Managing Uncertainty

Innovation is the means by which you create the source of future success. If only the future were stable and predictable, then decision making would be easy – you would simply test the potential benefits of proposed innovative activities against that known and calibrated future. Of course, it’s not that simple – and it turns out that the lack of stability and predictability is actually good news for you.

The 1951 British/American film “No Highway in the Sky”, starring James Stewart and Marlene Dietrich, told the story of an aeronautical engineer who repeatedly tried to warn of potential catastrophic failure of the “Reindeer”, a new type of aeroplane. Of course, this being a movie, Stewart’s character was eventually proved right and saved the day in the most dramatic of circumstances, by preventing at the last minute what would have been a doomed flight, but not before one aeroplane had already been lost due to his predicted metal fatigue – with that accident initially blamed on pilot error.

As so often, truth mirrors fiction. On 28^th October 2018, a Boeing 737 Max operated by Indonesia’s Lion Air began to behave extremely oddly, with the crew wrestling for control during the entire flight. But because the flight landed safely, and almost on time, little was done to follow up beyond a routine inspection. This being real life, and not a movie, there was no hero to make sure the plane did not fly again. The following day that very same Boeing 737 Max crashed into the Java Sea. The accident killed all of the 189 people on board, becoming the worst ever involving the Boeing 737. Worse was to follow. On 10^th March 2019, a Boeing 737 Max operated by Ethiopian Airlines crashed just after take-off, killing all 157 passengers and crew. Following the second accident, this relatively new aeroplane was grounded by airlines and authorities across the world.

Why did these accidents happen? The 737 Max utilised much larger engines than its predecessors, and in order to house them without significant changes to the airframe design they were placed slightly further forward and slightly higher when compared with previous models (Wendel, 2019). This changed the dynamics of flight, in particular causing a tendency to come closer to a potential stall condition. In order to address this, and to avoid retraining of flight crew to fly the new aircraft, the control software was changed. It turns out that this series of changes introduced a risk of unanticipated and unwanted events. As a direct result, the short term consequences were that Boeing suffered a significant reduction in its stock price and market capitalisation and saw the threatened cancellation of much or all of its $600 billion order book for the aeroplane (Gegna & Odeh, 2019).

Unfortunately for Boeing, their problems with the 737 Max were swiftly followed by Covid-19. Commercial aviation journey numbers fell dramatically and almost overnight, as people stopped travelling and many countries closed their borders. One estimate is that up to 4700 aircraft will be removed from production schedules in the next ten years, approximately 25% of previously planned volume (Wyman, 2020).

Both of these issues will be severely damaging to Boeing. But I think both of them could have been anticipated. Both involved a failure to see potentially adverse events in the future. Although they are very different in nature, the right approach to strategy and planning would at least have prepared the company – any company for that matter – for the consequences of either.

The issues with the 737 Max were very much within Boeing’s control – their design, their software, their decision on how to develop the training protocols. They emerged and were exacerbated within Boeing’s own internal organisation, systems and processes. On the other hand, the problems that Boeing (and its suppliers, competitors and customers) have encountered as a result of Covid-19 came from outside the company, from the external environment we all inhabit. The first involves risk; the second involves uncertainty.

There’s an important distinction between the two, first made by Frank Knight (1921). He wrote that risk involves different possible outcomes whose probability is capable of being measured, whereas uncertainty involves possible outcomes whose probability cannot be measured. According to Knight, a risk whose likelihood can be estimated or measured is “not in effect an uncertainty at all”.

While important for all strategic discussions, the distinction is particularly important for innovation, in the face of uncertainty about how market and nonmarket environments will develop, how traditional and nontraditional stakeholders will react, and how the external environment in which we all live, and work, will change. As I mentioned earlier, uncertainty about the future is actually good news. Why? Because a successful strategy depends on differentiation. If everything about an opportunity is known, then the most successful strategy will be obvious to all potential competitors and market entrants and there will be no profit, just “perfect competition” as described by Peter Thiel (2014). It makes sense, then, that embracing uncertainty – as uncomfortable as that may feel – is absolutely necessary for successful, differentiated innovation. So how do we make the uncomfortable feel more comfortable?

To address what Knight called “measurable” uncertainty, which I will simply call risk – for example the problems that emerged as a result of Boeing’s own organisation, systems and internal processes – we can use risk managementto try to anticipate and perhaps even quantify potential problems. Generally, such risks will have some kind of precedent within the organisation.

But, as Rafael Ramírez and Angela Wilkinson warned in 2016, we can’t use risk management in situations of volatility and uncertainty because risk assessment tools depend too heavily on past experience. Novel events, or sequences of events, that change underlying conditions mean that the assumptions underlying risk analysis become invalid. To address Knight’s true uncertainty, for events originating outside the organisation and its stakeholder environment – for example the impact of a pandemic on Boeing’s future business – we can look to scenario planning.

Scenario planning involves the creation of multiple, equally plausible and equally valued visions of possible futures. Once developed, scenarios can then be used to test existing strategy and, if needed, to develop new and alternative strategies by considering existing and potential new options, and how successful they would be if each of the scenarios presented actually came to pass. Scenarios can remove blind spots and alert the organisation to potential future threats that may not have been considered.

Risk management and scenario planning offer two distinct but complementary solutions to help us to manage, and benefit from, two very different kinds of uncertainty. In my coming book I dive into both in some detail to provide the reader with the tools they will need to embrace uncertainty and use it as a key source of differentiation and, therefore, success.