Crisis of Business: Maximizing value in a VUCA World

Executive Summary

Situation: Business confronts a crisis. The issue? How can and should companies maximize value in an unpredictable world. Today’s economy is VUCA (volatile, uncertain, complex, and ambiguous).  VUCA-based business involves 'managing' complex systems. Business problems in complex systems are ‘wicked’ and ‘messy’. The convergence of internal / external forces (disrupting the status quo) creates many scenarios / paths / problems / options / choices. Complex business challenges are colored “shades of grey”; the underlying causes and the best solutions aren’t either ‘black’ or ‘white’.  By their nature, complex systems require holistic, integrative, and adaptive approaches that provide flexible solutions responsive to changing situations over time.

Complication: Western thinking is dualistic. How you ‘see’ the business world informs your understanding and description of the world. All company programs need to be “fit for purpose” (relevant and appropriate). However, the discipline or function of professionals shapes their respective view(s) of the problem and pre-determines their likely recommended solution(s). Triangulation of perspectives is critical since management disciplines and functions hold discrete views of business problems and in turn solve those problems in isolation.

Solution: Value is the essence of business. The Integrated Value Process (IVP) Framework is a conceptually sound, empirically tested, and practice-used approach to business value. IVP includes (a) a meta-definition of business value that embraces all disciplines / functions; (b) five “first principles of business value” to guide your programs; (c) an intra- and inter-firm value process to coordinate your activities; and (d) five value gaps to measure and gauge your company’s evolution and progress. A paradigm shift is necessary.  Focus on business value to “cut through” functional barriers / blockages, reduce organizational friction and improve your company’s outcomes. Align your business programs using the Integrated Value Process (IVP).  Let value creation and value flows guide your company’s efforts in a VUCA world!

VUCA – a world of increasing unknowns

The growing convergence of internal and external forces on companies challenges business executives (more people, more diversity / cultures, more markets, more competition, more demand for resources, more impact on environment, more connections through technology, more availability, faster transactions, etc.)   Volatility, Uncertainty, Complexity, and Ambiguity (VUCA) make it difficult for companies to understand the key determinants of current market success. VUCA also makes it harder to forecast, influence and shape future business conditions.  (See “What VUCA really means for you” by Nathan Bennett and G. James Lemoine, Harvard Business Review, January / February 2014)

Today’s VUCA-driven business reality is determined by complex systems. Human-based social systems (economic) and human-altered anthropogenic systems (global climate) are complex. They contrast with former ‘closed’ mechanical systems encountered last century. Every complex system is a system composed of (sub) systems. These constituent (sub) systems are interconnected, have feedback loops, are subject to external shocks, and are dynamic (change over time). They often cause the overall system to behave strangely and are therefore difficult to comprehend. Einstein’s theory of relativity (positing the bending of space and time) is a prime example (see previous article).  Complex systems are difficult – some believe impossible -- to manage.

External shocks make system outcomes variable. As a result, complex systems are hard to model. It’s why weather forecasts are so often wrong. Error terms in the model’s equations are compounded (due to feedback loops) making select subsystems more influential at different moments. Results from models of complex systems fluctuate because their outcomes are path-dependent, i.e. end states are contingent upon prior events that are in turn dependent upon variable inputs (external shocks). Any ‘resolution’ to a complex issue needs to be flexible and adaptive in order to be responsive to changing future outcomes. Bennett and Lemoine (2014) suggest the following VUCA-based management approaches:

Complex systems require adaptive approaches that provide flexible solutions responsive to changing situations over time. Complex systems pose ‘wicked’ problems that are ‘messy’. (See previous article) Although a complex system may initially appear chaotic, patterns do emerge over time. In contrast, closed mechanical systems have easily anticipated problems with pre-determined solutions (established ex ante or “before the fact”). Closed systems are more often in a state of stasis; complex systems rarely are.

Any ‘right’ solution must address the ‘right’ problem. Like a medical doctor, the best prescription requires the best diagnosis. (See previous article) Any prescriptive management approach similarly needs a proper diagnosis of the underlying ‘messy’ or ‘wicked’ business problem. This is difficult. Why?

