How to thrive in uncertain times

30 August 2018
" "
Dr Peter Zámborský

The University of Auckland's Dr Peter Zámborský suggests what companies can do to become more competitive in a world of business uncertainty.

Globally, the business world is in a state of uncertainty. Firstly, disruptive technologies are reshaping industries, from retail and entertainment to financial services and travel, and secondly, China, India and other emerging markets are reshaping global competition. These two trends are feeding anti-globalism and rise of political populism and protectionism. While around 80 percent of Chinese and Indians think globalisation is good for their country, less than 50 percent of Americans, Germans and Japanese think so, according to a survey by global market research company Ipsos. Lastly, protectionist trends might spread to emerging economies as gains from technological change are unlikely to be distributed equally and trade frictions will continue.

While these three factors are already apparent, we have only seen the tip of the iceberg in terms of their impact. Digitisation has still a long way to go in most industries (a recent McKinsey study found industries are less than 40 percent digitised). China is set to be the world’s largest economy within 10 years and India will join it within 20 years, with other countries such as Indonesia possibly rising to be the world’s largest economies.

In this world of uncertainty the best response is to be proactive by building organisational capabilities in three areas: sensing the context, driving the market, and redesigning the business.

Sensing the context

Sensing business context includes scanning for opportunities and threats, while understanding uncertainty and risk. Classical approaches such as a five-year plan are appropriate with a clear-enough future, but more uncertain environments require a more agile approach.

IKEA, for example, has long been a leader in the furniture retail industry with a business model focused on retail stores in the suburbs which has worked for decades. However, the company has struggled recently as consumers increasingly order furniture online and many don’t own cars, expect deliveries or don’t want to assemble furniture. IKEA’s sales in 2017 stagnated as only five percent of sales are from online shopping.

The company’s new CEO ditched a “five-year strategic plan” not agile enough to respond to the changing market and instead “reinvented” IKEA with a transformational three-year plan. The new strategy includes more stores in central business districts in cities from New York to Tokyo, new formats such as a specialised kitchen store recently opened in Sweden and a wardrobe store opened in Spain. They are building a better digital presence, providing more delivery options and experimenting with other innovations such as virtual reality and loaning furniture.

Small and medium-sized enterprises benefit from sensing their context too. An excellent example is Ecostore, New Zealand’s environmentally conscious producer of household products including laundry detergents, soaps and baby skincare. They sensed the shift to e-commerce and sustainable products in China and launched an e-flagship store on China’ in 2015. China has now become a key export market, rising from zero to over 10 percent of sales in two years. Ecostore was voted one of the top five health and sustainability brands in China last year alongside global brands such as Adidas and the company won Tmall’s Consumer Experience Excellence award this year.

Ecostore’s ability to sense changes in context—the rise of China’s middle class, e-commerce and “green consumers” – has contributed to its rapid growth. According to Alibaba’s research, there are 400 million green consumers in China and their numbers on Alibaba’s platforms rose from about four million in 2011 to about 65 million in 2015.

Driving the market

This means taking an active role, not just in deciding how to enter a market or what market needs are, but to create or co-create it. This requires an action-driven approach with a portfolio of initiatives ranging from no-regret moves to options and hedges as well as big bets.

Netflix, the global online TV leader with over 200 million customers provides examples of some of these types of “bets”. From 1997, the company bet on DVD and internet growth and became a premier online DVD rental company in the US. While this market was still strong in the 2000s, the company sensed video streaming replacing DVDs and introduced free streaming to DVD rental customers in 2007. This move provided the option to grow into content streaming, but still hedge against uncertainty. Its unsuccessful attempt to separate its DVD rental business from streaming business in 2011 with two separate fees was an example of a strategy going wrong.

While we are all familiar with Netflix’s “big bet” expansion to 130 countries in 2016, the company had already moved into Canada, Latin America, UK and Scandinavia where they had started with a low cost limited offer, collected detailed data about what people liked, and structured programming and investment around that consumer preference. So before embarking on radical innovation with Netflix Original Series and Movies, it had years of detailed data on subscribers’ preferences and could use predictive algorithms to determine the likely success of new programming.

Redesigning the business

Finally, companies that want to thrive in uncertainty need capabilities in redesigning their business. This requires strategic goals, an aim to be agile and adaptive, and can involve recombining resources, reinventing business models and acquiring or allying with other businesses.

IKEA is an example of these capabilities, but many companies go beyond transforming from within to transforming through connections with other companies. For example, Haier acquired Fisher & Paykel Appliances to strengthen its design, branding and growth in Australasia. It expanded F&P’s R&D team to 400 and linked it to its global innovation system in China, Japan, USA and Europe. This was a stepping stone towards the more ambitious acquisition of GE’s appliance business.

While we are likely to see other industries reshaped by Chinese multinationals, rising anti-globalism is creating new investment and trade barriers. Chinese technology heavyweights including Alibaba, Huawei and ZTE have all faced significant restrictions on their US operations.

So to summarise, digital disruption and the rise of China and India will maintain heightened uncertainty in the business environment. But companies can remain and become more competitive in this world of uncertainty by investing in their capabilities to sense changes in their context, drive their market, and redesign their business from within and through external ties, including acquisitions and alliances.

Dr Peter Zámborský is the author of Global Strategy: Thriving in a World of Uncertainty, from which this article is adapted.

Dr Peter Zámborský is a senior lecturer in management and international business at the University of Auckland's Business School.

Used with permission from NewsroomHow to thrive in uncertain times published on 30 August 2018.