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James: Transformational Leadership: An Option for Managing VUCA EnvironmentTWP107 1501" 'risk' means in some cases a quantity susceptible of measurement, while at other timesit is something distinctly not of this character; and there are far-reaching and crucialdifferences in the bearings of the phenomena depending on which of the two is reallypresent and operating. It will appear that a measurable uncertainty, or 'risk' proper, aswe shall use the term, is so far different from an immeasurable one that it is not in effectan uncertainty at all."To examine this, let us take another familiar case. In 2001, Enron collapsed with a suddennessseldom seen earlier in the business world and brought down its auditors, Arthur Anderson, alongwith it. Everyone knew that the Enron’s business model had high risk, but managing risk was theirdifferentiation in the business of commodities such as energy, water and spectrum. In order tobuild on their differentiation, they recruited the best brains and paid them high and contingentcompensation to do what exactly Enron is good at – take risks. They adopted the ‘mark to market’accounting system based on present value and rewarded the employees based on this. In order tomeasure and control risk, they developed a state of the art information system called RiskTraccapable of factoring in interest rate, time horizon, location, price risk etc. and fine-tuned it usingMonte Carlo simulation. But the system perhaps had no way to capture when a state wouldderegulate its energy and other core sectors, what laws would be in place and so on. So, anotherwise well designed risk tracking system became uncertain because the time of deregulationand the laws governing the deregulation were uncertain.To make the situation worse the business was became very complex based on asset light model inwhich several hundreds of companies were created to hold the assets and make it easy for Enronto show a favorable balance sheet within permissible limits. These companies were often ownedby Enron employees. Though ethics and conflict of interest precautions were taken, it was difficultto state what constituted a conflict of interest because of the complex nature of the holding. Beingin an era of technology, people had blind faith in the RiskTrac. Globalization had created severalinterlinked systems and Enron had invested in several foreign countries with varied laws. All thesemade the Enron system complex. This complexity was created to manage the former challengei.e., uncertainty; rather to convert uncertainty to measureable and manageable risk.A complex system is difficult to understand and hence ambiguity set in. The auditors felt that allis not well in Enron but could not clearly pinpoint any irregularity. Even the highly competentindependent directors found the systems so complex that actions could be interpreted in multipleways. The social sentiments of the era eulogized (this is so even now) risk taking and theambiguous situation led to a positive way of looking at risk and most experts called the Enronsystem as ‘bold and innovative’ rather than ‘dangerous’ although they did not understand itscomplexity.Enron was thus a company that had all the components of VUCA. It perhaps started whenuncertainty was perceived as measurable risk using a technology platform with complexcomponents which no one understood and therefore could be interpreted in multiple ways(ambiguous). As a result, the company became volatile and literally imploded.TAPMI WORKING PAPER SERIES

James: Transformational Leadership: An Option for Managing VUCA EnvironmentTWP107 1501ComplexityAlthough dictionaries tend to define complexity as a state of being intricate or complicated, theconsequences of being complicated and being complex differ. Complicated systems are ones inwhich there are a number of subsystems but they are largely, sequential in interaction which makesit possible to predict outcomes. Complex, on the other hand, is non-linear and therefore thedirection of causality is unknown. As a result, proactive measures and responses are relativelydifficult.To understand this phenomenon better, let us turn to the case of Southwest Airlines (SW) knownfor sustained profit in an environment of losses by other airlines. SW was a new entrant to thederegulated airlines industry and operated in an environment of high fuel price volatility. It lackedairport rights in many important airports and had to rent them at exorbitant cost from otheroperators or operate without touching these hubs on the basis of point to point flights, which wasoperationally inefficient compared to hub and spoke model where people were flown to a centralplace (hub) from