For CEOs, admitting uncertainty can be the key to success
Facing up to uncertainty is a skill that's in short supply in a business world that rewards conviction. But it's becoming a core competency for companies planning a long and prosperous run.
So says management consultant Michael E. Raynor , a distinguished fellow with Deloitte Research in Boston, who argues in a new book that corporate strategy has been focused too heavily on managing operations while neglecting the managing of risk.
"When it comes to the time CEOs spend thinking about strategy, thinking about uncertainty should be the lion's share of what they do," Raynor insisted in an interview.
Raynor outlines a fresh framework for grappling with uncertainties in his book, "The Strategy Paradox." It suggests the very steps companies take to ensure success often result in failure because decision-makers are pressured to make choices about the future and commit resources to those choices, based largely on guesswork.
Sony Corp. did everything right -- targeting viable markets, developing leading-edge products, and executing flawlessly -- in rolling out two products that bombed: the Betamax VCR and the Minidisc.
The first was tripped up by Matsushita's cheaper VHS format and the birth of the video-rental business, the second by the emergence of digital portable devices such as MP3 players and, ultimately, the iPod. In both cases, Sony made big logical bets on the wrong things.
Raynor believes such examples aren't unusual because decisions are based on assumptions about a future that's unpredictable. To remedy that situation, Raynor proposes the disciplines of "requisite uncertainty" -- in essence, separating the management of commitments from the management of uncertainty -- and "strategic flexibility," enabling companies to quickly recognize and capitalize on shifting trends and emerging technologies that might otherwise blindside them.
Had the Sony leaders focused on longer-term trends in the entertainment world rather than on product features for the Betamax and Minidisc, they might have hedged their bet by investing in a cheaper version of the Betamax that was easier to license, Raynor said. They also might have been less confident the compact discs sold by Sony's music division would be embraced by consumers for portable devices at a time when music was being digitized and downloaded, he said.
"Strategy should begin with what we do not know rather than with what we do," Raynor wrote. "And the need to humbly identify the limits of our knowledge and admit our ignorance is most acute where uncertainty is greatest: at the highest levels of the hierarchy."
Raynor contends that operating managers, responsible for meeting quarterly sales and earnings targets, are poorly positioned to weigh strategic risks. Frequently they are slow to spot new products or business models that could erode the core businesses they manage. Even when they understand the need to launch a new product or establish a foothold in an adjacent market, they often can't move the corporate levers rapidly enough to implement changes effectively.
Hence the responsibility for hedging bets, reversing course, and adapting to unforeseen market developments necessarily falls to top executives, Raynor concludes. But they too often are preoccupied with short-term results. Raynor proposes "the managerial equivalent of a thermal inversion," where ongoing operations are ceded to line managers and executives focus on "the middle-distance future."
General Electric Co. has moved in that direction under the leadership of chief executive Jeffrey R. Immelt , who early in his career ran the firm's plastics division in Pittsfield. (In May, he unsentimentally agreed to sell the plastics unit to a Saudi company.) Today senior GE executives are tasked with risk and innovations, investing in emerging fields and products such as wind energy and turbines, with the potential for faster growth than traditional GE businesses.
John G. Rice , the GE vice chairman with oversight for infrastructure businesses from energy to aviation to water purification, said division managers in each of those areas are empowered to make day-to-day decisions and are accountable for results. "We've got people in these jobs that don't have to be told what to do," Rice said. "I get involved in the resource issues and the planning cycle, figuring out how our businesses will be run over the next two to three years."
Other companies have taken similar steps. Johnson & Johnson's top executives monitor trends such as the convergence of devices and pharmaceuticals and help their operating units adapt. Microsoft Corp. leaders have invested in new businesses, from the Xbox game console to Internet-based Live software, that could extend Windows technology but have the potential to thrive independent of Windows.
But companies need a language for grappling with uncertainties, Raynor said, if only to explain it to Wall Street.
"It's difficult to take uncertainty seriously without a set of tools and framework," he said. "The CEO can't get on the quarterly call [with securities analysts] and say, 'We have no idea what the future holds.' "
Robert Weisman can be reached at weisman@globe.com. 
