. Changes occur faster and more frequently, and their impact is longer and more extensive than in the past. Why is that so?
The significant role of the capital market
Richard Sennett is an American professor of sociology who today teaches at the London School of Economics. In his book The Culture of the New Capitalism Sennett describes how, over a long period of time, companies initially appear to be stable, predictable systems that are both an iron cage and a home to their employees. Security and a livelihood have been provided for many decades in exchange for discipline, subordination in hierarchies and the provision of services. Since the end of the last century, this rigid order has given way to a growing flexibility, marked by a decline in stability and predictability.
The reason for this, in Sennett’s view, is the altered role of the capital market. After World War II, the world economy was governed by the Bretton Woods system, which coupled the exchange rates of the world’s leading economies via a band of exchange rates to the US dollar, which in turn had a fixed exchange rate to the gold standard. This system gave the participating economies stability, but it ultimately failed in 1973 as a consequence of the USA’s current account surpluses: The dollar could no longer be sufficiently safeguarded by the gold standard. After the collapse of the global monetary system, vast amounts of capital became available worldwide, which sought short-term interest rates. As a result of progressive globalization and the new possibilities offered by the emerging communication technologies, this ‘impatient’ capital flowed worldwide into corporate bonds, with the aim of making short-term profits from the rising share prices. The consequence was a more intense global networking of financial interests. Revenues were now hardly expected to come from dividends, which meant that it was no longer the stability of companies that seemed desirable, but the change in revenues with the aim of maximizing the share prices. Since this development, the capital market system, along with the associated evaluation by financial analysts, determines the quarterly performance of listed companies. This short-term competition for the favor of investors and analysts leads to widespread irrational behavior on the markets, allowing a company’s share prices to rise, for example, if it cuts back on R&D staff or restructures for no apparent reason. This type of behavior, which is incomprehensible from an entrepreneurial point of view, allows the share price, and thus the market value of a company, to rise, which effectively prevents a company from being taken over.
Companies that do not bow to this logic are undervalued in this new financial system and consequently end up being bought up by other companies that stick to the rules of the game. Therefore, in order for a company to retain its share price and ensure its long-term attractiveness as an investment object, the company must undergo constant change by the management. A change of strategy, restructuring, acquisitions, portfolio adjustments and downsizing, coupled with a good story for the market, have thus become an end in itself and a key feature of good corporate management. Long-term changes, such as the restructuring of a company as a result of a major change of strategy, are hardly possible anymore. The consequences of these worldwide developments, coupled with ongoing globalization and the increasing spread of modern communications technologies, shape the everyday work of managers today. High time and performance pressure, unconditional mobility, long working hours, permanent reachability, a constant feeling of uncertainty and a neglect of private life are the consequence of this.
The driving role of technology
Another driving factor for this growing volatility lies in the nature of technological innovations and the speed with which they are spreading. The spread of newer, more disruptive technologies, such as the mobile phone, is occurring at a faster pace today than 100 years ago. While it took landline telephony more than 120 years to reach across the world, mobile phones are expected to reach similar coverage within just 20 years – that is six times as fast. While it took nearly 90 years to build global electrical power grids, the Internet will have a comparable distribution within 30 years at most, which is three times as fast. Technologies such as email and smartphones, without which modern, everyday working life would be inconceivable, are 30 and nearly 10 years old respectively. Today, as many as 3.3 billion people use email, and 6.3 billion smartphones were bought between 2009 and 2012. Permanent availability unquestionably simplifies many work and coordination processes and also increases efficiency. And yet there also appears to be a collective blind spot regarding the iniquitousness of these technologies. Permanent reachability also creates stress for many people. But, in actual fact, we have been using these technologies for only less than one generation of managers. Seen from this perspective, it would actually be surprising if we didn’t have difficulties adjusting to the enormous speed with which these technologies have been gaining in importance. Technological innovations also significantly increase the volatility at our workplace.