smaller places (spoke) and then flown out again to their respective destinations(spoke). Point to point method would normally imply high operating cost compared to seatoccupancy.In order to manage the airlines better, it focused on speedy turnaround of the aircraft. Employeeswere given a work environment full of fun and with the complex HR system (which we now callHigh Performance Work System) they created even the pilots helped in unloading to ensure thespeedy turnaround. In fact SW fun and speedy turnaround was so complex that no other airlinescould mimic it. The complex system that ensured the speedy turnaround (15 minutes versus theaverage 45 minutes) enabled a Southwest aircraft to make at least one additional trip a day whichreduced the impact of fixed costs of the aircraft. Point to point flight to less known airfields madethe turnaround faster and it also make it convenient for passengers, especially the businesstravelers, thereby creating a synergy between the route selection and turnaround and passengerconvenience. Further, SW hedged as much as 70 percent of their fuel as against 20 to 30 percentby the competitors because they saw volatility in the fuel market in the long run. This reduced theirfuel cost to half of what the other airlines paid. The combined synergy of making the trips,including the additional trip, with fuel that cost them less is self-explanatory. Thus the SW systemhad two well managed VUCA components i.e., complexity and volatility.These systems were so complex that people could not interpret it effectively. So, there wasconsiderable ambiguity about what made SW so successful and this ambiguity led to multipleinterpretation of their success – was it point to point, was it fuel hedging, was it fun lovingworkplace? The ambiguity made it difficult to imitate and gave Southwest airlines the competitiveadvantage for many years. This also removed the uncertainty because 1) uncertainty due to lack ofhubs decreased, 2) uncertainty that competitors can create especially through price wars reducedand 3) uncertainty related to retrenching of workers almost became non-existent.SW case is thus a good example of existence of the various components of VUCA and still beingable to manage them proactively.TAPMI WORKING PAPER SERIES

James: Transformational Leadership: An Option for Managing VUCA EnvironmentTWP107 1501AmbiguityAmbiguity is defined as ‘being open to more than one interpretation, inexactness or somethingsusceptible to multiple interpretations. To understand the impact of this, let us take the case ofVodafone India.Indian tax authorities slapped a whooping Rupees 140,000 million (approximately US 2330million) tax cum fine on Vodafone for tax related acquisition of the share of Hutchison Essar, adeal executed in Cayman Islands in 2007. Though Supreme Court of India gave a favorabledecision to Vodafone, the government made a retrospective amendment to the tax policy to recoverthe money (The Economic Times, 2013). The case still hangs fire with the assumption that thegovernment may do a course correction.If we track this incent, we can find that at the time of acquisition, Vodafone had not consideredthe tax laws as ‘ambiguous’. But once the tax authorities issued notice, the issue of taxation becameclearer i.e., the law could have multiple interpretations. It was at this stage the ambiguity wasperhaps discovered. The situation became volatile when the tax authorities issued notice forrecovery and then it made a positive turn when the Supreme Court verdict went in its favor andthen became volatile again when the government passed a retrospective law to recover the taxes.The situation remains uncertain or unpredictable because the government states that it is not infavor of retrospective taxation, but has done nothing about it so far. It is also complex because ofthe position taken by the tax authorities, government department and trade bodies and the need tolook fair and just to both corporate world and the larger public who might perceive revoking theorder a climb down in favor of the corporate at the cost of the citizen. The situation still remainsuncertain.This case too has all the components of VUCA. Though it manifested through a volatile situationwhen the tax authorities slap a recovery cum fine, its roots lie in the ambiguity in law that Vodafonedid not detect.Defining VUCA as a Three Dimensional ModelFrom the foregoing discussion, it is evident that VUCA is a unified phenomenon and needs to beaddressed as such. In other words, all components of VUCA exist together even though the initialmanifestation may be through one of them.A closer scrutiny of VUCA across different types of companies indicates that the phenomenon ispervasive