CAPABILITIES IN THE VUCA MARKET

BY DR. TANAI CHARINSARN

FEBRUARY 16, 2017

 

“Building a visionary company requires one percent vision and 99 percent alignment.”— Jim Collins

 

Today, "strategy" is a major focus for every organization everywhere, as they have come to realize that without a strategy, surviving in the business world becomes more challenging. Past strategies, even if successful, do not necessarily apply to the future. In the era of globalization, changes occur constantly and faster than before. This includes changes in market conditions, consumer demands, industry regulations, and technological advancements. Every industry has the potential to be disrupted by smaller players like startups that leverage the internet and technology to introduce new offerings to customers. Traditional business models and limitations are being bypassed. For example, hotels are not just competing with each other but are also contending with platforms like Airbnb. Even banks need to keep an eye on new fintech developments, and the insurance industry is witnessing a surge in insurtech both internationally and, even though less familiar, in Thailand.

 

Crafting strategies in a VUCA (Volatile, Uncertain, Complex, and Ambiguous) environment:

Developing strategies in a VUCA environment (characterized by volatility, uncertainty, complexity, and ambiguity) is not an easy task. It particularly challenges mindset and internal alignment within an organization. Shaping the mindset of employees is essential to make them believe in and actively participate in the direction the organization is taking. Achieving alignment within the organization is also crucial.

How an organization's capabilities should be in a VUCA environment:

1. Strategy and capabilities should align.

The first question an organization must ask itself is what capabilities are necessary to drive the strategy that the organization currently lacks. To do this, it's important to first identify the existing capabilities and the required capabilities to identify the gaps and figure out how to fill those gaps.

Example of misalignment between strategy and capabilities:

The online grocery business was growing rapidly and seemed promising for the future. Even consulting giant Accenture invested hundreds of millions of dollars in creating an online grocery business named Webvan. Customers could order groceries online and have them delivered to their doorstep. However, Accenture's venture failed within 18 months because the company's capabilities did not align with the chosen strategy. Apart from having no prior experience or knowledge in the supermarket business, their online capabilities required significant development, such as website design, online customer acquisition, and suitable transportation for groceries.

Example of alignment between strategy and capabilities:

At the same time, a giant company like Amazon has similar intentions. However, it is evident that Amazon has a clear advantage when it comes to online capabilities and already possesses a database of online users. Furthermore, Amazon has the capability to handle its own deliveries in multiple cities, with faster delivery times and cost-effective management.

Another example of an organization that aligned its capabilities with its strategy is Tesla Motors. The trend in electric cars is the future of the automotive industry, which uses batteries as a power source. Tesla Motors joined hands with partners to build gigafactories for the production of batteries specifically for Tesla cars.

 

2. Strategy and capabilities must be agile.

In a VUCA environment, strategies should not remain static because the VUCA environment has become the new normal. Holding onto a single long-term strategy without adapting to the evolving environment is difficult and often leads to failure. Capabilities built to execute past strategies may not be beneficial in the future and may eventually become a heavy cost burden for the organization. 

Consumer behavior in the past:

For example, in the banking industry, there was a time when banks everywhere were rapidly expanding their branches to accommodate growth. They were leasing or purchasing spaces to establish branches, hiring more branch employees, and providing training to enhance the knowledge and skills of branch staff, such as sales skills and knowledge of banking products.

Consumer behavior changes today:

However, as people became more accustomed to using the internet and with the growth of smartphones, consumers started shifting towards conducting transactions online rather than visiting branches, as it was more convenient. Consequently, fewer people visited physical branches. This shift led to a surplus of branch employees.

Impact of the VUCA environment:

Many banks had to close certain branches due to them becoming cost burdens on the banks. Additionally, the skills and capabilities of branch staff needed to be developed as traditional sales and product knowledge were no longer as effective. Differentiating and retaining customers within the bank became a matter of managing the relationships with customers that branch employees should possess. In the case of the banking business, the organization's capabilities had to be highly adaptable to respond to these changes, both in terms of personnel and other assets.

Examples of agile strategies and capabilities:

Today, many businesses are shifting towards "renting" resources rather than "buying." This approach provides greater flexibility to organizations, as seen in the growing trend of contracting services rather than hiring full-time employees. For instance, many organizations are now opting to purchase IT management systems as a service instead of owning and maintaining them. Retail businesses, like convenience stores or restaurants, are increasingly focusing on franchise operations rather than growing independently. Numerous startups exhibit high agility and flexibility, making them capable of adapting, changing, or developing their abilities and resources quickly and easily.

 
3. Strategies and capabilities must be future-oriented.
 
Instead of spending time assessing current capabilities, organizations should prioritize seeking and developing the capabilities needed for the future. This includes elements that will enhance organizational efficiency and help reduce costs.

Examples of organizations with future-oriented strategies and capabilities:

For instance, Amazon invested in drones as a tool for a new form of delivery that the organization believed would result in faster and more cost-effective deliveries compared to current land-based transport methods. The capabilities of the organization extend beyond just assets and technology; they also involve the capabilities of the employees. For example, when recruiting employees, organizations should consider the potential candidates' suitability for the organization's future needs. Apple, for example, began hiring personnel from the automotive industry to help develop the Apple Car because they believe that transportation and vehicles will be of greater importance to consumers in the future.

Why considering strategies and capabilities is crucial in a VUCA environment:

Having a well-crafted and aesthetically pleasing strategy is one aspect, and having the capability to execute it is another. Many organizations fail to execute their strategies because they lack the capability to drive them. Conversely, some organizations, despite their strategic planning, fail due to a lack of flexible and adaptable capabilities. The world is rapidly changing, and businesses need to adjust and respond to changes to survive. Therefore, organizations must ensure that their strategies and capabilities are aligned, flexible, and future-oriented.