How do we know what we know? The problem of dualism

Plato’s impact on Western culture and thinking cannot be overestimated. Ever since Plato advanced his notion of ideal forms (ideas) as opposed to concrete manifestations (objects), Western thinking has been dualistic. Plato imprinted a view of reality, a dualistic ontology, onto Western philosophy. It is based on binary or “either-or” thinking: mind versus body, spiritual versus material, divine versus human, good versus evil, individual versus society, reason versus emotion, objective versus subjective, etc. Religion (the Roman Catholic Church), the natural and social sciences, and Western nation-states absorbed this dualism. It was implicit and unquestioned.

Psychologists call this “black and white thinking”. It prevents more granular deliberation and yields conclusions / responses that are often counter-productive. Responses to complex systems require non-dualistic understanding in order to be contingent and dynamic to an unpredictable future. The answers to complex problems are ‘grey’ rather than ‘black’ or ‘white’.

Linguistics introduces the concept of polysemy -- a sign having multiple meanings. English has many polysemous words. So does business. Value, knowledge, transformation, and innovation are frequently used polysemous words in business with abstract meanings. These words are usually not defined by most professionals so their meaning remains ambiguous. Interpretation depends upon a given listener. Often the listener’s definition will differ from the speaker’s, especially when the meaning is not explicitly stated. Different and sometimes opposing meanings lead to confusion, misinterpretation, and misunderstanding.  Polysemy is common in complex systems involving groups of people using terms that don’t have commonly accepted definitions. A Tower of Babel results. (See previous article)

The Chinese logograph for the word crisis illustrates the point. 危机 (wēijī) is composed of two characters (syllables). The first, wēi, is generally (and accurately) translated as danger. The second, jī, is misunderstood by Americans and usually mistranslated as opportunity. It is more accurately translated as “crucial point; incipient moment; moment of junction / confluence / change”. The Chinese word crisis is used by Americans to illustrate the proverbial “fork in the road”.  This is a misunderstanding / misapplication / mistranslation of the original Chinese. It is inaccuarte. The inaccuracy stems from dualism.

The American speaker referencing a “fork in the road” envisages a crossroads with two alternative paths (and a sign pointing left or right). One is presumably the ‘right’ choice (i.e. the opportunity); the other is the 'wrong' choice. Yet the typical fork (i.e. utensil) has four tines! Most business problems aren’t binary with a single positive or negative outcome, choice, or action. Like the utensil, they have multiple ‘tines’. Using another analogy, complex business problems are colored in “shades of grey” -- they are neither “purely black” nor “purely white”. A “fork in the road” may present an opportunity ... then again it may not! Herein lies the inherent challenge of trying to “manage a complex system”.

I earlier noted that complex systems are difficult to model. Predicting their future end-states is hard. Convergence of internal / external forces (disrupting the status quo) creates many different scenarios / paths / problems / options / choices. Which scenario will a business most likely encounter? Which path should an organization follow? Which option should an executive choose?

Improving understanding through pluralism

Thinking about thinking is helpful. How do we ‘know something’? How do we justify what “we know to be true”? How do we prove what “we believe to be true”? Are these the equivalent questions? Multiple schools of epistemology (philosophy of knowledge) examine this issue, but from different angles.

There are three broad schools of epistemology: Rationalist / Idealist (thought-based), Materialist / Objectivist (matter-based) and Interpretivist / Subjectivist (impression-based). [Note: Apologies to any philosopher reading this – I seek to describe clearly and simply an extensive body of knowledge!] These three schools are summarized in the following illustration. I use the metaphor of language (with its concept of parts of speech, e.g.. verb, noun, and adjective) to differentiate the three schools:

Every epistemological school is a lens through which its adherents view reality. Each school has its own language to describe the nature of reality. The way one ‘sees’ the world shapes one’s description and understanding of the world.  Writers have noted that concepts are better portrayed in one language versus another. (See previous article) Whenever the same concept exists in two languages, the characterization of the concept in each language ‘colors’ the meaning held by speakers of those different languages. We refer to this as linguistic nuance.

Some languages are richer in words and expressions for certain concepts than others. They provide more granular descriptions of those particular concepts. For this reason, multilingual speakers and writers often use different languages for particular tasks. For example, there are more words for snow / ice / cold in languages spoken in the Arctic than in the Sahara. This similarly holds true for epistemology.  

Nuance is a “double-edged sword.” The presence of more words for a particular domain in a given school – be it “pure thought” (rationalism), “pure matter” (empiricism), or “pure perception” (interpretivism) -- increases that school’s ability to articulate those concepts at finer levels of granularity. The same descriptive power, however, also makes erroneous conclusions more likely, especially when dealing with concepts better handled by other domains. The language of a given epistemological school ‘shapes’ how and what its adherents look for and measure.