Higher volatility in our environment – that is more frequent, intense and longer lasting changes – makes the future less predictable. This decline in transparency affects the capital markets, the national economies, companies and their managers and employees alike, albeit with different consequences. Capital markets react more nervously to changes of any kind, national economies try to increase the funding available for innovation and companies take an increasingly tactical, short-sighted approach. Managers and employees respond to the growing volatility of their environment with increased activity and tension, which can quickly make people feel negatively stressed and overburdened. Furthermore, progressive globalization and the increasing transparency of the markets have led to more and more competition coming from emerging economies, such as China, India and Brazil, reinforcing this feeling of insecurity and unpredictability even more.
The new VUCA world we live in has fundamentally changed the relationship between a manager and the company he works for. While in the past it was clear that as a manager you would work for a company until you retired, provided you didn’t steal the silver, today even consistently high performance is no longer a guarantee for the continuity of one’s career. The outsourcing of business units, merging of departments, corporate amalgamations, frequently
changing superiors and staff cuts appear to an individual manager to be ‘forces of nature’ over which he has hardly any influence and which can easily knock his career off course. A further aspect of insecurity comes from global climate change, which is moving much faster than many had anticipated, and in many cases not linearly. In all probability, volatility and insecurity are not passing phenomena, but they will increasingly become part of our lives. So it is up to us to accept these circumstances and to adapt to them. But this is not all that easy, since insecurity is closely affiliated with fear and stress which results in the activation of the pain area of the brain which is in turn inhibiting the more advanced brain functions. The capacities for innovation, agility and prudence are the first abilities to be affected. It will therefore be increasingly necessary for future managers and employees to accept, endure and make the best of this tension.
The worldwide geopolitical power dynamics following the collapse of the Eastern Bloc, the real estate bubble in the USA and its repercussions for the global economy, climate change and its consequences, and the recent euro crisis and the role of Greece are good examples of the increasing complexity in the VUCA world. Complexity describes the state in which there is an abundance of interdependent variables, not all of which are known, and which do not always behave in a linear fashion – for example due to irrational mass phenomena, such as the fear or threat of inflation. Due to the amount of contradictory details involved, it is often not possible to adequately abstract or simplify a complex situation adequately by means of Approximations.
Complexity is also characterized by the fact that, even in retrospect, no statement can be made about whether a decision taken was good or bad. Such statements are necessarily based on the comparison with alternative decisions, but their impact in complex situations cannot be predicted. It is therefore more difficult to learn from mistakes in complex situations. Another factor of complexity is that not all variables are known, or that there are interdependencies between various areas that, at first sight, are unconnected. A higher level of complexity therefore reduces the incomprehensibility and the ability to manage the environment that will tend to make leaders feel more stressed and overburdened.
Ambiguity describes the ambivalence or vagueness of a situation. In contrast to a situation that is ‘unclear’, in which no meaningful conclusions can be drawn, there are several possible and equally valid valuations and interpretations possible in ambiguous situations that are mutually contradictory. Hence, ambiguity makes it more difficult to assess trends and hence to derive a sensible strategy and course of action. If situations appear to be unpredictable and uncontrollable, many people will tend to react with discomfort and negative stress. Often a dangerous behavioral tendency can be observed, in which simple and ill-considered measures or systems of rules and a more linear way of thinking are used to re-establish order and structure. Crises of this proportion have the tendency to attract populists who claim to have simple solutions. Simple solutions give people a sense of security and orientation, but are often inappropriate.
Karsten Drath works with top managers and their teams to improve their leadership effectiveness and resilience. He is a certified Executive Coach and Psychotherapist, a published author and keynote speaker, and is one of the Managing Partners of Leadership Choices, an international consultancy focusing on leadership development at Top Management level. Looking back on more than 15 years of own leadership experience in several international roles he knows the challenges that come with the executive lifestyle and also how to cope with them.
Check out his latest book
Resilient Leadership – Beyond Myths and Misunderstandings