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In a world of uncertainty, how can leaders make strategic decisions?

· Allana Ferguson,VUCA,Analysis

The world is increasingly volatile, uncertain, complex and ambiguous. Businesses are expected to advance their commercial interests and provide value to shareholders. Policymakers are expected to act responsibly and create public value. But in a variable and unpredictable environment, the high costs of mistakes are having more adverse and far-reaching impacts on major vested interests than ever before. For government, how do we determine these uncertainties and challenges to create optimal policy? How do we communicate them to policymakers? And how can businesses help policymakers deal with them?

Henk Don aimed to address these very questions while he was Managing Director of the Netherlands Bureau of Economic Policy and Analysis. In 2006, he convened a conference which provided a forum for policymakers and researchers across policy areas to share their experiences and provide some guidance for addressing uncertainty in strategic decision-making.

During a number of sessions, dilemmas were presented to illustrate how policymakers can deal with risks and uncertainties and how their perceptions of a policy problem can influence their decision on how to formulate the appropriate solution. At one such session, attendees were presented with an example scenario:

Every year, 800 people die from the effects of radon exposure. This is almost as many as the 1,000 people killed in road accidents in the Netherlands every year. People are exposed to radon in the place where they feel safest: at home. Although the impact is high, it took years for preventive measures to be implemented. On the other hand, many measures have been taken in other areas where the risks are objectively lower, but where there is much more public protest, such as chlorine transport in the Netherlands, for instance. The Dutch government has spent millions towards relocating a plant in order to reduce chlorine transportations. Scientifically speaking, however, the actual risk was limited.” [1]

Overall the key message imparted was to “deal sensibly with risk” but ultimately this scenario highlights the number of forces at play in creating policies to address an infinite number of problems with finite resources. This in itself is complicated, but in an increasingly fast-paced and unpredictable world, how can policymakers make strategic decisions to create maximum value?

The U.S Army War College has described the modern strategic environment over the past 25 or so years as a VUCA world: Volatile, Uncertain, Complex and Ambiguous. The term originates from the post-cold war climate but its use by consultants and business leaders took off following the September 11 terrorist attacks as a way to articulate the turbulent and rapidly transforming business environment that we have found ourselves in today. This has not come without conjecture (“this is not a new idea, business has always been tough, competition and technological change has been around for years” and so on) but applying a VUCA framework to understanding geopolitical uncertainty and technological disruption as a means of making sense of the risks and opportunities in the business environment explains its ready adoption.

What is VUCA?[2]

Volatile: unexpected and/or unstable challenges

Uncertain: change is possible and presents a challenge even if cause and effect information are known.

Complex: overwhelming volumes of information that has different interconnected aspects and variables.

Ambiguous: challenges with “unknown unknowns” and unknown causal relationships.

Using VUCA as a construct for decision-making provides a framework for discussing risk within and outside an organisation while also highlighting how leaders should shift their mindset and behaviour to readily adapt to an unpredictable and equivocal environment. Psychological literature is rich in human decision behaviour research, particularly in attributing the psychological determinants of how we make decisions to uncertainty. Sources of uncertainty are not homogenous, and modern research has posited a plethora of theories involving the role of motivation and emotional functions interacting with cognitive judgements, conscious and unconscious influences on making decisions, as well as tactic and explicit processes on individual choices. Normative economic theories assume that we have unlimited capacity to gather information, analyse the data and assess probability to result in the best choice. Yet we don’t always act in a logical and reflective manner and largely make decisions that are satisfying, but not necessarily optimal. Put these cognitive processes in a VUCA environment and we are left with having to make difficult decisions in the absence of a clear pathway to optimal choices.

While the Netherlands conference did not explicitly explain decision-making in the context of a VUCA environment, the recommendations following its conclusion shed some insight into how policymakers, and business leaders, can tackle this ubiquitous challenge (and with optimism, we can presume that leading policymakers already are).

Image source: Bennett, Nathan & Lemoine, James, G, ‘What VUCA Really Means for You”, Harvard Business Review, January-February 2014 issue, https://hbr.org/resources/images/article_assets/hbr/1401/F1401C_A_LG.gif

Other than recommendation number 10 (organise a second edition of the conference in four years), many resonate here in Australia and in the VUCA context, including

  1. Scientists, policy advisers and policymakers should adopt an uncertainty-tolerant attitude.
  2. Uncertainty information should be regarded as knowledge.
  3. Ministries should create awareness of uncertainty and ways of tackling it among their workforce. A number of simple ways of achieving this include:
    • Organising a course focused on uncertainty for the entire workforce.
    • Adding a section on uncertainty to all analyses that are carried out within or at the request of the ministry.
    • Selecting important projects that have been implemented by the ministry over the past twelve months and assessing how uncertainty can be dealt with.
    • Developing the function of an uncertainty expert within each ministry.

Making decisions despite moving variables in the policymaking environment is a challenge for policy leaders. But using the VUCA construct to identify and assess uncertainties in a rapidly evolving environment can aid strategic decision-making. While any decision-making construct is imperfect (by its very nature an uncertain environment means that not everything can be known), it provides a useful framework to lay out the complex and rapid changes in the world that policymakers must contend with to meet strategic priorities.

Read the Final report on the conference Dealing with Uncertainty in Policymaking, 16 and 17 May 2006, The Hague, July 2008 here

Allana Ferguson is the Risk Analyst at FPL Advisory.

FPL Advisory is a team of specialists resolving risks and creating opportunities with respect to government. We work with public sector and corporate clients to execute strategies for owning and managing change.

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