Strategies for Ambiguity: Finding Opportunities in Uncertainty
Paul Freeman, CEO of a private asbestos removal company in Denver, Colorado, had built a very successful business. Then insurance companies decided they could no long offer liability insurance for asbestos removal. The ambiguity and uncertainty was too great to price the risk. They pulled their insurance. Without the insurance, Freeman's company would have to shut its doors.
But Freeman took a different view of the ambiguity and uncertainty. Where the insurance companies saw only risk, he saw opportunity. Rather than closing the doors of his company, he decided to go into the insurance business. He started his own insurance company, called ERIC (Environmental Risk Insurance Corp.). Freeman believed that he could safely insure a building or warehouse against asbestos claims if: (1) an in-depth site analysis identified all major asbestos problems, (2) an insurance policy was tailored to the specific circumstance faced, and (3) subcontractors were trained to perform removal or abatement according to exacting standards.
"By combining engineering and actuarial analyses with tight oversight of subcontractors, the company succeeded where traditional insurance players feared to tread," says Paul Schoemaker, who teaches in several Wharton Executive Education programs including Critical Thinking and Full-Spectrum Innovation. "The insurance industry is largely characterized by firms who tend to avoid uncertainty, as opposed to risk."
After Freeman proved the success of his insurance company, reinsurers (such as Swiss Re) purchased the contracts. The business succeeded so well that ERIC was eventually acquired.
"Managers need the ability to live with paradox, surprise, and its associated ambiguities," Schoemaker says. "Simple, absolute answers are few and far between in a clinical field such as business. The ability to live with these ambiguities, and periodically to re-conceptualize them, may be the most important skill set managers must develop."
Six Levers
Given the daunting challenge of managing in the face of ambiguity and uncertainty, Schoemaker says managers need new tools and frameworks. "As uncertainty continues to increase in many industries, managers may wish to rethink how they handle it," he says. In particular, Schoemaker points to six key levers identified in his work with diverse companies as research director of Wharton's Mack Center for Technological Innovation and through his consulting company Decision Strategies International. These levers are:
- Use scenario planning to improve your insight and foresight about the future.
- Devise adaptive strategies that have sufficient flexibility to deal with the unexpected, including using real options thinking to take an experimental approach to planning.
- Design a dynamic monitoring system to track the external world in real time, as well as to gauge internal progress on executing strategies and plans.
- Improve your organization's agility in terms of structure, processes, norms, and rewards to cope better with the unknown.
- Enhance your information and decision-making procedures
to remain vigilant, through external networks and by properly balancing
traditional and newer tools.
- Foster strong leadership at multiple levels in the organization to deal better with crises and other unexpected circumstances.
"It is the very complexity of the game and its associated skewed payoff structure that make it worthwhile for established organizations to learn how to play it well," he says. Schoemaker notes that he and colleagues have worked with organizations such as BP, Chubb, Coca-Cola, Merck, the U.S. Navy, Microsoft, McKinsey, Memorial Sloan Kettering, and Procter & Gamble to apply these approaches to better address ambiguity. "Leaders should review to what extent their organization currently relies — and should rely in the future — on each of these six levers. Also, they might explore more deeply how to integrate the various levers so as to benefit from their inherent synergies."
The Challenge for Education
Given the need for new tools such as scenario planning and dynamic monitoring, traditional business education is not well designed for a world of high ambiguity and uncertainty. An analytical approach, while useful, does a better job of managing the operational risks than recognizing the strategic opportunities in ambiguous and uncertain contexts.
"The traditional paradigm of business schools, with its strong focus on analytical models and reductionism, is not well suited to handle the ambiguity and high rate of change facing many industries today," Schoemaker says. "For example, in uncertain environments, managers need to view planning as learning and reinvention rather than as prediction or control. They need to recognize the importance of intuition and seasoned judgment, while understanding when intuition can be unreliable. They often need to look at problems through multidisciplinary lenses rather than through the blinders of a single discipline."
Schoemaker notes that a study of emerging technologies at Wharton's Mack Center identified a set of paradoxes that are not addressed well by current management education:
- A strong commitment is necessary, but you also have to keep your options open.
- Winners are often pioneers, but most pioneers fail.
- You need to leverage competencies, yet organizational separation is crucial.
- Competition is intense, yet winning requires collaboration.
- Focus is critical to success, but managers must scan the periphery.
"These challenges that managers face in large, established enterprises demand a new approach to business education in which the management of uncertainty and paradox, as opposed to analyzing well-structured risks or tradeoffs, assumes a more central place," Schoemaker says. "Managers need to develop ‘peripheral vision' and become skilled at exploring multiple futures. These are not skills that typical MBA or even executive education programs concentrate on."
