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Strategizing Under Uncertainty

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Strategizing Under Uncertainty Strategizing Under Uncertainty Strategizing Under Uncertainty

Strategizing Under Uncertainty

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How do you build a strategic plan for your company without any certainty about the future? 

The situation can be compared to laying down the foundation of a house on a ground that might move or shift on its own in the future.

The reality is that every single decision in your organisation is made with a degree of uncertainty, but companies still have to make them. Ideally what organisations do is that they make their choices based on informed possible outcomes and predictions on how the future will pan out.

The decision making should take place based on data and analysis over intuition and gut feelings.

The main issues with that are that it can be difficult to gather all necessary data. If you do manage to collect data, it gives you no clarity on what will happen in the future, it merely helps you gain a better understanding of what has already occurred.

So what can be done? Is there a way to create data that can help you gain some foresight into the future? Fortunately, there are tools that strategists can use to predict the future to make more informed choices for short and long-term goals.

What is scenario planning?

Scenario planning is a strategy that is based on making assumptions about the future and how your business environment will evolve based on it. 

It is the identification of specific uncertainties or different ‘realities’ of what the possible outcome of your business might be.

It sounds simple and unworthy of delving into too much but it is probably the best way you can guide your organisation in the long term.

For example, farmers use scenario planning to predict whether the harvest will be good or bad, depending on the weather. It helps them forecast their sales but also their future investments.  

Another example is that of military institutions who use scenario planning in their operations to cope with any unlikely situations by anticipating the consequences of every event. In this case, scenario planning can mean the difference between life and death.  

Scenario planning might not have such dire consequences in your organisation, but if not done, you risk opening the door to increased costs, increased risks, and missed opportunities.

So how to use scenario planning?

The aim of scenario planning is to help your organisation define critical uncertainties and develop plausible scenarios around them. It will help you discuss their impact and create better responses that you can use for each of them. Once you are aware of what all could happen, you will be better at dealing with the consequences.

As you can see from the above illustration, the scenario development process has 4 critical steps. First, you have to identify the driving forces and critical uncertainties in your assigned time frame. You then develop 4 distinct scenarios based on their high probability of occurrence. The best way of doing so is to organise brainstorming workshops for your team to identify creative solutions. Four scenarios may not seem like a lot but they are enough to help you focus on all the critical issues at stake. 

How do you create the scenarios? It’s a fairly simple process that involves the following steps:

  • Identify your driving forces

Discuss all the biggest shifts in society, economics, technology and politics for the future and evaluate how they will affect your organisation.

  • Identify your critical uncertainties:

Identify two of the most critical driving forces that are likely to have the biggest impact on your business. For example, two of the most important uncertainties for agribusiness companies are food prices and consumer demand. 

  • Develop a range of plausible scenarios:

Create a matrix using your two critical uncertainties as the axis (see the above example) then follow the direction each scenario will take you to. You will be able to draw four possible scenarios for the future.

Discuss the implications:

This is the final step. Here you discuss the implications and impact of each scenario if it materialises and start reconsidering your existing strategies in place. You should set your mission and goals after taking each of these scenarios into account.

Here is an example. There were three Detroit-based automakers operational in the early 1980s. Each company had management teams that were focused on the future of their industry. They all drafted 4 plausible scenarios based on the two possibilities of uncertainties in the future, which are fluctuating oil prices and the evolution of consumer value

Using scenario planning, they all predicted the “Long live Detroit” scenario in which the entire automotive industry would thrive. Unfortunately for them, they didn’t see far enough to predict the coming of new competitors from Japan, which triggered off a big crisis in the automotive industry.  

To see the complete case on Forbes:

As you may notice, scenario planning is more of a subjective technique that enables dialogue within the company than a data-driven analysis and this is actually what gives it strength.

Some pitfalls to avoid

  • A common trap is to be paralyzed by the multitude of possibilities. Don’t try the infinite number of combinations of uncertainties to build your scenarios. Keep it simple and focus on two major uncertainties.
  • Another common misconception is that organisations believe that you have to select just one particular scenario to build your strategy. The scenario planning process is not about choosing one possible future but rather dealing with multiple outcomes of a scenario by developing strategies that will withstand most consequences.
  • When you are developing your different scenarios, avoid looking at the short-term vision based on the existing market, products or competitors. Go beyond and try to anticipate where the market and your competitors could be in the future years. Be creative!
  • Scenario planning is a tool, but not the only tool that will help you plan your strategy. Focus on the vision of your company and use scenario planning to build a more robust future and vision within these scenarios

As long as you understand how to use scenario planning and how not to fall into these traps, there is no doubt you will feel more confident about which decision to make and which strategy to choose regarding the future.