5-minute read |
Like many others have pointed out since, the Brexit referendum, the rise of Donald Trump and the Brangelina break-up (!) left many voters, observers and institutional leaders shocked, dazed and confused in 2016.
While many have doubts about how much legs the stock rally has and the jury is still out on longer term impacts, the first shockwaves of at least 2 of these events were significant. According to our analysis, the VIX jumped by 45% overnight on June 23/24, 2016 (this is the Chicago Board Options Exchange’s Volatility Index, a popular gauge of expectations of stock market volatility over the next 30-day period). This is one of the top 5 one-day hikes and swings in its history since 1990. The index also rose by about 65% over slightly more than 2 weeks before the U.S. election, following news about Obamacare premium increases and the reopening of Clinton's email server investigation, before swiftly tapering down to what is now its lowest level in over a decade.
What should be most striking, however, is that “surprises” like this are not all that surprising anymore. In fact, our review indicates that significant one-day swings in the VIX (defined as +- 25%) have become 5 times more frequent since the beginning of the Great Recession in August 2007. With upcoming elections in France and Germany and a U.S. President keeping everyone on their toes with hardball negotiation tactics at home and abroad, we would expect that volatility will spike again from its current low at some point in 2017 (it has already rebounded slightly in the few days it took to update this article.)
Beyond political upheaval, industries after industries are struck by systemic, (initially) slow rising disruptions: fintech business models and digital payment are pressuring financial institutions, bitcoin and blockchain could redefine currencies and online security, climate change could leave trillions in stranded assets and machine learning only lived in sci-fi movies until recently. There is hype, but the changes will still be significant.
With insiders getting it wrong and entire business models under pressure, who can blame executives and board directors for throwing their hands in the air and discarding the future entirely? The answer to that is… investors, of course, and they are right. Executive teams need structural and tactical solutions to ensure decision-making can better handle uncertainty.
So what does this outlook mean for your strategy?
1) Understand immediate impacts and risks
The potential implications of Brexit, the Trump presidency and other events are of a scale, complexity and pace that we believe that, for many companies, they warrant the attention of a cross-functional rapid response group reporting directly to the CEO tasked to catch up on developments. While answers may not be immediately clear, it is possible to understand implications and define key directional signposts.
2) Ensure strategy is dynamic and hypotheses challenged
i) Living in the future
Borrowing from investor Paul Graham and from my friend LP Maurice, your team should begin not only by reading up on disruptive trends, but also by experimenting through early individual and organizational adoption of disruptive products and technologies. On the political side, I would extend that to varying degree of immersion in fundamentally different realities, through regular on the ground visits and secondments in different cultural environments for example.
ii) Stress-testing outcomes
When talking about scenarios, many executives have visions of elaborate war gaming exercises. For most companies, we rather recommend starting with the regular high-level review of key strategic options against a few scenarios defined by executives themselves. Well prepared teams also want to define and track signposts that hint at which scenarios are becoming more or less likely. What is clear is that the days of top-down, linear and forecast-driven strategy are over.
iii) Challenging blindspots
Increasingly recognized as a key component of decision-making is the necessity to offset cognitive blindspots through tactics like, for example, ensuring that key “thinking hats” are represented around the table (e.g., optimism, judgment, creativity) and ensuring awareness of common decision-making biases. This is well articulated in Outsmart Your Own Biases by J.B. Soll, K. L. Milkman and J.W. Payne from the May 2015 issue of Harvard Business Review.
3) Upgrade capabilities for the exponential world
To many observers, the intensity of today's interconnectedness and technology enablement has ushered an exponential phase where changes deemed unexpected by our limited cognitive capacity are becoming more frequent. While this may eventually cause social backlashes that could in turn slow back down the pace of change, this calls for rethinking the organization in the mean time, around a few challenging capabilities:
i) Adaptation
Depending on how uncertain, mature and challenging a company’s specific operating context is, adaptation requires the ability to define various alternatives and manage simultaneous experiments, the openness and trust to adjust resource allocation mid-way and the ability to reconcile entrepreneurial autonomy with the checks and balances necessary to hedge downside risk.
ii) External savviness
The fate of business is increasingly intertwined with external economic, political and societal forces. Beyond emergency response teams, executives should make sure that they are plugged into developments and that they groom and orchestrate the ability to engage with, learn from and find strength in numbers alongside other stakeholders.
iii) Ambiguity management
When things are uncertain, we know and understand what could happen, but we don’t know which scenario will unfold. When facing ambiguity, we have a hard time even imagining what the scenarios are. This will be increasingly true. While data analytics has the potential to upskill decision-making, companies will likely also need to reconcile different views of the world from different parts of the organization.
In time, the current uncertainty may come to pass, but leaders cannot afford to wait out the storm. When the stakes were much higher and destruction more horrific, the British Government coined the phrase: “Keep calm and carry on”. With a systematic approach to handling current events, you’ll be able to do the same.
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Emmanuel Verrier-Choquette is a Partner at Authentique Partners, a top tier, independent strategy studio empowering the leadership agenda. He has led and contributed to critical projects in strategy, transformation and operations across multiple sectors in mature, emerging and developing markets, including with the McKinsey Strategy & Innovation practice and the McKinsey Global Institute, at Booz & Company and at Secor Consulting, where he developed Scenario Planning with input from the former Head of Scenarios at an energy supermajor.
The author wishes to thank LP Maurice for many inspiring discussions as well as Ken Smith, former Chair of the Board and Managing Partner of Secor Consulting, and David Waldron, Partner at Vires Capital VII, for valuable comments.