Professional Documents
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VUCA
VUCA
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www.elsevier.com/locate/bushor
ORGANIZATIONAL PERFORMANCE
a
Robinson College of Business, Georgia State University, Tower Place 200, Suite 400,
3348 Peachtree Road NE, Atlanta, GA 30326, U.S.A.
b
Scheller College of Business, Georgia Institute of Technology, 800 W. Peachtree Street, Atlanta,
GA 30308, U.S.A.
KEYWORDS Abstract VUCA is an acronym that has recently found its way into the business
VUCA; lexicon. The components it refers to–—volatility, uncertainty, complexity, and
Volatility; ambiguity–—are words that have been variously used to describe an environment
Uncertainty; which defies confident diagnosis and befuddles executives. In a ‘VUCA world,’ both
Complexity; pundits and executives have said, core activities essential to driving organizational
Ambiguity; performance–—like strategic planning–—are viewed as mere exercises in futility. VUCA
Leadership conditions render useless any efforts to understand the future and to plan responses.
When leaders are left with little to do other than wring their hands, organizational
performance quickly falls at risk. In this installment of Organizational Performance,
we demonstrate that by overlooking important differences in the conditions that
volatility, uncertainty, complexity, and ambiguity describe, we have disempowered
leaders. We show how leaders can appreciate the differences among each of these
challenging situations in order to properly allocate scarce resources to preserve and
enhance organizational performance.
# 2014 Kelley School of Business, Indiana University. Published by Elsevier Inc. All
rights reserved.
* Corresponding author
1
E-mail addresses: nate@gsu.edu (N. Bennett), The acronym VUCA originated in the U.S. military (Whiteman,
jim.lemoine@scheller.gatech.edu (G.J. Lemoine) 1998).
0007-6813/$ — see front matter # 2014 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.
http://dx.doi.org/10.1016/j.bushor.2014.01.001
312 ORGANIZATIONAL PERFORMANCE
‘‘Volatility provides profit opportunity.’’ as strategy and marketing are now ‘dead’ (Draycott,
(Warwick-Ching, 2013) 2012).
Consider these three problems and it is evident
‘‘Uncertainty is opportunity.’’ (Hemingway & that the second and third are not unavoidable con-
Marquart, 2013) sequences of the modern business world, but rather
entirely avoidable outcomes of the first. That is, we
‘‘Simplifying IT complexity [is] a major opportu- have little actionable advice to deal with VUCA and
nity.’’ (Boston Consulting Group, 2013) are tempted to say there’s nothing we can do about
it specifically because we don’t break out the com-
‘‘Ambiguity equals opportunity.’’ (Amerasia Con- ponents of VUCA and fully understand the exact
sulting Group, 2013) natures of the problems we face. Until leaders
become able to identify the unique challenges pre-
Capitalizing on opportunity first requires under- sented by volatility, uncertainty, complexity, and
standing it; reviewing what leaders have said and ambiguity, they will not be positioned to seize the
done thus far, however, there is ample evidence of opportunities promised by the aforementioned op-
misunderstanding. Three significant problems exist timists. This is because volatility, uncertainty, com-
in how leaders have employed these terms. First, plexity, and ambiguity all require their own separate
their use has been cavalier: VUCA has become a cute, and unique responses. Each of the four is a distinct
trendy way of saying ‘unpredictable change.’ As an phenomenon with equally distinct appropriate re-
experiment, perform a web search for any two of the sponses that require different–—and possibly diffi-
four words comprising VUCA. You’ll probably realize cult to reallocate–—investments. Leaders face a pair
two things: all four are typically used as a set in of problems: If VUCA is seen as general, unavoid-
executive interviews, consultant blogs, and the busi- able, and unsolvable, leaders will take no action and
ness press, and they’re treated as synonyms. Though fail to solve an actual problem. Alternatively, if
the words do have related meanings, it’s the differ- leaders misread the environment and prepare for
ences among them that are most valuable for leaders the wrong challenge, they will misdirect resources
to understand. We contend that the term VUCA offers and fail to address the actual problem.
