What Is VUCA and Why Innovating Is Even More Important Today

Discover what an ambiguous and uncertain business context means for established organisations, and how to succeed at corporate innovation in a VUCA environment. Harness the power of intrapreneurship with Studio Zao.

Technological exponential evolution, advancement of AI, climate crisis and the recent Covid-19 pandemic have accelerated the pace of unpredictable change across industries, society and almost all walks of life.

This has created an ambiguous and uncertain environment for business leaders to operate and essentially calls for a new approach to drive innovation so that established organisations can remain competitive and profitable.

Crucially, leaders need to develop the capability to innovate at scale and become more resilient in the face of potential new challenges or crises.

What is VUCA: Volatile, Uncertain, Complex and Ambiguous

The first time the VUCA acronym was used was as far back as 1987 in US Army War College documents to describe the more Volatile, Uncertain, Complex and Ambiguous multilateral world perceived as resulting from the end of the Cold War.

In 2014, the Harvard Business review started to recognise how the VUCA term applies in business environments too. Unpredictable events happening outside an organization make it more difficult for leaders to make decisions, and to succeed at corporate innovation.

Let’s see some examples:

V = Volatility: the speed of change in an industry, market or the world in general. An example is a sudden price fluctuation after a natural event that takes certain parts of the value chain.
U = Uncertainty: the extent to which we can confidently predict the future. An example is a competitor’s pending product launch based on a novel technology muddling the future of the business.
C = Complexity: the situation has many interconnected parts and variables. An example is an organisation operating a business in many different countries, all with unique regulatory environments, tariffs and cultural differences and values.
A = Ambiguity: the causal relationships between events are unclear. An example is an organisation entering immature and emerging markets whose features can’t be fully understood.

Why has the business environment become so uncertain and ambiguous?

A combination of factors has created the current VUCA business environment.

The speed of adoption of technologies exponentially increased in the XXI century. The telephone was invented in 1876, but it wasn’t until a century later that landlines reached a saturation point in households. On the contrary, microwaves, cell phones, smartphones, social media, tablets, and other inventions from the modern era all show fast-rising adoption rates.

We have always been fascinated by this graph created by Nicholas Felton of the New York Times and reported in 2013 by the Harvard Business Review.

Given its increased adoption rate, technology took over the world of business. In 2001, the top 5 global public companies by market cap were General Electric, Exxon, Citi and Walmart. Only one of them, Microsoft, was a tech company. Fast forward 15 years, the top five was dominated by tech companies: Apple, Alphabet, Microsoft, Amazon and Facebook. The tech companies’ secret to such a fast market cap growth was scale. To reach more people, Walmart had to build more stores, expand complex supply chains, and hire new employees. This takes a lot of capital and manpower, and the stakes are high for each new expansion. Organisations like Amazon, on the other hand, can generate more revenues with less risk, by adding new servers or signing new partnerships.
One key technological advancement is the adoption of Artificial Intelligence (AI), which is promising to re-shape the future of work. The consultancy firm McKinsey found out that about 50% of current work activities are technically automatable by adapting currently demonstrated technologies. In a scenario of the fastest adoption of AI in the workplace, up to 800m jobs may be globally replaced by AI by 2030, or 30% of global FTE workers. This could displace large amounts of labour—for instance, in mortgage origination, paralegal work, accounting, and back-office transaction processing. For business, this will mean a massive reorganisational and upskilling effort.

Then Covid-19 hit, adding even more uncertainty and ambiguity to business environments. In February 2020, the world stopped. Lockdown measures started to be imposed on the population in an effort to save lives while scientists and governments were struggling to face an unknown disease spreading exponentially at a global level.

The impact on business has been enormous. In June 2020, when the full scale of the crisis was yet to unfold, the International Monetary Fund predicted a hit to the global economy from Covid-19 for the year of $28tn (£21.5tn) in lost output.

According to the OECD, some countries are recovering much faster than others. Korea and the United States are reaching pre-pandemic per capita income levels after about 18 months. Much of Europe is expected to take nearly 3 years to recover. In Mexico and South Africa, it could take between 3 and 5 years.

The long term impact of the Covid Pandemic is still unknown. Many emerging markets and developing economies will likely be struggling with Covid-19 for years to come, and face the real possibility of a lost decade of development, and prolonged recessions in lower-income countries will likely lead to an epidemic of debt and inflation crises.

