Choosing the right strategy handling uncertainty

Imagine you ask your management team or your employees to figure out, design and launch something that will replace your current business, and give them a deadline and a budget. Then you will immediately realize how inefficient and risky that is – paralysis may be the best-case scenario. The worst-case scenario could involve your people feeling stressed and faking results. Both situations are more common than we’d like to admit, simply because we try to apply what we know (how to run projects and operations with performance models, ROI and budgets) to something we don’t know. Realistically, you can’t make a detailed plan and you can’t set a final budget or deadline. You can have a vision, but not much more.

Someone might now say, ‘well, many brave entrepreneurs and leaders throughout history did that’, but that was in relatively familiar territories and in what is called Horizon 2 (H2).

Let’s start with Horizon 1 (H1), where most organisations invest their efforts (up to 99 per cent, according to many studies). It’s incremental and involves so-called spiral staircase leadership (Table A). This is when leaders work step-by-step towards well-defined goals, calculating ROI, and predicting future results.

In H2, the strategy is not to understand and respond to the market, but instead to understand needs and use technology in new ways. Platform and design thinking, prototyping, ideation, project selection, and speed are imperative capabilities. The leadership in H2 is more entrepreneurial, challenging the business model (Cauldron style, Table A), seed-funding external projects then buying them back (Pacman style, Table A), as well as acting as the gardener on a fertile field (trying out what’s working and removing what isn’t). H2 projects are measurable by working with small experiments and prototyping, building the base for cash flow assumptions. It’s also here you find a lot of brave innovations driven by high ambitions and technology (decoding the Enigma, going to the moon, and developing tanks).

H3 is the explorative style: needs are investigated on a deeper level and new technology is used to disrupt. It’s essential here to sharpen the future possibilities with external knowledge-sharing, open innovation, and co-creation. H3 projects cannot be measured by traditional methods such as ROI: it’s more about exploring. Here we find innovations such as penicillin, the microwave and plastic – all created through coincidence, technology and a real underlying need.

Table A. Based on the work of Ralph-Christian Ohr and Kevin McFarthing. [1] Based on Jaruzelski and Dehoff (2010). [2] Based on Loewe, Williamson, and Chapman Wood (2001). All data is collected and analyzed in InnoSurvey™ (2016) with data from 62 countries and  over 1000 companies.

All companies have a conscious or unconscious strategy, leadership, culture, capabilities, and competencies they use to improve and innovate business internally (e.g. processes) and externally (e.g. value propositions). According to Steve Coley (2009), innovation work can be divided into three parallel Horizons, each one representing an S-Curve. The first Horizon 1 (H1) is about incremental innovation in the existing business, extending the existing S-Curve of the company. Horizon 2 (H2) is about expanding and building new business (the next S-Curve) through innovations. Horizon 3 (H3) is an explorative approach to future S-Curves, to be commercialized in H2, ending up in H1.

The insight of dividing innovation work into different Horizons in order to manage it effectively is, in my experience, often well-known at C-level. At the same time, large H1 projects are prioritized to the extent that they cause internal traffic jams among projects that are sharing resources. This results in projects that are too numerous, too big, and often less value-creating than they should have been. Instead, companies can utilize common resources more optimally, improving and caring for today’s profit (H1), developing tomorrow’s profit and market shares (H2), and learning for the future (H3).

The key lies in understanding how to organize and transform into an organization that’s able to work short-term (H1), mid-term (H2), and long-term (H3), while maximizing the utilization of all resources (tangible and intangible) and simultaneously minimizing business risk. Correlations in the data indicate that different Horizons call for different strategies, leadership styles, capabilities, competencies, and metrics. Adapting our approach is how we can systematically explore, test, and evaluate future possibilities, creating a sustainable innovative organization that minimizes risks and maximizes returns.