Living with Volatility

An Age of Increased Volatility

That we live in a world of constant and upending change has been accepted as a given in every corner of our modern society. While change is often disruptive and challenging for those of us caught in its midst, what has become more troublesome in recent days is the extreme volatility associated with the changes we’re witnessing - whether in climate, finance, or the business world. 

Climate volatility, a touchstone in the ongoing debate over global warming, is well documented. Over the past three years alone we’ve seen extreme weather conditions wreak havoc across the globe. For example: In 2008 China witnessed the worst severe winter weather in five decades, with over 78 million
people affected by January’s freezing temperatures and heavy snow. Conversely, Australia was marked by extraordinary heat waves in 2009, which affected the southeastern part of the country in January and February. The extreme temperatures stoked bushfires that caused more than 170 deaths.

Of course the stock market is no stranger to volatility, indeed the metaphor of a roller coaster seems perfectly apt considering the vast swings that global markets have been subject to in recent months. Even the wealthy investors among us, frequently considered to be the most stable slice of our economic pie, are not immune to the effects of volatility.

If you’ve been following the recent Occupy Wall Street demonstrations that began in New York City and have since spread around the globe, you’ve undoubtedly heard countless references to the “1% versus the 99%.” The one percent represents the super-rich, who according to the protestors and some pundits, control more of the wealth (particularly here in the United States) than the other ninety-nine percent combined. But it seems that in these times of rapid upheaval, even the much maligned “one percenters” have felt the stinging effects of volatility. The Wall Street Journal reports that during the past three recessions, the top 1% of earners experienced the largest income shocks in percentage terms of any income group in the United States.  According to the Internal Revenue Service, the super high earners have the biggest crashes. The number of Americans making $1 million or more fell 40% between 2007 and 2009, while their combined incomes fell almost 50%, which is far more than the approximate 2% drop in total incomes of those making $50,000 or less.

Embracing Volatility:

Given the rapid and extreme pace of change you might logically conclude it’s more important than ever to effectively plan for the future – assessing your environment, projecting present trends, and creating a strategy that sees you vanquishing your competition and controlling your markets. Of course I am an ardent believer in strategic planning, but the realities of our ever-changing environment have forced me to re-evaluate the role of medium to long-term strategic planning in organizational success. What first caused me to shift my thinking was the realization that we, as human beings, are pitiful predictors of the future. This sad reality can be viewed both empirically – one of many studies of expert predictions discovered that over 80% were wrong – or by simply examining popular cultural trends: JK Rowling’s original manuscript for Harry Potter was reportedly rejected by upwards of a dozen publishing houses. This dramatic inability to predict the future presents a dilemma for strategic planners since, at its core, strategy is concerned with making predictions about the future, events that quite often, and increasingly so, are unknowable.

Perhaps a more suitable planning approach today is what the management scholar Henry Mintzberg described as ‘emergent strategy.’ The essence of this school of thought suggests that planners focus less on making predictions about far off events over which they have little control, and concentrate instead on reacting quickly to changes on the ground around them, thereby improving their ability to learn about what is working at this moment.  One corporate example of this movement is Zara, the Spanish clothing retailer. Zara eschews the traditional process of attempting to predict next year’s fashion trends, acknowledging that it basically has no idea what may be gracing the world’s runways, and later its streets, in the coming months. Instead, it employs an ‘observe, measure, and react’ strategy. As a first step, Zara sends teams of people to shopping malls, cafes, and other gathering places to see what people are currently wearing so they can quickly develop numerous ideas about what might work. Based on those ‘on the ground’ observations the company produces a large portfolio of styles, fabrics, and colors, all in small batches, which are quickly dispatched to stores where sales can be accurately measured. Based on the information that comes back – the react component - Zara utilizes its flexible manufacturing and distribution capabilities to respond quickly, dropping items that aren’t selling and scaling up the production of those that are.

In Practice:

You may not currently possess the strategic flexibility of a Zara, but that in no way precludes you from critically examining the volatile elements surrounding you, taking action, measuring, and reacting accordingly. As a first step I would suggest you examine some of the core components of your business, those that are potentially subject to the most volatility. The purpose of this exercise is to gain insights on what is happening ‘on the ground’ around you. Here is a short list of the many possible volatile phenomena that may be spinning in your organizational orbit:

•    Customer preferences
•    Employee competencies (in relation to strategy)
•    Cultural changes
•    Global and local economy
•    Technology
•    Competitor actions (particularly those of new competitors)
•    Globalization
•    Regulations
•    Demographics
•    Supplier relationships

In addition to making medium to long range strategic predictions about each of these items (a hallmark of traditional strategic planning) your team should make detailed observations about what is occurring right now, and what is likely to take place in the immediate future. What are your customers buying? What are your competitors doing today that is impacting you? Are you surprised in any way at what is playing out around you? Why or why not? Answering these questions allows you to confront the realities of your current situation and provides you with the ammunition necessary to make more strategic decisions moving forward.

Business will always be concerned with the future, it’s a given that we operate under the 'going concern' principle which assumes operations in subsequent periods. Therefore, attempting to anticipate what may occur years ahead is a challenge that all organizations must face. While we don’t have a crystal ball at our disposal, we can increase our chances of success by taking into account what is happening around us today, and using that knowledge to help us make informed decisions about what may in fact take place years down the road. Combining a view of current events with longer-term prognostications weaves a sturdier rope between today and tomorrow.

-World Meteorological Society, "Weather Extremes in a Changing Climate," 2011.
-Robert Frank, "The Wild Ride of the 1%," Wall Street Journal, Saturday, October 22, 2011.
-Duncan J. Watts, "Everything is Obvious: Once You Know the Answer "(New York, NY, Crown Business, 2011)