a mélange that is dangerous in its consequences. The In the paragraphs that follow, we begin by point-
four components of the VUCA acronym have unique ing out the differences between the terms volatility,
meanings that should be instructive to leaders; in- uncertainty, complexity, and ambiguity. There are
stead, useful differences between the terms are non-trivial, albeit nuanced, differences in the
glossed over and their value lost. meanings of these words–—such as the military has
Second, even when pundits and leaders are sen- taken to teaching at the Army War College. Then,
sitive to the differences in meaning, there is a lack we discuss how to identify VUCA situations in the
of information regarding just what it is that leaders organizational environment and distinguish exactly
should do in order to confront one or another of which type of unpredictability is being experienced.
these conditions. Executives often mention in inter- Finally, we discuss the ways leaders need to position
views and press releases the difficulties of ‘‘doing their companies to address these singularly: each
business in a VUCA world,’’ but quickly move on to requires something different from the company and
simpler topics without discussing exactly how a firm its leadership. As we will explain, you cannot rec-
can position itself in such an environment. Those few ognize the hidden opportunity (e.g., in complexity)
that do consider how to deal with VUCA typically offer by misdirecting resources (e.g., addressing the
one highly general solution for all four of its compo- threat from ambiguity). Failure to use the right
nents, such as ‘‘innovate,’’ ‘‘be creative,’’ ‘‘be flex- label will lead to a misallocation of what could be
ible,’’ or ‘‘listen more.’’ History does not offer many considerable corporate resources. Table 1 summa-
examples of such pabulum producing great leaders, rizes our key thoughts regarding volatility, uncer-
effective change, or robust organizations. tainty, complexity, and ambiguity.
Finally–—and likely because there is a dearth of
actionable advice out there–—too many leaders are
confronting this VUCA world by simply throwing up 2. What do these terms mean. . .and
their hands. As one executive told us, strategic what do they mean for your company?
planning is idle at his company because, after all,
‘‘How can you plan anything in such a VUCA world?’’ 2.1. Volatility
Indeed, a growing thought leadership movement
asserts that due to the complete chaos and uncon- Reid Spencer is a division manager for a technology
trollability of the VUCA world, ‘obsolete’ ideas such company in Cambridge, Massachusetts. The industry
ORGANIZATIONAL PERFORMANCE 313
is highly competitive and speed is a key competency itself and the likely associated causes and effects.
for both leaders and their organizations. Like others Reid knows that the fire could cause price in-
in similar positions, Reid has a lot on his plate and creases, he knows the history of price fluctuations
only so much bandwidth. Among today’s concerns is for the computer chip, and he likely has a good idea
the impact a fire at a large computer chip production of what has caused these trends. He has informa-
facility will have on the prices charged by one of his tion on other suppliers for the chip and how many
key suppliers. Margins are thin, and upon approach- other production facilities for the part exist within
ing his boss for advice, Reid is told merely: ‘‘In a VUCA the key supplier. The secret to dealing with vola-
world, we have to innovate!’’ tility, as with any component of VUCA, is under-
A volatile situation can be defined as one that is standing the opportunities and threats inherent in
unstable or unpredictable; it does not necessarily the situation.
involve complex structure, a critical lack of knowl- Not long ago, pundits widely credited Southwest
edge, or doubt about what outcomes may result Airlines’ decision to hedge on jet fuel as a key
from key events. Rather, volatility most closely toward supporting the company’s low-cost operat-
represents the general definition of VUCA com- ing strategy (Brooks, 2010). Fuel prices can be
monly used in the business press: relatively unsta- quite volatile, but not really VUCA. Southwest
ble change. A manager facing a volatile situation was not faced with significant deficits of knowl-
like Reid’s seeks to address certain questions: edge or overwhelming complexity; rather, it rec-
Will the situation create a spike in prices? If so, ognized that environmental factors beyond its
how high? And how long will the elevated prices control were lining up to cause a highly volatile
last? The production facility fire introduces cost fuel market. Southwest knew change was coming,
volatility, but Reid still maintains several useful–— and what was causing that change. It required a
perhaps critical–—assets as he attempts to manage strategy to deal with that change, for which even-
the situation: he understands both the situation tual existence was expected but magnitude was
314 ORGANIZATIONAL PERFORMANCE
unknown. The company prospered during this pe- inherent in it at all. For instance, Reid is uncertain
riod of change by leveraging its agility, the key to about the pending product to be offered by his Asian
handling volatility. competitor. There is nothing volatile here; he simply
When volatile change is expected, the best way does not know enough to plan a best response. The
to prepare is to devote resources toward developing solution to volatility is agility and building slack
agility. This is typically expensive and consists, for resources, but there is not enough information in
example, of stockpiling resources. Hedging on fuel, an uncertain situation to indicate that this would be
overbuying talent, and amassing raw materials al- an appropriate response. If there is not enough
lows the slack to be agile–—should volatile times information to indicate that volatile change is ap-
suddenly suggest that is the right move. As previ- proaching, stockpiling resources could be a costly
ously mentioned, Southwest Airlines embarked on a waste of time.