though its intensity and impact may vary. A further look at each of its constituentcomponents reveals some predominant characteristic. In the next few paragraphs we discuss these.Volatility can be perceived as rapid change in the environment in unexpected direction. We sawsuch changes in the Timeshare Company, Enron and Vodfone cases where the direction of changewas quite unexpected. For example increasing salary, competitive pressure etc. are clear directionto predict employee turnover but not emergence of a sunrise sector. Volatility therefore has lackdirection as a key characteristic.Uncertainty refers to unprecedented eruption of external environment in a direction that washitherto considered impossible. For instance a sunrise sector leads to turnover in another sector, anon-existent tax law suddenly props up in the form of a retrospective law and a complex politicoTAPMI WORKING PAPER SERIES

James: Transformational Leadership: An Option for Managing VUCA EnvironmentTWP107 1501economic situation and social acceptance of higher risk leads to undetectable erratic behavior inEnron. Inherent in uncertainty is immeasurability and a lack of awareness of thedanger/opportunity which can be seen in all cases. For instance Enron’s model was considered anopportunity and innovation rather than a danger and its risk could not be measured. Vodafonepurchasing the shares in Cayman Islands was considered an opportunity and the direction of itsconsequences could not be identified. The success of failure of a point to point versus hub andspoke model aviation could not be measured. Thus uncertainty made situation both directionlessand immeasurable.Complexity is the result of multiple interrelated systems which makes it difficult to understand thecausality. In other words, it is difficult to identify what event caused the other. This makes itdifficult or impossible to interpret. This manifests best in Southwest Case. But even in thetimeshare case, the complex emerging economic system made it impossible to predict the causalityof turnover until it happened. This was true in the case of Enron and Vodafone also.Ambiguity is the existence of possibility of multiple interpretations. For instance a discussion onemerging sectors did take place in the strategic meetings of the Timeshare Company when theauthor was a top executive working for it; the discussion revolved around the increasing marketand expansion opportunities rather than on impending massive employee exit. The tax laws inIndia could be interpreted in several ways and so was the risk perception of Enron and theperceived foolhardy point to point system of Southwest airlines. This makes a situation impossibleto interpret.Three key characteristics of VUCA that emerge from the above discussion are 1)‘directionlessness’, 2) ‘immeasurability’ and 3) ‘uninterpretability’. Combining these, the authordefines VUCA as an environment of directionlessness’, ‘immeasurability’ and‘uninterpretability’.Paraphrased, it means that ‘directionlessness’ makes it impossible to extrapolate meaning frompast experience and predictive tools which depend on such data become ineffective and redundantleaving us to heuristics and intuition or perhaps collective wisdom. Immeasurability creates asituation of not knowing what variables one should include and even when they are knownpartially, their combined effect remains unknown leading us to depend more on multiple, andperhaps, diverse views. Uninterpretability creates a situation where causality is not known whichmakes any interpretation useless leading us to a situation where one has to boldly try out variousoptions and then determine whether they work or not.Perspectives on Managing VUCAThough I argue that VUCA is directionless, immeasurable and uninterruptable, I concede that evenin such circumstances decision are (and would be) made; but such decisions are likely to be basedon heuristics. For instance, the managers and the auditors of Enron accepted that the practices theyfollowed were bold and innovative but stopped short of calling it illegal or not permissible. Thiswas a heuristics driven decision. The timeshare company that we discussed decided to train andhold larger manpower than required to face any future challenges of exit due to sunrise sectors andthis affected its profit. Though the decisions were based on heuristics, their impact can be evaluatedretrospectively. For instance, Enron got liquidated and the timeshare company realized that highlevels of exit was never repeated perhaps because several training institutions emerged to trainTAPMI WORKING PAPER SERIES

