Given the current convolution of crisis, there is no doubt that organizations need to learn to operate in the face of an unknown future with extremely uncertain conditions: climate change; COVID-19; the Ukraine conflict; massive inflation; supply chain disruptions; transformative regulatory shifts, such as like the European Union’s green deal; cyberattacks; and moral and ethical dilemmas such as Google’s artificial intelligence (AI) withdrawal from the Pentagon’s military drone program. This also shows in numbers. The Global Economic Policy Uncertainty Index—a GDP-weighted average of national EPU indices for 20 countries—has climbed from 76 in 1996 to 303 in March 2022 (with a historical peak in May 2020 of 430 during the pandemic).

Uncertainty means that the probabilities of the relevant environmental conditions occurring are unknown to the decision maker. Risk is a special case of uncertainty, namely with the probabilities at least known. Further, uncertainty is characterized by first the severity of changes, second their frequency, and third the persistence of these unnormal or crisis situations. Uncertainty is by no means a new phenomenon; however, going forward leaders will have to bring a fresh look at uncertainty.

At the peak of the pandemic Brian Chesky, Airbnb’s CEO, explained the extreme uncertainty: “We don’t know exactly when travel will return. When travel does return, it will look different.” Today’s conditions have triggered an increase in all parameters of the uncertainty complex and makes future developments nearly impossible to predict. Hence, companies need to prepare for the unexpected, build strategic options, and strengthen their capability to proactively shape the future instead of solely responding to it. With new and disruptive currents, this leadership challenge is here to stay.

/ RESILIENCE: THE PITFALL OF TREATING IT AS A MEANS RATHER THAN AN OUTCOME

Recently, resilience has emerged as the central response to just about everything—both at the individual and organizational levels. However, resilience is an outcome, not a means, and the negative consequences can be significant when resilience is misunderstood as a means.

Defined as a person’s psychological ability to adapt to stressful circumstances and recover from adverse events, regardless of circumstances and challenges, resilience is a highly sought-after personality skill in the modern workplace. Recently, there has been a tendency to transfer this individual trait to organizations and consider it as the ideal of a firm’s capabilities.

But the opposite is true. If you make resilience the means, you can easily end up with toughness. History teaches us that leaders who strive for toughness should be critically observed. Toughness was declared a key trait and ideal in the Third Reich. To counteract an alleged effeminacy of youth, leaders were required to be “nimble as greyhounds, tough as leather, hard as Krupp steel.”  Curiously absent from this pejorative ideal are all the classical virtues of the Age of Enlightenment such as learning, wisdom, and justice.

Numerous recent studies show that too much focus on resilience leads to a denial of the larger need to explore and heal situations. For individuals, too much personal resilience can lead to being too tolerant of adversity, for example, staying too long in a toxic environment such as a demoralizing job. For companies, too much organizational resilience risks stressing organizations beyond what is reasonable.

Overly resilient leaders might satisfy the need of employees to be protected by a strong and tenacious leader; however, studies show that they can significantly reduce leadership effectiveness and, in turn, team and organizational effectiveness. Bold leaders are unaware of their limitations and overestimate their leadership abilities and current performance, leading them to be rigidly and unreasonably resistant and closed to information that could be essential to remediating—or at least improving— behavioral weaknesses. The same holds true on an organizational level when endurance stands as an obstacle to learning.

While it may be reassuring for countries, organizations, and teams to select leaders based on their resilience, such leaders are not necessarily always good for the group or organization. Employees can burn out, organizations can fail to shape the future or even fail with immoral and unethical practices.

Learning organizations, on the other hand, win. When leaders make learning the means, organizations can intelligently deal with extreme uncertainty, proactively shape the future, adapt and evolve organizationally, and even stand the test of time or, in other words, achieve resilience as a by-product.

“The key to pursuing excellence is to embrace an organic, long-term learning process, and not to live in a shell of static, safe mediocrity.”
— Josh Waitzkin

If business leaders are serious about building organizations that can stand the test of time, four actions will make the future better than we might think: (1) lead and learn with an infinite mindset, (2) Develop options for strategic flexibility, (3) Shift business models towards resilience, and (4) Establish digital operating models for sensing organizations.