For example, Rationalism / Idealism is prone to circular reasoning since it characterizes reality as “pure thought”. Rationalists commonly fall into the trap of creating a new theory from existing theories and then using those same existing theories – and their underlying assumptions / premises -- to justify the new theory. Economists are particularly prone to this. Empiricists / objectivists are prone to reification. They often fall into the trap of viewing an object as the “thing itself.” I previously noted instances of this error whenever a tool is conflated with the solution (see previous article) or when commentators use current stock prices to prove the validity or soundness of an idea, e.g. that blockchains are a good idea. (See previous article and “Blockchain’s Occam Problem” McKinsey Quarterly, January 2019) Consultants – and financial professionals -- are particularly prone to this trap. [Note: Inferring causality through induction using selectively “cherry-picked” observations is flawed – it’s similar to looking for your lost keys but only under a streetlamp because you can see them there!] Finally, Interpretivism / Subjectivism is prone to perceptual biases. One’s perceptions may reflect reality. Then again, they may also distort reality due to the perceiver’s limited awareness, limited access to evidence, limited exposure / experience, and / or his or her personal bias. Marketing professionals often fall into this trap.

Pluralistic schools of epistemology developed by other Greek and Hindu philosophers are often overlooked. These philosophical schools propose combining different aspects of various approaches depending upon the nature of the problem. Such triangulation of philosophical approaches seeks to counter dangerous mental traps. (See “24 Cognitive biases that are warping your perception of reality”, 03 December 2018 and “18 Cognitive Bias examples show why mental mistakes get made”, 03 March 2018 -- both by Jeff Desjardin) Triangulation of perspectives is critical in the business world where management disciplines and functions ‘frame’ business reality differently (usually excluding other perspectives)! Triangulation, however, requires more effort and a deeper understanding of business by professionals. It commonly is a victim of the tyranny of time. Few professionals (can) devote the time and effort.

Need for integration and synthesis

Recall that business problems in complex systems are ‘wicked’ and ‘messy’. They require holistic, integrative, and adaptive solutions. In terms of knowledge, multiple epistemological approaches are required. In terms of academic theory, inter- and intra-disciplinary synthesis is needed. (See previous article where I describe the conflicting definitions of value even within a single discipline, i.e. economics) In terms of business activities, multifunctional integration across organizational departments needs to occur.

It is commonly stated that business management should be more agile to operate effectively in today’s markets. To be responsive in a VUCA-driven world, a company’s change / integration / transformation efforts should be interdisciplinary, multifunctional and pluralistic. The “one-size-fits-all” approach to management is no longer valid. All company programs need to be relevant and appropriate. 

Most business executives face a crisis managing their respective organizations. The problem? If one has only a hammer, every problem looks like a nail. If an executive discusses a business challenge with an IT vendor or IT consultant / programmer, the recommendation will likely include a new system or application (even though said technology might not solve and might even aggravate the problem). If the executive discusses the same challenge with an accountant or finance professional, the likely recommendation will include determining the ‘right’ cost / price for everything (even though there are limitations to monetizing aspects of the business). (See previous article1 and article2) If the executive discusses the exact same challenge with a knowledge manager, the recommendation will likely include widespread-sharing of more company knowledge (even though this constitutes reification and potentially commoditizes critical intellectual capital and risks misuse). The discipline or function of individuals molds their respective view of the problem and pre-determines their likely recommended solution(s). How does one escape this management quagmire?

Improving outcomes -- effectiveness and efficiency -- using relevant and appropriate responses

New corporate offices / executives – Vice President of Transformation, Chief Knowledge Officer, Director of Innovation, Customer Evangelist, etc. – reflect an attempt to avoid the dangers of over-professionalism. Senior positions with enterprise-wide titles seek to span organizational boundaries in order to combine and integrate the work of multiple departments / functions. Yet like the Chinese philosophical concept of yin and yang, companies are pulled in opposite directions. The growing body of knowledge within functions / professions leads to increased specialization (reflected in current recruiting practices of companies that target new hires with ever more finite and specific skill sets / competency ‘slices’). Yet integration and the ability to work across functions (i.e. agility) are needed more than ever. Specialization versus generalization …more dualism! How to reconcile or syncretize these opposing developments? 

