“It’s not the strongest of the species who survive, nor the most intelligent, but the ones most responsive to change.” ─ Charles Darwin
Traditionally, strategising thrived under an era of relative predictability. With many more variables in the form of competition, globalisation, technological breakthroughs and customer demand and expectation increasing, the degree of complexity involved in getting things done has gone up exponentially. This has shattered the cocoon of certainty within which earlier generation of managers operated.
Strategy is about creating the future. It needs an ability to predict the future with some amount of certainty. This is an important assumption because organisations commit enormous amount of resources and time based on the predicted future. Many a times, such actions and decisions are irreversible .
Such uncertainties manifests in many ways. While internal uncertainties are understood and managed better by reasonably good top management, most of the external uncertainties — industry level or environment related — are not mastered and hence left to fate. Often the external uncertainties have the highest risk but most opportunities. Even while dealing uncertainties, by applying analytical tools there is a chance of ‘knowing’ or predicting with some accuracy what the future holds. But in practice, very few organisations rigorously and methodically use such methods and tools.
There are of course ‘unknowables’ about the future, and such ‘unknowables’ have gone up in the last couple of decades. This is causing problems for the management.
A survey by S&P identified some critical uncertainties as follows:
~~ What is the level of globalisation
~~ What is the role of technology? (example: front office, back office)
~~ What is the risk appetite of investors?
~~ What are the industry structure and competitive dynamics?
~~ What is the level of product and service innovation?
~~ What is the level of talent availability and skills?
As McKinsey consultants Hugh Courtney, Jane Kirkland and Patrick Viguerie point out in an Harvard Business Review article, one can categorise the above into demand-related, supply-related and competitive scenario-related. Many of them remain still relevant. One way the writers suggest that the problem can be solved is by categorising the residual uncertainties (after having dealt with the ‘knowables’ through existing tools) into four groups. These levels are: clear enough future, alternative future, range of future and true uncertainty
While level one and two can be dealt with easily, even in the traditional world, level three and four are the reality and source of the agony.
Scenario Planning
Scenario planning recommends coming up with four to five different scenarios in the future and preparing a game plan in the context of each of the made-up scenarios playing out. The idea is to take ‘strategic postures’ depending on the companies’ risk profile.
Some may make bold bets in terms committing resources on one or more of the scenarios and reap huge benefits if the prediction comes true or suffer huge losses if things go south.
Instead of making a commitment, some create an ‘option’ that can be exercised under certain scenarios. But in such cases, the risks are low and so are the potential returns.
Why Use Scenarios?
~~ If uncertainty is high relative to one’s ability to adjust
~~ If too many costly surprises have occurred in the past
~~ If insufficient new opportunities are perceived
~~ If the quality of thinking is deemed to be low
~~ If an industry is experiencing significant change
~~ If a common language is desired, without stifling diversity
~~ If major differences of opinion exist, each having merit
~~ If your competitors use them
The main limitation of scenario planning is the inability of the organisation to have the wherewithal and flexibility/agility to simultaneously gear up for different scenarios.
Using competitive strategy means making trade-offs between focus and flexibility, and deciding whether to be a first-mover or to wait.
If you are a large player, it might not be a bad strategy to wait as it won’t be difficult to catch up. But, on the other hand, if your organisation can move quickly and has access to resources, a flexible approach is a better option to deal with uncertainties.
While there are no generic prescriptions for dealing with uncertainty, one can use the above ideas to think through and come up with what is appropriate and adapt it to different contexts.
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