/ OPPORTUNITY 1: LEAD AND LEARN WITH AN INFINITE MINDSET

“We know that someone has won the game when all of the players have agreed who among them is the winner. No other condition than the agreement of the players is absolutely required in determining who has won the game.”
— J.P. Carse

 

As we know, in business all the players can determine their own strategies and tactics and there is no set of fixed rules on which everyone has agreed, other than the law and this can vary. Additionally, we may not know the other players, and new players can join the game at any time. Hence, it is surprising to see how many leaders still play business as if it were a finite game, namely, to win and beat the competition. But beating the competition is a losing business strategy.

Today, Siemens has evolved into an innovative company focused on growth through digitalization and sustainability, solving the most pressing problems to create a better future. The company was named “World Changing Company of the Year” in 2022 by Fast Company magazine. In contrast, in the 1980s and 1990s, Siemens focused primarily on competing directly with General Electric. This restructuring to beat the supposed role model came at the expense of the company’s unique engineering culture, which had made it great and nearly made the company irrelevant.

Benchmarking never makes you better than your benchmark. Admiring worthy rivals can be motivating to constantly improve to stay in the game, but focusing on the competition defocuses innovation for the customer. Jeff Bezos wisely noted in the same context: “If we can get our competitors to focus on us while we focus on the customer, we’ll end up right.”

Instead, winners focus their leadership on a North Star, a transformative purpose, and long-term goals for people to embark on the journey to a greater cause. At Amazon, Jeff Bezos focused the long-term goal on “more products, cheaper, and faster” and kept re-investing most of their cash into additional innovations.

Leading means changing. Changes in the environment should be followed by changes in the company because entrepreneurial action is not an end in itself; rather, it serves to satisfy the needs of select stakeholders. The harmonious fit between the conditions of the environment and the company’s activities is closely linked to processes of organizational learning.

/ OPPORTUNITY 2: DEVELOP OPTIONS FOR STRATEGIC FLEXIBILITY

When Steve Jobs said in his famous 2004 Stanford University commencement speech: “You can’t connect the dots looking forward; you can only connect them looking backwards. So, you have to trust that the dots will somehow connect in your future,” what he meant was that learning something useless in the short term can create an option that pays off in the future when the right application or use cases emerges. In other words, thinking long term and learning a range of things increases the likelihood that the dots will connect later and new combinations can be enforced.

Jobs was a leader, who naturally thought in terms of real options. Real options include derivatives that get their value from future decisions; they give the holder the right to make a decision in the future and involve real (i.e., physical) underlying assets. Real options can be understood as the acquisition of alternative courses of action, which enable specific activities to be carried out to secure opportunities and avoid threats as — through learning — further information is gained. They thus reflect the value of the additional flexibility gained.

Real options add the wait decision to the invest and not invest alternatives and take learning plus the resulting information gain into account, both passively and actively. This can lead to a change in course; for example, when an in-house development fails, then a development cooperation is sought instead. Since real options grant the right, but do not imply an obligation, to engage in certain activities, there is an asymmetry of opportunities for profit and risk of loss. Losses and expenses already incurred (sunk costs) can therefore be limited without restricting the realizable profit potential.

Especially in the face of high uncertainty, it is necessary to develop room for maneuvering at both the project and portfolio levels. The relationship between uncertainty and the required range of strategic options is also important. When uncertainty is high, the provision of a sufficiently large number of strategic options for action proves to be critical to success. As shown in Figure 1, the following applies: The greater the number of real options available to an organization, the greater the scope for action.

Figure 1. Room to maneuver depending on uncertainty and options.

Strategically, this implies a shift from high, largely irreversible investments in a few large projects (big bets) toward a portfolio of smaller investments into real options, hence room for maneuver. This allows the organization to reposition itself more quickly than competitors who concentrate on doing more of the same and being, therefore, resistant to change.  It also reduces the risk that strategic windows cannot be exploited because specific resources and capabilities (sticky factors) are not available, and their development has already become too costly (lock-out). Such variant thinking places strategic focus on learning through experiments and fast feedback loops, and ultimately can transform an organization substantially.