massive fuel-hedging plan that baffled its compet- Because uncertainty exists in the lack of ad-
itors, predicting the fuel market volatility and lev- equate information, addressing it simply involves
eraging its assets to create future agility. As most of obtaining information. Investment here entails
Southwest’s competitors hedged only 20%—30% of methods of collecting, interpreting, and sharing
their fuel purchases, limiting their eventual agility, information. Uncertainty can be solved structurally
Southwest hedged a massive 70% of its total need. by devoting more resources to boundary-spanning
The end result was that Southwest ended up paying activities: moving beyond existing networks, data
as much as 50% less for fuel than its competitors, and sources, and analysis processes to gather informa-
has arguably been the only consistently profitable tion from new partners and look at it differently.
airline for most of the 21st century. Information networks are created from many differ-
Southwest correctly forecast the volatility in fuel ent sources, both inside and outside the firm.
prices while prices were still low, and acted aggres- This principle is well illustrated by the aftermath
sively to maintain its agility. We propose that this of the 2001 U.S. terror attacks. Since those events,
agility is the key to dealing with environmental the world has lived with a greater sense of uncer-
volatility. When change is coming but its magnitude, tainty regarding if, when, and where a next attack
direction, and length are unknown, effective organ- could occur. To again reinforce distinctions between
izational leaders build their slack resource avail- the different components of VUCA, we note that the
ability, preparing for a potentially ‘long winter.’ In post-9/11 situation was not necessarily volatile: the
the short term, this is often expensive and seem- core issue facing the world’s governments was not a
ingly unneeded. However, if a market truly is vola- lack of stability or predictability. Rather, govern-
tile, it’s the definitive prescription for success in the ment leaders realized that the success of the attacks
long term. on the World Trade Center might encourage other
terrorists to create similar plots. How many more
2.2. Uncertainty attacks might we face? When and where might these
attacks occur? Who might be behind them? This was
In a separate market, Reid is anxious to learn more the core of the West’s uncertainty–—but not neces-
about the precise capabilities of a product about to sarily a volatile situation, nor a totally ambiguous
be launched by a worthy Asia-based competitor. It one, nor an overly complex one. Addressing the
could be that the new product changes the game–— uncertainty regarding the strategies of potential
and it could have strong implications for how he terrorists has led governments around the world
manages his research and development dollars. A to collect and cull through unimaginable amounts
senior manager in this division of Reid’s company, of information. New partnerships were formed and
speaking to a trade publication about the impend- information networks established, resulting in a
ing challenge this product may bring, was quoted as relatively successful anti-terror campaign. The
saying: ‘‘It’s a VUCA world. We’re going to have to key to the West’s success in rebuffing more attacks
be flexible.’’ in the style of 9/11 has been uncertainty reduction
Uncertainty is a term used to describe a situation through relentless information gathering.
