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VUCA: Finding calm & order in the eye of the storm

Andy Latham, managing director K3 Business Technology Group, discusses the impact of volatility, uncertainty, complexity and ambiguity (VUCA) and how ERP can ease the issues arising in today’s turbulent markets.

Imagine an established global construction products company supplying cement and aggregates in all its forms, in more than 70 countries across the world. Having done this for many decades, and riding on the back of an excellent reputation, one assumes that the company will always produce and sell cement, gaining attractive returns in the commodity sector.

What happens when a competitor announces the launch of a secretly developed cheap alternative that beats every one of the characteristics of traditional cement? This new contender’s features include faster setting times, higher strength and binding limits, with lower mass, which makes it lighter and easier to transport. Could such an entry to the commodity market kill the cement giant? 

Around the world, hurricanes, tsunamis and the recent global economic meltdown all brought their fair share of chaos to thousands of organisations that would have preferred order and the predictability that goes with it.

Also, new technology and inventions shape and change the world profoundly, often within very short time frames. Consider the impact of mobile technology, open access to IT solutions, and cloud computing on business all over the world. No sooner have organisations got to grips with their chosen technology when something new comes along.

Think of the new demands placed on an organisations’ financial reporting needs by international pressure for transparency introduced primarily by the Sarbanes-Oxley Act of 2002. The powerful international drive towards renewable energy and reducing companies’ carbon footprints also placed its own demands for adjustments to business strategies and reporting requirements.

In a world that is shrinking as a global village, change has become inevitable and the speed and volume of change is growing exponentially.

Understanding VUCA
VUCA is an acronym developed by the US Military in the late 1990s. It refers to the volatility, uncertainty, complexity and ambiguity that characterise conditions and situations, particularly when influenced by significant change. The term soon entered the business world because companies recognised its impact on the business world too.

Business leaders in a changing world understand the value of instant, reliable information and optimal visibility of all their processes, KPIs and systems at all times. The challenge is to create enterprise-wide systems that store information by department or function and allow users to extract and manipulate it as and when this is required. This includes taking account of the impact of each sub-system on all other systems. It is this integration and accessibility that enterprise resource planning (ERP) solutions should provide.

Consider the impact of VUCA against this backdrop:
Volatility refers to the nature of change, including the speed at which it happens. It creates sudden and profound instability within companies, creating uncertainty and anxiety.
Uncertainty is the consequence of an inability to predict behaviour. There is uncertainty about the future; about demand and stock needs; about new competitors entering the market; about new government policies, etc. A lack of clarity obstructs management’s ability to understand and to value the threats and challenges facing them.
Complexity is created by the magnitude of the forces that confront companies. They get faced with problems and apparent chaos, which clouds their thinking. The challenge is to gain a clear perspective on the situation and not to confuse threats and opportunities as collectives.
Finally ambiguity is brought about by the haziness of one’s reality, the potential for misinterpretation and the confusion between causes and effects. Diversity and global influences strengthen ambiguity, demanding a multi-divisional approach to evaluate and to judge reality.

Businesses want uncomplicated clarity and maximum control over their entire operations. Their stock forecasting must be reliable and accurate; customer promises should be in-line with agreed service levels and achievable; product quality should be exceptional; and potential problems must be predictable and pre-empted, allowing for contingencies to resolve any issues that occur. Their ERP solutions must offer them the ability to cope in spite of what VUCA and harsh reality throws at them.

In a changing world, a good ERP system is expected to offer:
- increased information visibility

- improved alignment of business operations with its strategy

- improved financial management and corporate governance, and

- reduced business risk.

In effect, the solution should strengthen management’s foresight while simultaneously enhancing its insight into the business.

Bringing order to chaos
Fundamental to managing VUCA is the selection and implementation of an ERP solution that addresses the exact needs of the enterprise’s business model and all its functions. This will provide the user with the information and the flexibility to anticipate changes in the environment that shape their conditions across the entire business, while at the same time giving management a better understanding of the consequences of the changes and of their chosen actions.

The management principles of planning, executing, and controlling are accommodated by modern ERP systems. This covers the flow of resources and material through the value chain, allows clear visibility, and provides critical business information on a real-time basis on any aspect of the entire process.

In addition, reliable business process modelling (BPM) software provides huge value to the planning stages of a business process, whether it is in manufacturing, logistics, service management, or any other process.

BPM improves the efficiency, effectiveness and operational agility of an enterprise by automating, optimising, and managing its business processes. It enables business processes to be designed independently of any single application and then leveraged as shared business logic. Combined with optimal workflow processes and capabilities, it also takes care of much of the complexities presented in a VUCA environment. It offers the methodologies and tools for modelling and administrating processes that involve people, organizations and systems, making complexity easier to see and to understand.

Workflows simultaneously make the flow of information through the organization more visible and manageable. In addition to the value added by access to workflows, the issue of complexity becomes much easier when management has access to visible and graphical reporting tools, such as functional dashboards that provide this capability for organizational function or division, or even business role. These tools also provide analytical capabilities, enabling users to evaluate reports and data in a proper context in spite of fluctuations that come with volatility in the environment. The graphic use of pictures cuts across cultural barriers, giving clarity and ease of interpretation.

The power of such tools is further enhanced if they offer the accumulation of data for overall reporting to senior management across functions, thus providing complete transparency. By providing graphical displays, much of the complexity becomes clear and accessible to users.

Any modern ERP system should take the muddle out of supply chain management across all aspects of the business. A really good system will cut through the haze of dust kicked up by VUCA and still offer a clear and unambiguous view of the processes and systems, allowing for effective management in turbulent times.

The eye of the storm
Calmness and order is to be found in the eye of the storm. It is how leaders find their way through the storm to conquer chaos that makes the big difference. ERP solutions should bring the insight (vision) and the understanding that clears up the confusion and the chaos that VUCA brings and should translate it into organisational agility and ultimately to business success.