Because of the increasing pace of business innovation, the need to adapt is becoming more urgent. As Martin Reeves and Mike Deimler wrote in “Adaptability: The New Competitive Advantage” for the Harvard Business Review, in the past thirty years the volatility of business operating margins has more than doubled, as has the size of the gap between winners (companies with high operating margins) and losers (those with low ones). Market leaders are knocked off their thrones with increasing regularity, with the rate of companies dropping out of the top three rankings in their industry increasing from 2% in 1960 to 14% in 2008.

Even worse, market leadership no longer guarantees strong profits; Reeves and Deimler pointed out that in some sectors the once ironclad correlation between industry share and profitability has become almost nonexistent. The traditional lines separating industries are becoming blurred. It’s even become more difficult for some leaders to clearly identify in what industry and with which companies they’re competing! For example, if you owned a telecom company that provided cell phone service, would your competition be another cell phone provider, or email? Or Twitter? Or the local cable company that offers video conferencing? Who would be competing with you in the same industry, and who would want to wipe out your industry—your competitors included?

The rise of uncertainty makes strategic planning much more difficult. That’s because traditional approaches in which long-term planning was used as a buffer against competitor innovation and other uncertainty assumed a relatively stable and predictable world. But if the world is highly unstable, then your rigid strategic plan will quickly become a straightjacket from which there’s no escape.

The Fed Ensures Banks Can Innovate

In the banking industry, because the stakes are so high planning for uncertainty is mandated. The US Federal Reserve, in an effort to save big banks from succumbing to volatility, demands that they undergo regular stress testing. Big banks are compelled to embrace various scenarios of future conditions—such recessions and runaway inflation—and, through computer modeling, demonstrate they have enough liquidity to survive a volatile future.

One of the goals of the Fed’s stress testing of big banks is to destroy the echo chamber that too many executives live in. When these vain leaders speak, instead of hearing the truth come back at them, they hear their own voices.

“Profits are up,” the leader says, inaccurately.

The echo chamber replies, “Yes, profits are up!”

“People will keep buying our old product,” the leader says, with no basis in reality.

The echo chamber replies, “Yes, people will keep buying our old product!”

Innovation leaders know they need to break down the echo chamber and open themselves up to real information that can leverage meaningful change.

To do this takes attention and humility, and then to respond appropriately requires agility.

Could your company survive the Fed’s stress tests? Does your strategic plan incorporate the possibility of unforeseen and unwelcome volatility in the future? Can you compete on the playing field of innovation?

I hope so!