characterized by a lack of knowledge, not as to Although Reid has likely heard the general advice
cause and effect but rather pertaining to whether to ‘‘be flexible’’ countless times regarding VUCA
a certain event is significant enough to constitute a issues, his best course of action may be to actively
meaningful cause. Uncertainty is not volatility. A grow his information collection and data processing
volatile situation is one in which change is likely, but resources. He lacks precise information about the
that change may come quickly and at varying mag- capabilities of the new product, and needs to gather
nitudes; an uncertain situation, on the other hand, that data. Further, he needs to reach out to part-
is not so volatile–—in fact, there may be no change ners, customers, researchers, trade groups, and
ORGANIZATIONAL PERFORMANCE 315
perhaps even competitors to better understand how Instead, the most straightforward way for an organ-
this new innovation might or might not change the ization to address complexity is to simplify the
marketplace. Will the product’s launch be more situation by adopting a structure that mirrors that
comparable to that of the iPod (a game changer) of the environment. Research has consistently
or that of the Segway personal transporter (market shown organizations that adapt themselves to
impact did not match pre-reveal hyperbole)? What ‘match’ environmental change perform at substan-
are the specifications of the new product, how do tively higher levels, whereas firms that maintain
they compare to the current market, and what past structures and processes in the face of a
impact should it have on the firm’s own research changing business environment are less effective
and development direction and budget? These are (Heugens & Lander, 2009). Organizations should
all questions that can be answered by information be structured to align with and take advantage of
gathering, making an uncertain situation more environmental complexity rather than struggle
certain–—and certainly more manageable. against it.
In the most obvious example, as a small, informal
2.3. Complexity organization grows, it is expected that formal de-
partments will appear to address what has become
Meanwhile, efforts to grow markets abroad have too much for a single person to handle. A smaller
been frustrating because of a variety of consider- operation dealing with a smaller group of suppliers,
ations such as export control, tariffs, and the in- a smaller customer base, and fewer regulations
transigence of officials in each market. Reid often works best within a relatively simple organizational
feels overwhelmed by the sheer number of moving structure, but that structure becomes obsolete as
parts involved in each market, and his staff strug- the organization grows and–—consequently–—the or-
gles to keep up with all of the associated regula- ganization’s operating environment becomes more
tions and other idiosyncrasies. Reid looks to trade complex. Finance, operations, marketing, and hu-
journals for guidance, and is struck by a columnist man resources functions are established so that
who writes: ‘‘It’s a VUCA world, and dealing with each part of the organization addresses something
multiple markets is just part of that. You can in which it has expertise. As the organization grows
succeed in this VUCA environment by being crea- larger, complexity will increase and departments
tive.’’ may divide further: the human resources depart-
A complex situation is characterized by many ment may hire specialists in benefits, compensation
interconnected parts. Again, this is distinct from a administration, and EEO compliance. Causes of this
volatile or an uncertain situation. The situation Reid internal restructuration should not be limited to
faces in regard to the regulatory environments and changes within the organization; changes in increas-
political climates in the many nations where his ingly complex business environments (i.e., changes
company does business is indeed complex, but not outside the organization) also indicate a need for
necessarily volatile or uncertain. There is no un- internal change. For instance, many organizations in
predictable or unstable change implied in this sit- the U.S. are restructuring their operations in terms
uation, and Reid is not faced with a lack of key of employee benefits due to the onset of healthcare
information. Indeed, he has a great deal of hard reform. The new healthcare law is tremendously
information on regulations, tariffs, and the like, but complex, and many leaders are finding that the most
is overwhelmed by the need to process it all. In efficient solution to cope with it is to restructure the
complex situations, a great deal of effort is required relevant parts of their firms to better align with its
to collect, digest, and understand the relevant in- requirements.
formation in its entirety. In Reid’s situation, his firm’s growth into so many
A complex situation calls for a uniquely distinct new markets creates a complexity that might best
response that is utterly separate from those neces- be resolved by moving to a more geographically
sitated by the other components of VUCA. This based organizational structure, such that different
highlights the danger of not properly understanding branches of the company are able to specialize in
and defining firm challenges. Although effective in understanding and exploiting market regulations
volatile situations, stockpiling resources is useless if and idiosyncrasies. It seems his company’s involve-
a firm does not understand where best to allocate ment in multiple markets has created an untenable
them in a complex environment. Similarly, estab- complexity for the current organizational structure.
