Turbulent Times

“Predictions can be very difficult – especially about the future.” – Nils Bohr

This month, January 2022, saw me take my first flight in a Boeing 737 Max – six years after its first flight and almost 5 years after entered commercial service. For reasons I’ll describe below, the 737 Max developed a fearsome reputation in recent years. Was I concerned about flying in it? No. Given the scrutiny it has faced since a pair of terrible accidents in 2018, it is now probably one of the safest, if not the safest, aircraft in the sky. Mine was an internal flight in Canada, and once the inevitable de-icing had been completed (it was January, after all) the journey from Vancouver to Edmonton was very comfortable, very smooth and incident-free.

It wasn’t always such smooth sailing for the 737 Max, though, and its manufacturer, Boeing, was hit hard by events in the last few years.

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 28th 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 189 people on board, becoming the worst ever involving the Boeing 737. Worse was to follow. On 10th 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. Clearly, there were technical reasons for both accidents. These have largely been identified through detailed investigation, and improvements recommended – but not before 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).

Why did these accidents happen? The 737 Max utilised much larger engines than its predecessors, and 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, causing a tendency to come closer to a potential stall condition. To address this, and to avoid substantial retraining of flight crew to fly the new aircraft, the control software was changed. It should be no surprise that changing the dynamics of the aeroplane and introducing new control software introduced a risk of unanticipated and unwanted events.

Unfortunately for Boeing, their problems with the 737 Max were swiftly followed by the massive blow to the entire aviation industry that was Covid-19. Commercial aviation journey numbers fell dramatically and almost overnight, as people stopped travelling and many countries closed their borders. One estimate at the time was 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 issues will be severely damaging to Boeing. I’m going to argue that both 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 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 have encountered and will encounter because 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”.

In other words, we must be clear when we can try to assess risk in a probabilistic or quasi-probabilistic way and when we need to accept that we do not know enough to attempt to quantify the future. This is important for strategy. Rafael Ramírez and Angela Wilkinson (2016) warned against applying risk management tools in situations of volatility and uncertainty. They argued that risk assessment tools depend heavily on past experience, especially when the assessment becomes quantitative and probabilities are assigned, and in turn that this assumes that underlying conditions do not change. Novel events, or sequences of events, that change underlying conditions mean that the assumptions underlying risk analysis become invalid.

While important for all strategic discussions, the distinction is particularly important for innovation, faced as it is with uncertainty in 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. Now, that uncertainty is not bad news. It’s actually good news. Let me explain. 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 as a prerequisite to successful, differentiated innovation. How do we make the uncomfortable feel more comfortable?

To address what Knight called “measurable” uncertainty, which I will simply call risk – for example technical problems that emerge within a project – we can use risk analysis to try to anticipate and perhaps even quantify potential problems. Generally, such risks will have precedent within the organisation.

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. Accordingly, they can remove blind spots and alert the organisation to potential future threats that may not have been considered. It is important to realise that scenarios are not predictions, forecasts or model runs – they are simply alternate, equally plausible, views of the future (Ramírez, 2020). Neither are they contingency plans, although they can help to inform contingency planning. Unlike risk analysis, they must not be quantified by assigning probability or by trying to extrapolate trends. To assign probability would suggest that one scenario is “better” or “more likely” than the others, and this inevitably would reduce the power and the utility of the other scenarios.

While risk analysis can help to improve the quality of your project execution, scenario planning can help you to pick the right strategy, or even to discover entirely new successful strategies for your organisation.

The techniques offer two distinct but complementary solutions to help to manage uncertainty and allow us to transform uncertainty and risk from a threat and a potential problem to an opportunity and a significant source of potential competitive advantage. Both are described in some detail in the first volume of my book.

Key Learnings

  1. Innovators wrestle with sometimes significant uncertainty about the future.
  2. Uncertainty in the stakeholder environment tends to have measurable uncertainty, or risk, whose probability can be estimated.
  3. Uncertainty in the external environment, sometimes known as “Knightian uncertainty”, cannot be assessed in a quantitative manner.
  4. We deal with uncertainty in the stakeholder environment by using risk management.
  5. We deal with uncertainty in the external environment by using scenario planning.
  6. Risk management and scenario planning both require us to challenge our existing thinking.
  7. Risk management gives us options to mitigate and retire risks.
  8. Scenario planning gives us a tool we can use to assess potential strategic and innovation options.
  9. If everything about an opportunity is known, then we are stuck with “perfect competition”, so embracing uncertainty is totally necessary to a successful, differentiated innovation strategy.

References and Further Reading

(n.d.). No Highway in the Sky (1951). https://www.imdb.com/title/tt0043859/

Gegna, B., & Odeh, L. (2019, March 14). Boeing’s 737 Max Problems Put $600 Billion in Orders at Risk. https://www.bloomberg.com/news/articles/2019-03-14/boeing-s-600-billion-in-max-orders-at-risk-as-airlines-retreat

Knight, F. (1921). Risk, Uncertainty and Profit. Boston: Houghton Mifflin Co.

Ramírez, R. (2020). Introduction to the Oxford Scenario Planning Approach. Oxford Scenarios Programme course notes.

Ramírez, R., & Wilkinson, A. (2016). Strategic Reframing. Oxford: Oxford University Press.

Thiel, P. (2014). Zero to One. London: Random House.

Titan Grey. (n.d.). Boeing 737 Max. https://titangrey.com/boeing-737-max/

van der Heijden, K. (2005). Scenarios: The Art of Strategic Conversation. Chichester: John Wiley & Sons.

Wendel, W.B. (2019). Technological Solutions to Human Error and How They Can Kill You: Understanding the Boeing 737 Max Products Liability Litigation. Journal of Air Law and Commerce 84(3), 379–444.

Wyman, O. (2020, November 18). Even With 737 MAX Clearance, Covid-19 May Cause Overnight Closures in Aerospace Supply Chain. https://www.forbes.com/sites/oliverwyman/2020/11/18/why-covid-19-may-cause-overnight-closures-in-aerospace-supply-chain/

 

© 2020–2021 J M Clegg Ltd.

Image © aapsky – stock.adobe.com

 

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