James: Transformational Leadership: An Option for Managing VUCA EnvironmentTWP107 1501people in skills required for the emerging sectors. Eventually an expansion helped the company toabsorb its surplus manpower created to face the VUCA environment. Similarly despite the setback,Vodafone operates and continues to expand in India and Southwest airlines thrives.While the academic world is still in the process of getting a grip on VUCA, the consulting worldhas been proactive to recommend many suggestions to manage the VUCA world. For instance,FMI Management consulting in its paper on “Redefining Leadership: Strategic Thinking inToday’s VUCA World” makes a series of recommendations such as 1) ability to hold on to thevision while fighting the tactical battles, 2) having tangible closer milestones rather than one grandmilestone, 3) frequent introspection, 4) aggressive action orientation, 5) shifting to networkorganizational architecture from hierarchy, 5) ability to let go the past and focus on the future and6) encouraging individual critical thinking to face the challenge of VUCA (FMI, consulting paper,2013).Johansen and Voto (2013) identify ten leadership skills for the future. These are: 1) maker instinct,2) clarity, 3) dilemma flipping, 4) exceptional learning ability, 5) bio-empathy, 6) constructivedepolarizing, 7) quiet transparency, 8) rapid prototyping, 9) smart mob organizing and 10)commons creating. Out of these, the authors identify five skills as crucial for managing VUCA.The first of this is the maker instinct which implies the inner urge to create communities of makersfor larger impact. Second is clarity which gives the leaders the ability to understand the strategicintent and take actions or operationalize the maker instinct at multiple levels based on theunderstanding of the intent. Third is ‘dilemma flipping’. This means that rather than try to solvethe unsolvable problems, flip them to identify newer opportunities. For instance, workplace woulddemand more freedom and so, rather than work with complex organizational structures that createcontrol-freedom paradigm, one may be able to modularize work and hand it over to entrepreneurialteams. Fourth is smart mob organizing, which means bringing together dissimilar people usingtechnology to solve seemingly irresolvable problem. For instance, it is the smart mob organizingthat led to the change in Egyptian government in 2011. It is once again this mob organizing throughcrowd sourcing that enabled the Indian Civil Servant, Armstrong Pame, make 100 kilometers ofroad in the rural Manipur without any government help (Times of India, 2012). Fifth is bioempathy which is the ability to take systems approach, integrating and sharing approach from thebiological world and creating symbiotic problem solving. The author argues that this needs a‘commons’ approach. It is a concept of increasing dependence on pooled resources, a conceptwhich is well articulated in the work of Nobel laureate, Elinor Ostrom (Ostrom, 1990) also.Coats (2009), argues in support of ‘Arya’ leadership, to manage VUCA. His suggestion is thatleaders should have strong skill of discernment between what is reality and what are merelycaricatures of it. In other words, leaders should be able to distinguish between the real and mereexpression of the real. Of course the concept is rooted in Vedas from India.Horney, Pasmore and O’Shea (2010) developed a leadership agility model to manage VUCA.Their proposition is that leaders in a VUCA environment should be flexible, fast and focused. Theyshould 1) anticipate change through visioning, sensing the changes happening and monitoring, 2)generate confidence through connecting, aligning and engaging, 3) initiate action through showinga clear bias for action, decision making and collaborating, 4) liberate thinking through innovation,TAPMI WORKING PAPER SERIES

James: Transformational Leadership: An Option for Managing VUCA EnvironmentTWP107 1501customer focus (this author prefers to call it stakeholder focus) and idea diversity, and 5) resultorientation through creating expectations, feedback and evidence based measurement.Summarizing the insights from the above works, we can find that managing VUCA involves sixdistinct competencies: 1) introspection through suspension of judgment and ego to identify the realfrom the illusionary, 2) critical and creative thinking facilitated by dilemma flipping and diversityof ideas, 3) clear and focused vision building and adherence to the vision, 4) strong alignment tothe vision rooted in action and resu

James: Transformational Leadership: An Option for Managing VUCA Environment TWP107_1501 TAPMI WORKING PAPER SERIES Introduction VUCA, the acronym for volatility, uncertainty, complexity and ambiguity emerged from the US . recently, we have seen Malala speaking up for education of girls in