lishing new information networks, as a firm should To reiterate, the preferred solutions for volatile and
do in times of uncertainty, risks an even greater uncertain situations are not relevant here: instead
degree of information overload, which can cause of stockpiling unneeded resources or gathering re-
firms to ‘freeze’ and not make any decisions at all. dundant information, the firm’s most efficient
316 ORGANIZATIONAL PERFORMANCE
course of action is to restructure itself to align with the digital revolution is presenting traditional print
the new environmental complexity. publishers: how news junkies will want to stay in-
formed, how students will want to get their learning
2.4. Ambiguity materials, and how lovers of fiction will want to
discover new authors are factors that will require
Finally, Reid tries to carve out time each day to the industry to adopt a mindset of experimentation.
ponder whether or not an innovative product cur- Further, technology allows content providers to
rently under development is likely to catch on. entirely circumvent traditional publishers. It is
Although it is unlike anything on the market today, unclear what the revenue model that maximizes
it isn’t clear that customers will see the value return will be. Successful publishers, small and
proposition the product provides. He can’t afford large, have thus far responded to this ambiguity
to escalate commitment to the product if it isn’t with experimentation and a willingness to take
going to be a hit. He reads a marketing blog for risks. In an industry not typically recognized for
advice and learns that ‘‘The VUCA world is pure groundbreaking innovation, publishers have created
chaos. Successful firms avoid over-planning and bundled contracts for authors with both traditional
make things up as they go.’’ publishing and e-books, offered bonus content to
Ambiguity characterizes situations where there is customers who purchase e-books through their own
doubt about the nature of cause-and-effect rela- digital marketplaces, embedded exclusive videos
tionships. Looking at Reid’s situation, it is easy to within their e-books, and even offered book chap-
see how this is distinct from the other components ters or whole books for free (for a limited time) in
of VUCA. It’s not volatile: there is no reason for Reid order to entice new readers. What will work as a
to expect quick, unpredictable, unstable change. business model 10 years from now? The only way
It’s not complex: there aren’t an overwhelming these publishers can find out is to experiment with
number of moving parts here, just a lack of under- the unprecedented.
standing as to what will happen next. And that lack The potential impact of his company’s new prod-
of understanding is distinct from uncertainty: in a uct is very ambiguous to Reid. Being such a depar-
merely uncertain situation, you have a good idea of ture from what the company is known for,
what causes what. An ambiguous situation, on the predicting customer reaction to the product is dif-
other hand, typically revolves around a wholly new ficult; accurately forecasting associated supply
product, market, innovation, or opportunity. In an processes and needs may also prove problematic.
uncertain situation, you can predict what may hap- Reid’s best option may be experimentation. For
pen if you gather adequate information. An ambig- example, his company can introduce individual
uous situation is more challenging because of the features from the new product into existing prod-
newness: there is little historical precedent for ucts, experimenting with customer receptivity.
determining the outcomes of certain causes or Furthermore, his firm may contract out–—to a vari-
courses of action. ety of suppliers–—input processes required by these
Stockpiling resources, while appropriate for vol- new features, experimenting with different supply
atile situations, could be a huge waste of time and flows and partners. The key here is options. Reid
energy in an ambiguous situation. Gathering infor- isn’t locked into any one plan without knowledge of
mation is similarly unhelpful when a situation is cause and effect; that would be risky for the firm.
ambiguous, as you likely don’t know what informa- Instead, he spreads out his resources, trying many
tion would be most useful to gather. Likewise, a different new strategies and analyzing each care-
company restructuring could be enormously ineffi- fully until he can determine with some confidence
cient if the firm doesn’t really understand what that exactly which will be best suited to the market
restructuring might lead to. The fourth component environment.
of VUCA continues the overall trend: the solution
that works for one part of VUCA likely won’t work
for the other three. Each dimension of VUCA is 3. Final thoughts
distinct and unique, and requires a different opti-
mal course of action. In the case of ambiguity, we It isn’t just Reid Spencer who suffers from a daunting
believe the key to success is experimentation–—not agenda. There is broad consensus that these are
slack resources, information gathering, or restruc- challenging times for leaders. Globalization has
turation. created opportunities with one hand as it has in-
Recall that ambiguous situations are those in troduced threats with the other. The stubborn glob-
which the relationship between cause-and-effect al recession has blunted repeated bursts of optimism
is uncertain. Such could be said of the challenge for the return to a path of prosperity. Layer on the
ORGANIZATIONAL PERFORMANCE 317