And even in more developed economies, the scars may be lasting. The impact on city centres, retail, public spending, debt, education, infrastructures, the future of work is still to be defined, and the threat of inflation pose serious challenges to governments and organisations alike, creating what The Economist called “the era of predictable unpredictability”.
Finally, probably the biggest threat being faced by humanity at the moment, the climate crisis, is driving the need for transformation. In August 2021 an updated report by the Intergovernmental Panel on Climate Change (IPCC) of the United Nations body has warned the world about the critical conditions of our planet, with many of the changes observed in the climate are unprecedented in thousands, if not hundreds of thousands of years, and some of the changes already set in motion—such as continued sea-level rises—are irreversible.
The scientist’s warning was clear: “Stabilizing the climate will require strong, rapid, and sustained reductions in greenhouse gas emissions, and reaching net-zero CO2 emissions. Limiting other greenhouse gases and air pollutants, especially methane, could have benefits both for health and the climate”.In the months preceding the IPCC report, dramatic natural events unfolded across the globe prompting observers to call for a ‘new phase of climate change’. In four weeks alone, wildfires burnt a Canadian village off the map after it shattered the national record with a temperature of 49.6C. Floodwaters tore through German towns like a tsunami, tossing cars like corks. Terrified Chinese subway passengers stood in chest-high water as nearly a year’s worth of rain fell in just three days.
The call for governments and organisations to act and make sustainability at the core of their activities is key, as well as consumer behaviour needs to change accordingly adopting more sustainable behaviours.

Why VUCA makes Innovation imperative

According to the author Azeem Azhar, businesses operate today in an exponential age.
In the past, the approach of traditional business was to rely on models that had succeeded yesterday. They were based on a strategy that tomorrow might be a little different now, but not markedly so.

However, in a business context in which technologies’ efficiency grows and costs decrease exponentially, and not in a linear fashion, organisations have to drastically transform their operations and propositions to ensure that the gap between their strategy and the market does not widen up until the point in which they may be outcompeted by faster or more agile alternatives.

On top of this, the pandemic has shown global shocks and crises are very real, and the threat of more isn’t going away given the current circumstances in which businesses find themselves operating.

In early 2020, the most immediate response from global business leaders was to reduce investments in innovation. For example, according to the Tilburg University and Rotterdam School of Management, 33% of corporations cut their innovation budgets due to the Covid-19 pandemic, and around a third of companies stopped or decreased their collaboration with startups altogether.

However, the biggest innovations were born out of post-crisis environments, and with such a fast-evolving business landscape, innovating and transforming remains imperative for organisations to thrive.

History suggests that companies that invest in innovation through a crisis outperform peers during recovery, and businesses can gain long-term advantages by understanding such shifts and the opportunities they present. According to the consultancy firm McKinsey, in past crises, companies that invested in innovation delivered superior growth and performance postcrisis.

In the year following the 2008 financial crisis, economic activity declined in half of all countries in the world. However, organizations that maintained their innovation focus through the 2008 financial crisis, for example, emerged stronger, outperforming the market average by more than 30% and continuing to deliver accelerated growth over the subsequent three to five years.

In this time and age, while operating in a VUCA environment and while having to cope with a post-pandemic scenario combined with an impending climate crisis, the only way for organisations to win is to innovate and transform, to capture the white-space growth opportunities from this, while simultaneously becoming more resilient to volatile, uncertain, complex and ambiguous (VUCA) shocks.

How to innovate successfully in a VUCA business environment

Does this mean organisations should ringfence billions for innovation activities?
Given the current uncertain scenario, we believe it’s time for a different approach, one in which efficiency comes first.

Whether it’s embracing remote working to build collaborative teams, using technology to predict future obstacles, or reorganising your corporate structure to foster a culture of innovation, organisations must find creative ways to move forward and navigate the new landscape.

Getting things done fast, and well; removing boundaries and breaking down silos; streamlining decisions and processes; empowering frontline leaders, and redesigning slow-moving hierarchies and bureaucracies.
Essentially, it’s about “doing more innovation with less”, possibly relying on internal resources to deliver new products and new business models at scale.

Why rely on internal resources for innovation? The answer is simple: internal talent knows the market, customers, industry regulation and requirements and internal processes better than anyone else. And they care about their company, to which some of them devoted their entire career.

Only by not having innovation to operate in a secluded department but working alongside BAU, organisations can speed up the pace of transformation and growth while responding to the challenges of an uncertain and ambiguous business landscape.

A new approach for innovating internally is needed in uncertain and ambiguous times. This is the entrepreneurial approach, the same mindset and methods startup founders use, adapted for the way established organisations work: it is called intrapreneurship.

At Studio Zao, we specialise in partnering with organisations to execute innovation and transformation by empowering intrapreneurs and internal teams to master innovation and entrepreneurial culture. In this way, activating intrapreneurial talent and initiating transformational cultural change will ensure a meaningful impact on your organisations’ growth.