We need a robust “way of thinking” about business problems and solutions that is “fit for purpose”. Popular “ways of thinking” in business are often reductive (simplistic) and therefore not “fit for purpose”. For example, assuming a tool will solve the problem. Using “laundry lists” (i.e. “Do these ten things!”) that are not conceptually grounded (i.e. theoretically based) to determine responses to complex issues. “Cherry-picking” evidence. Adopting a single disciplinary theory or ontology to solve issues like value or knowledge that cross departments and functions. All of these actions will ultimately be suboptimal. They may in fact prove catastrophic!

There are ways to escape these traps -- theoretical counter-argument, confirmation using both objective and subjective data, event studies across time, etc. Scenario planning is proposed as a solution to improve strategic forecasting and to develop flexible long-term plans. (See article) Scenario analysis is indeed helpful. But scenario thinking requires understanding the most essential factors that drive future business conditions. What are they in your business? In addition, scenario planning envisages several – most commonly four -- alternative future realities. How should your organization align its activities to meet all of those alternative future scenarios?

Use the Integrated Value Process (IVP) to structure / align your programs for optimal business outcomes

Responding to a VUCA-defined business world, most large companies have launched enterprise-wide change initiatives. Business model reinvention, knowledge management, digital disruption, organizational transformation, and innovation are several common programs. Sometimes companies launch multiple programs simultaneously! These initiatives are inter-related, i.e. they are systems of systems. What unites them? How should firm-wide programs be coordinated and guided?

Let’s pause for a moment. What is the purpose of business? Over a half century ago, Peter Drucker (1955) clearly stated the reason a company [business] exists:

“There is only one valid definition of business purpose: to create a customer …There may have been no want at all until business action created it … by advertising, by salesmanship or by inventing something new.”

In other words, a company makes decisions (its value strategy) to deliver products / services (its value proposition) by doing some work (its value-added activities). (See previous article) Value is the essence of business. (See previous article) Let value management therefore guide your programs. 

Integrated Value Process (IVP) framework

My PhD research in management advanced the Integrated Value Process (IVP) framework. IVP includes:

·     Meta-definition of business value (to translate between the many uses of the term value, i.e. value as a noun, verb, and adjective)

·     First principles of business value (a set of guiding principles, grounded in theoretical synthesis, to guide action)

·     Intra- and inter-firm value process (to interlink value activities within a company and across its value chain)

·     Value gaps (to gauge the evolution of a firm’s value management activities and detect ineffectiveness / inefficiency)

IVP has been tested theoretically and researched objectively / subjectively across UK- and US-based value chains. IVP was developed with the input of (business) academics, practitioners, executives and management consultants. It is a published framework. (ProQuest publication number 3121355)

This new “way of thinking” about business challenges traditional disciplinary / functional-based theories, models, and methodologies. A paradigm shift is necessary. Resistance (‘friction’) from legacy groups (business school faculties, professional certification groups, corporate functional departments, etc.) is likely, since the shift challenges the status quo (how we have traditionally thought about / done things). To encourage the evolution and institutionalization of new approaches for career development (see “Generalise, don’t specialize: Why focusing too narrowly is bad for us” by David Epstein, The Guardian, 12 July 2019 and my previous article) and business management (see previous article), IVP uses the fundamentals of business value creation / flows to guide your efforts and overcome this resistance.

Focus on business value to “cut through” functional barriers / blockages, reduce organizational friction and improve your company’s outcomes. In innovation, lean / agile operations, knowledge management, digital disruption, organizational transformation – in all your efforts. Align your business programs using the Integrated Value Process (IVP). Don’t allow the momentum and energies of your company’s programs to be dissipated and wasted. Let value creation / flows guide your company’s efforts in a VUCA world!

About the Author

Andrew Swan, PhD is a multidisciplinary and cross-functional integrator of strategy, processes, and information technology. His focus and expertise center on helping executives increase value creation and value flows for companies by mobilizing their collective intelligence. Dr. Swan holds four degrees in Management, Information & Knowledge Strategy, Accounting & Finance, and Computer Science from Columbia University, the University of Chicago Booth School of Business, and the University of Bath. He publishes articles on several management topics -- value chains, value streams / flows, Integrative Value Management, and collective intelligence -- on his website www.andrewjswan.com. Dr. Swan created and published the Integrated Value Process (IVP) Framework to help companies optimize the flow of information & knowledge, goods & services and funds across their respective value chains. He can be reached at andrew.swan@columbia.edu or at +1.773.633.7186. He lives in Chicago.