We see that organizational slack can be a good thing to accelerate learning and increase an organization’s strategic flexibility to stand the test of time. However, it is advisable to limit investments as not all options will be exercised. Hence, first develop an option with limited resources, then exercise and mobilize resources on a large scale only when competencies have been acquired, uncertainty has been reduced, and the strategic relevance is still considered to be high.

“Depending on the future environment, not all options will be exercised. However, those discarded are not wasted, but serve the useful purpose of insurance against an uncertain future.” — O.E. Williamson, 1999

 

This flexibility can even be existential. An existential flex rather happens when the company is fully formed and functioning. In this case, the leader is risking the apparent certainty of the current, profitable path with the uncertainty of a new path — one that could lead to the company’s decline or even demise (Sinek, 2020). To the finite-minded leaders, such a move is not worth the risk.

To infinite-minded leaders, however, staying on the current path is the bigger risk. They embrace the uncertainty. Failure to flex, they believe, will significantly restrict their ability to advance the cause. They fear staying the course may even lead to eventual demise of the organization. The motivation of the infinite-minded player to flex is to advance the cause, even if it disrupts the existing business. To build a learning organization, you need a leader who does not simply want to build an organization that can weather change but one that can be transformed by it. They want to build a company that embraces surprises, adapts with the, and comes out of times of upheaval entirely different than when they entered and are often grateful for the transformation. They embrace the surprise as an opportunity to transform for the better rather than a threat ­– a characteristic move of an infinite-minded leader.

To become great leaders, we must first be able to lead ourselves. If leaders can’t change, the organization can’t either (Linz, 2019).

/ OPPORTUNITY 3: SHIFT BUSINESS MODELS TOWARD RESILIENCE

We are witnessing the convergence of digital transformation, sustainability transformation, and business model transformation.

Digital technologies are the prerequisite for business impact as well as social impact at scale. However, many executives still view sustainability and technology as separate priorities and even opposing goals. But the opposite is true, as the interplay between digitalization and sustainability opens up brilliant opportunities for shaping a greener economy and society and will change  interpretation of the sustainability paradigm itself.

But overhyping the deployment of digital technologies in existing businesses to do what we have always done, faster and cheaper, is not enough. If changes are too small, organizations run the risk of digitizing the past instead of innovating and transforming for the future.

Despite the reset on the horizon, many incumbent companies base their business models on yesterday’s logic; they risk relying on improvements that only scratch the surface. Eighty percent of executives think that their business models are at risk, whereas 60% of companies that have successfully undergone a digital transformation, say they have transformed into new business models. To take full advantage of the opportunity provided by crisis, we need to challenge our basic assumptions about how to create, deliver, and capture value.

Our analysis of 250 digital initiatives worldwide, reveals that most companies still focus on process automation and efficiency gains. In other words, they make the existing processes more digital such as document workflows replacing paper-based processes.

Fortunately, an increasing number can be classified as process reimagination that challenges and puts the existing processes to the test before reimplementing them. Predictive maintenance scenarios replacing traditional repair–replace processes would fall into this category.

Only a minority of organizations transform the operating model, which implies that digital technologies have become an integral part of the organization’s value-creation architecture. One example is Adidas group’s so-called “Speedfactory” approach, which integrates a number of trends transforming supply chains today, including 3D printing, customization on a mass scale, near-sourcing, and the digitalization of its operations. Similarly, a bank that establishes a hub to provide financial services at other banks, or embeds them into enterprise processes, could be classified as an operating model transformation. Or the Circular Footware Alliance, which aims to produce a fully recyclable safety shoe made from recycled materials that can also be recycled after use.

