In this critical time of coronavirus, which has disrupted supply chain management and created a lot of uncertainty in business, it is essential to learn how to manage uncertainty. Uncertainty requires a new way of thinking about strategy as the old traditional way of crafting strategy will not help manage the uncertainty. In a world where things have become dynamic and uncertain, most companies underestimate or overestimate their forecast. I hope the below guidelines enable us to manage uncertainty in business in a better manner.
Flexibility: It is essential to create or in-build flexibility in business to help manage uncertainty better. Hence, taking employees on a contractual basis rather than taking them on their board will help the company remove contractual employees easily by giving one-month notice. Similarly, it is better to outsource certain services rather than in-house when the market is uncertain. Hence flexibility allows adapting very quickly.
Monitoring the situation closely: It is essential to review and monitor the situation in an uncertain scenario closely. Every new development needs to be monitored, and its impact on your business needs to be analysed or forecasted, and required action should be taken.
Scenario analysis: It is essential to do scenario analysis wherein the company should draw or create various scenarios and cope with each of these scenarios. The company should have a plan in place reflecting the actions required in each of these scenarios.
Four levels of Uncertainty: Even the most uncertain business environments contain a lot of strategically relevant information. The uncertainty that remains after the best possible analysis has been done is what we call residual uncertainty. For example, the outcome of an ongoing regulatory debate or the performance attributes is still in development. There are four levels of uncertainty:
1) Clear Enough future: As a first step, the company can forecast the precise future for the strategy development. Although it will be inexact to the degree that all inherently uncertain business environments, the forecast will be sufficiently narrow to point to a single strategic direction. In other words, at this stage, the residual uncertainty is irrelevant to making strategic direction.
2) Alternative Futures: This is a second scenario wherein the future can be described as a few alternate outcomes of discrete scenarios. Analysis cannot identify which outcome will occur, although it may help establish probabilities. Most important, some if not all elements of the strategy would change if the result were predictable. Many businesses facing significant regulatory or legislative change confront this scenario. For example, the company shall build a new plant will depend upon whether the competitor will create a new plant.
3) A Range of futures: In this scenario, a range of potential futures can be identified. A limited number of critical variables defines that range, but the actual outcome may lie anywhere along a continuum bounded by that range. There are no discrete natural scenarios. As in the second scenario, some and possibly all strategy elements would change if the outcome were predictable. Companies in emerging industries or entering a new geographic market often face this type of scenario. For example, a European company is considering whether to introduce its products to the Indian Market. The best possible market research might identify only a broad range of potential customer penetration rates, say from 10% to 30%, and there would be no apparent scenarios within that range. Such a wide range of estimates would be common when introducing ultimately new products and services to a market, and therefore determining the level of latent demand is complicated. The company would have followed an aggressive marketing strategy if it knew that its customer penetration rates would be closer to 30% than 10%.
4) Genuine Ambiguity: In this scenario, multiple dimensions of uncertainty interact to create an environment that is virtually impossible to predict. Unlike scenario no three, the range of potential outcomes cannot be identified, let alone scenarios within that range. It might not even be possible to locate much less predict all the relevant variables that will define the future. Consider a telecommunications company deciding where and how to compete in the emerging consumer multimedia market. It confronts multiple uncertainties concerning technology, demand, and relationships between hardware and content providers. All of these may interact in unpredictable ways that no plausible range of scenarios can be identified.
Strategy for managing Alternative Futures: Scenarios 2 and 3 are most faced by companies. Scenario 2 is a bit more complex as compared to scenario l. Managers need to develop discrete alternatives based on their understanding of how the critical residual uncertainties might play out. Each option may require a different valuation model- general industry structure and conduct will often be fundamentally different depending on which alternative occurs, so alternative valuations can't be handled by performing sensitivity analyses around one single baseline model. Getting information that helps establish the relative probabilities of the alternative outcomes should be a high priority. After selecting an appropriate valuation model for each possible outcome and determining how probable each is likely to be, a classic decision-analysis framework can be used to evaluate risks and returns inherent in alternative strategies. This process will identify the likely winners and losers in alternative scenarios, and perhaps more importantly, it will help quantify what's at stake for companies that follow status quo strategies. Such an analysis is often the key to making a case for strategic change. In the case of the second scenario, it is essential to identify the different possible future outcomes and to think through the likely paths that industry might take to reach these alternative futures. Will change occur insignificant steps at some particular point in time, or will it happen more evolutionarily as that information shall help determine what key market signals or trigger variables should be monitored closely?
Strategy for managing Range of futures: Compared to first and second scenarios, developing a strategy to manage third scenarios is complicated. Creating a meaningful set of alternatives is less significant. Scenarios that describe the extreme points in the range of possible outcomes are often relatively easy to develop, but these rarely provide much concrete guidance for current strategic decisions. Since there are no discrete natural scenarios in this scenario, deciding which possible outcome should be fully developed into alternative scenarios is a real art. First tips on how to develop alternatives in this scenario are as follows: Develop a smaller number of other options to avoid confusion, second avoid developing redundant alternatives as that have no unique implications for strategic decision making; making sure each scenario offers a different picture of the industry's structure, conduct and performance. Lastly, develop a set of alternatives that collectively account for the probable range of future outcomes and not necessarily the entire possible range. Because it is impossible to define a list of complete options and related probabilities in this scenario, it is impossible to calculate the expected value of different strategies. However, establishing a range of alternatives should allow managers to determine how robust is their strategy is, identify likely winners and losers, and determine roughly the risk of following status quo strategies.
