Magazine Spring 2018 Issue Research Highlight

The Five Steps All Leaders Must Take in the Age of Uncertainty

Corporate executives need to move beyond only managing their own company and become active influencers within broader systems.

Martin Reeves, Simon Levin, Johann D. Harnoss, and Daichi Ueda Reading Time: 6 min 

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Business leaders increasingly find themselves in unfamiliar territory marked by high levels of uncertainty and instability, a slowing global economy, and shifting political realities. Global economic policy uncertainty has tripled since 2000 and continues to accelerate.1 Our own research shows that this systemic uncertainty feeds into corporate decision-making. Companies are more exposed than ever to economic and political feedback,2 and their performance swings are increasingly due to noncompetitive effects.3 This phenomenon affects players across entire industries and, in the extreme, can threaten their very survival.

Take the U.S. retail industry, for example. Over the last several decades, companies like Walmart, The Gap Inc., and many others successfully played a global cost arbitrage game by taking advantage of labor cost differences, low trade barriers, and IT advances. As we know today, such sourcing strategies have unleashed economic, social, and political feedback effects, culminating in strong political backlash. Retailers now face the possibility of a border adjustment tax, which, if implemented, could wipe out a substantial proportion of the industry’s profits.4

The examples are manifold and not limited to the United States. Consider utilities in Europe, where companies underestimated the social demand and resulting political support for renewable energy. The top 10 European energy utilities lost 40% of their market value since their peak in 2007 — the top 3 lost as much as 75%.5

Political and macroeconomic forces are shaping the business environment as never before. The implications for corporate strategy and leadership are profound.

Change in Perspective Needed

We believe business leaders need a new mental model to better understand the complex interplay between companies, economies, and societies. To do so, they must shift their focus to the broader business and social ecosystems in which their companies are embedded. These ecosystems are nested complex adaptive systems: multilevel, interconnected, dynamic systems hosting local interactions that can give rise to unpredictable global effects and vice versa. Acknowledging the unpredictability, nonlinearity, and circularity of cause-and-effect relationships within these systems is a notable departure from the simpler, linear models that underpin traditional mechanistic management thinking.

What does a nested ecosystem look like? Companies are part of industries and markets — business ecosystems — that are embedded in local and national economies, which in turn are interwoven with societies.

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About the Authors

Martin Reeves is a senior partner at The Boston Consulting Group’s (BCG) New York office and director of the BCG Henderson Institute (BHI); he tweets @MartinKReeves. Simon Levin is professor of ecology and evolutionary biology at Princeton University who specializes in the theory and management of complex adaptive systems. Johann D. Harnoss is a project leader at BCG and an ambassador to the BHI. He tweets @Johann_Harnoss. Daichi Ueda is a consultant at BCG and ambassador to the BHI.

References

1.See, for example, the Global Economic Policy Uncertainty Index at http://policyuncertainty.com.

2.See M. Reeves and J. Harnoss, “The Business of Business Is No Longer Just Business,” June 6, 2017, www.bcg.com.

3.BCG analysis comparing the relative performance effects of noncompetitive factors (political/regulatory exposure) and competitive factors (e.g., profitability, EBIT [earnings before interest and taxes] margin). The importance of noncompetitive factors has increased relative to competitive ones (from 0.4x to 0.6x) and even exceeds competitive factors in financial services (~1.4x).

4.See M. Reeves and J. Rose, “Rethinking Your Supply Chain in an Era of Protectionism,” March 22, 2017, www.hbr.org.

5.BCG analysis based on S&P CapitalIQ.

6.BCG analysis based on S&P CapitalIQ. Intel share price grew from $0.81 to ~$34.20 (end of June 2017).

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Comments (2)
Patrick Hoverstadt
Gentlemen - Like the article.
Absolutely agree that an understanding of the ecosystem is critical.  We have developed an approach to strategy based on strategic fit within an organisational ecosystem. Just wanted to reinforce some of the points you made.
Your first point about understanding the whole ecosystem – we have a client which used the approach to inform their strategy development, by modelling how the battle for supremacy in their ecosystem was likely to play out and therefore pick a strategic partner to collaborate with.
Re nature of intervention, this way of thinking changes the design and execution of strategic interventions.  A financial institution developed a three-strand strategy which changed their relationships with the regulator, the market and their competitors, through an understanding of the interactions of those relationships.  Some of the changes were quite subtle based on identifying non-obvious high leverage points in the system.
It’s worth pointing out that both these interventions were really fast to do (in one case, orders of magnitude faster than the approach they had been using) – and of course being able to develop good strategy fast is in itself a competitive advantage.
As you say, it’s critically important to be able to develop strategy in both competitive and collaborative situations – and in those which are a bit of both, and we have numerous examples of these.
One of the most rewarding things about using the Patterns of Strategy approach with clients is the way it changes how they think about strategy – much more fluid and dynamic, considering their own possible actions and those of the others and the interplay between them – they are really thinking about the ecosystem, how it’s working today and how it might evolve.  Our approach is based on Maturana’s structural coupling model from biology. One of the unexpected benefits of the approach has been a catalogue of about 100 patterns of strategy which we see playing out in different organisations and different contexts. If you’re interested in the approach, which we’ve been using for about 5 years and with about 50-60 organisations, you could have a look at www.patternsofstrategy.com or 
www.amazon.com/Patterns-Strategy-Patrick-Hoverstadt/dp/1138242675/ref=sr_1_1?s=books&ie=UTF8&qid=1501858229&sr=1-1&keywords=patterns+of+strategy
simbarashe kamba
This is baseline insightful article, that, would-be business leaders and current leaders need to have take-a ways.  Thoroughly enjoyed the article for it is relevant to the kind of industry that the organization I work for  belongs.Anticipation of change processes through a collective envisioning of business ecosystems and being proactive in strategy formulation and implementation to hedge against business weakness in the competitive global economy is the way to go.No longer is the ardent "business as usual". Was just thinking of the impact and results that could, may be, in the next 5-10 years come from corp orates going global and the agile political,social, economic changes that they face and how they could mitigate to influencing governing authorities in those countries in policy changes and or  other stakeholders in the communities that the corp orates will be operating to increase revenue streams!