Lastly, the smallest share of companies drives digital transformation in the form of a business model transformation. For example, Microsoft transformed from the Windows-grounded software product firm into a cloud platform company, which works across technologies and integrates with partners and ecosystems such as LinkedIn and GitHub. From 2015 to 2020, their share price has nearly quadrupled, and their revenues have grown by 65% and shifted from upfront licenses to recurring subscription revenues. Or EspeRare, a not-for-profit biotech organization that improves the lives of children with life-threatening rare diseases. Their digital platform aims to methodically leverage all layers of intelligence to efficiently develop treatments and drive real-life improvements for these children and their families. And their sustainability-focused business model increases both business and social impacts.

As we can see, there is an important difference between the digitalization of the existing business model and a digital transformation toward a new business model. While process automation, reimagination, and operating model change can often be done locally in an engineering department, a business model transformation cuts across divisions and business functions. It requires new leadership and backing from the board(s) and then can be a highly effective lever for systematically driving digital transformation in a coherent way.

Business model transformation is also a viable means to reaching resilience. A business model is the distinctive logic of how to create value in the back end, deliver value in the front end to customers and other stakeholders, and capture value via the monetization mechanics for the organization. As illustrated in Figure 2, we can classify business models along two dimensions, which lead to four types: product, project, platform, and solution. Within the same industry sector, the business model types with higher inclusiveness have been better off because, on average, they showed higher resilience during the pandemic.

Figure 2. Transforming business models to build resilience.

Increasing inclusiveness can be achieved when the comprehensiveness of the offering and/or the stickiness of the business transaction is enhanced via a platform or solution business models. This implies moving from standalone, often physical offerings with vastly independent transactions, to comprehensive and integrated offerings with recurring transactions.

With higher inclusiveness levels, we have generally witnessed an increase in resilience (Linz, 2020). The higher the offering’s breadth and depth, the bigger the ecosystem around its customers, and the more premium services are integrated (e.g., free-of-charge shipping, unique content), the less reasons exist to change vendors. Furthermore, subscription-based monetization models increase the probability that the customer will continue the relationship with the same vendor and often leads to a chain of transactions.

Certain sectors illustrate how leaders can foster inclusiveness in their business model to positively influence their firm’s resilience:

• In financial services, retail banking is shrinking as demonstrated by Deutsche Bank closing every fifth outlet in their home market. In contrast, Banking-as-a-Service platforms, such as Railsbank or Solarisbank, have proved their resilience. Also, family offices, which provide holistic solutions, demonstrate resilience in times of capital market volatility.
• In manufacturing, traditional producers face downward pressure on demand, production, and supply chains. At the same time, digitalization of production and logistics accelerates with more connectivity, advanced analytics, automation, and advanced-manufacturing technologies. Companies that provide value-added services on their platforms, could rely on recurring revenue streams, such as Siemens or Microsoft Azure or AWS, with their resilient Internet of Things (IoT) platform models.
• In professional services, consulting companies have shown that they can build on their long-standing customer relationships, even in a crisis, and now can blend remote and on-site delivery seamlessly. Some consulting firms even productized their project knowledge, built up intellectual property, and shifted into platform business models such as Infosys; hence proving business model transformation is an effective lever for digital transformation.

As we can see, customization does not increase resilience per se but provides important flavors of additional resilience. Increasing customization means moving from standardized, packaged, and automated offerings to individualized offerings that are cocreated by the company and customer. The resulting tighter provider–customer bond and the accumulation of domain-specific knowledge bolsters resilience in a time of crisis.

With regard to their business model, companies need to cultivate an openness toward a better future, no matter how much they have already invested in going down a specific path. When thinking about flexibility, it should not be defensive but offensive.

Smart leaders make sure that 20% to 30% of their transformation initiatives are focused on new business models and ideally drive new digital- native revenue streams. In a disrupted world, they invest in strategic resilience and focus on inclusive—comprehensive and sticky business models—such as platforms and solutions.