Strategy for managing True ambiguity; In this scenario, it is practically impossible to develop alternatives due to lack of availability of information. However, managers should identify a sub-set of variables that will determine how the market will evolve, such as customer penetration rates or technology performance attributes. They need to identify favourable and unfavourable indicators of these variables that will let them track the market's evolution over time and adapt their strategy as new information becomes available. Managers can also identify patterns indicating possible ways the market may evolve by studying how analogous markets developed in this scenario, determining the critical attributes of the winners and losers in those situations and identifying the strategies they employed. Finally, although it will be impossible to quantify the risks and returns of different strategies, managers should determine what information they would have to believe about the future to justify the investments they are considering. Early market indicators and analogies from similar markets will help sort out whether such beliefs are actual or not.
Uncertainty demands a more flexible approach to situation analysis. The old one size fits all approach is simply inadequate. Over time, companies in most industries will face strategy problems with varying levels of residual uncertainty. It is vitally important that the strategic analysis be tailored to the level of uncertainty.
Strategic posture: Any good strategy requires a choice about strategic posture. Fundamentally posture defines the intent of a strategy relative to the current and future state of an industry.
Shapers aim to drive their industries toward a new structure of their devising. Their strategies are about creating a new opportunity in a market either by shaking up relatively stable industries or by controlling the market's direction in sectors with higher uncertainty.
Adapters: take the current industry structure and its future evolution to give and react to the market's opportunities. At higher levels of uncertainty, their strategies are predicated on recognising and responding quickly to market developments.
Reserving the right to play is a particular form of adapting. It involves making incremental investments today that put a company in a privileged position through either superior information, cost structures or relationships between customers and suppliers.
A posture is not a complete strategy but an intent, not the actions required to fulfil the goal. Three types of moves are especially relevant to implementing strategy under uncertain conditions: big bets, options, and no-regrets activities.
Big bets are significant commitments such as substantial capital investments or acquisitions that will result in large payoffs in some scenarios and significant losses in others.
Options are designed to secure the big payoffs of the best-case scenarios while minimising losses in the worst-case scenario. Most options involve making modest initial investments that will allow companies to ramp us or scale back the investment later as the market evolves.
Finally, no-regrets moves are just that moves that will pay off no matter what happens.
The choice of a strategic posture and an accompanying portfolio of actions sounds straightforward. But in practice, these decisions are highly dependent on the level of uncertainty facing a given business.
It is possible to be a shaper in scenario one situations, but that is risky and rare since the first scenario shapers increase the amount of residual uncertainty in the another-wise predictable market for themselves and their competitors to alter long-standing industry structures and conduct fundamentally.
Strategy for the second scenario: If shapers in scenario one try to raise uncertainty in other scenarios, they lower uncertainty and create order out of chaos. In the second scenario, the shapers strategy is designed to increase the probability of a favoured industry scenario. A shaper in the capital intensive industry like pulp and paper wants to prevent competitors from creating excess capacity that would destroy the industry's profitability. Consequently, in such cases, shaper might commit their companies to build new capacity far in advance of an upturn in demand to preempt the competition or consolidate the industry through mergers and acquisitions. Ultimately, companies going for shaping strategies supplement their shaping bets with options that let them change course quickly. But even the best shapers must be ready to adapt.
Monitor variables and take necessary action when they trigger: In an uncertain environment, it is a mistake to let strategies run on autopilot remaining content to update them only through standard year-end strategy reviews. Because trigger variables are often relatively simple to monitor, it can be easy to adapt or reserve the right to play.
Strategy for the third scenario: Shapers take a different form in the third scenario. In the second scenario, they are trying to make a discrete outcome occur. Still, in the third scenario, they are trying to move the market in a general direction because they can identify only a range of possible outcomes. Some industries choose shaping strategy for this scenario backed by big-bet investments in product development, infrastructure, and pilot experiences to speed customer experience. But in the banking industry is choosing adapter strategies. Reserving the right to play is a typical posture in this scenario.
Strategy for the fourth scenario: Even though this scenario contains the most significant uncertainty, they may offer higher returns and involve lower risk for companies seeking to shape the market than situations in 2nd or 3rd scenario. This scenario may have a technologic transformation or macroeconomic or legislative shock since no player necessarily knows the best strategy in these environments; the shaper's role is to provide a vision of an industry structure and standards that will coordinate the strategy of other players and drive the market toward a more stable and favourable outcome.
Levels of uncertainty regularly confronting managers today are so high that they need a new way to think about strategy. Scenario-planning techniques are fundamental to determining strategy under conditions of uncertainty. Game theory will help managers understand uncertainties based on competitors' conduct. Systems dynamics and agent-based simulation models can help in understanding the complex interaction in the market. The real-options valuation model can help in correctly valuing investments in learning and flexibility.