/ OPPORTUNITY 4: ESTABLISH NEW DIGITAL OPERATING MODELS FOR SENSING ORGANIZATIONS

In the age of extreme uncertainty, leaders often recognize that their organizations are working in operating models of the past, which are ill-suited to this highly uncertain environment. On the other hand, they know what they need: agility, flexibility, and collaboration across the organization. In other words, the approach used in a crisis mode can serve as a starting point: build a structure, a small group of trusted managers who have the judgment and internal credibility; have a broad network across the organization; and can count on top-level support when big stakes are required. After crises, this temporary structure is usually dismantled again because the effort is very high, resources are overstretched, and employees would burn out. In the age of extreme uncertainty, however, we need agility, flexibility, and collaboration, not just temporarily, but on a continuous basis.

This means throwing out the playbook. In the 90ies, management theorist Steve Haeckel introduced to the business world a concept borrowed from cell biology: sensing-responding-adapting. The idea behind it was simple: the advent of information technology had enabled companies to be more flexible and responsive to changing customer needs and market conditions, leading to a new way of developing strategy. 30 years later, technology has matured enough to make this concept a reality. Today, winners are creating new operating models that allow them not only to respond quickly to unpredictable conditions, but also to proactively shape the future of their businesses.

To turn this concept into reality, executives need to create a digital nerve center to holistically monitor both short-term crisis responses and strategic redesigns to ensure long-term survival. This allows the organization to move from deterministic prior year plans + 10% revenue—carefully prepared status reports that are out of date before they reach the board meeting and processes too rigid for a timely response—to real-time or at least up-to-date information from a single source of truth. Expanding information and awareness capabilities across the enterprise leads to greater enterprise resilience. It enables decision makers to fully understand the impact of decisions on the entire enterprise.

Technically, a digital nerve center requires a move away from isolated, tribal knowledge-based planning and decision-making, which is typically based on incomplete, fragmented, and siloed data scattered across multiple systems, often based on static tables and charts. Instead, it builds on a centralized, semantically correct data model that connects all key functions with real-time market and business data. It uses artificial intelligence (AI) to automate repetitive tasks, optimize processes, and generate insights that provide end-to-end visibility into the impact of decisions, enabling continuous learning and network effects. It also includes a digital monitoring and early warning system to better understand which events might trigger your business and integrates real-time knowledge, including leading indicators of market, demand, and supply.

Digital nerve centers recognize that, in a highly uncertain environment, genius comes from a collection of many people with different experiences and perspectives, which we like to call crowds and ecosystems. They enable seamless collaboration across functions and geographies and help create an organizational context for people to cocreate the future. Today, power lies more outside than inside the organization. It is less about the leader and more about the ship, with its blurring boundaries between inside and outside.

Figure 3. Organizational Learning at the Edges and Building Future Options

Consequently, such an “intelligent” organization can be seen as an amorphous entity that changes its structure over time to reflect the impulses in its environment and continuously evolves toward new, dynamic, and uncertain markets to develop innovative business areas (figure 3). Its core competence is learning at the periphery of the organization. Given sufficient entrepreneurial capacity for strategic options, the margins can be interpreted as a transitional stage to new markets, where organizational vanguards explore and exploit new business opportunities. Their development is enhanced by the provision of group skills and resources. Conversely, the group also benefits by building new competency bases that are first acquired by these vanguards and then successively replicated and possibly multiplied as best practices throughout the organization.

/ Conclusion: A Journey Strengthening Resilience

Life and business is a journey, not an event. Leadership in extremely uncertain environments requires a long-term perspective, a focus on purpose, a willingness to innovate and transform, and a constant focus on fast learning to seize the opportunity in the contradiction. Building teams that can weather uncertainty and change requires creating systems for support and dialogue. This is in stark contrast to toughness, but strengthens resilience.

/ ABOUT THE AUTHOR

• Dr. Carsten Linz is the CEO of bluegain. Formerly Group Digital Officer at BASF and Business Development Officer at SAP, he is known for building €100 million businesses and leading large-scale transformations affecting 60,000+ employees. He is represented on boards including Shareability’s Technology & Innovation Committee and Social Impact. A member of the World Economic Forum’s Expert Network, Dr. Linz is also a published author who shares his expertise as an educator in executive programs at top business schools.