Categorizing Strategic Priorities Based on the Level of Uncertainty
While there is much uncertainty, there can also be much opportunity. It can be hard to decide strategically what to do personally, professionally or in your business.
Do you act now? Do you wait and see? How can you decide with more conficence what path to take?
In traditional times, traditional methods of strategic planning work well - depending on the strategic information available. These are not certain times and therefore require strategic planning that takes true ambiguity into accout.
Uncertainty demands a more flexible approach to situation analysis. The old one-size-fits-all approach is simply inadequate. Over time, companies and you in your career will face strategy problems and decisions that have varying levels of uncertainty, and it is vitally important that the strategic analysis be tailored to the level of uncertainty.
Here is a framework for figuring out the level of uncertainty and adjusting your strategic planning to the situation including the current situation we find ourselves in. Nothing is foolproof against uncertainty but this will help lead to a more confident decision.
Four Levels of Uncertainty
The level of uncertainty is related to the strategic information available, such as market trends, demographics, and data. Additionally you can uncover more information by testing market parameters, doing competitor analysis, and analyzing regulatory and legal policies.
Because it is easier, most people tend to want to assume their situation is at one extreme or the other. To them, uncertainy is binary and therefore clear enough to predict, or they get stuck in indeceision by assuming there are too many variables and unknowables to determine what path to take.
The key to coming up with strategic priorities is objectivly assessing the current situation and applying the apprprioate level of analysis and then using the corresponding strategic tool.
A Clear-Enough Future
At the highest level of certainty, you can develop a pretty precise stratgy for the future. Although there is no scenario that has no uncertainty, it is narrow enough to point to a strong strategic direction.
Typcally this situation relates to a manager' strategic assesment of a competitor enters their market or gives a discount that is hurting sales. It can also be used to make personal decisions such as how to respond to another person going after the same promotion you are.
For this version of strategic planning, you can use the standard strategy tool kits—market research, analyses of competitors’ costs and capacity, value chain analysis, Michael Porter’s five-forces framework, SWOT analysis, and so on.
This scenario offers one of a few alternatives. You cannot predict which alternative will occur but this will help establish priorities.
For managers, there are changes in the market environment such as regulation or the increase in production or capacity and predicting a competitor's response.
First you must develop a set of distinct scenarios based on your assessment of the things you do know, for example if the competitor builds a new plant in response to your increase in capacity or the scenario where they do not. Getting information that helps establish the relative probabilities of the alternative outcomes is important.
After establishing 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 the risks and returns inherent in alternative strategies. This process will identify the likely winners and losers in alternative scenarios.
Decision-trees, scenario planning and game theory are good tools to use in this situation.
A Range of Futures
In this scenario there are a range of potential futures but there a limited number of key variables. So then th actual outcome may lie anywhere in a continuoum along that range.
Companies in emerging industries or entering new geographic markets often face this uncertainty. The variables increase as the company introduces new products and services to this new market.
The analysis in this scenario also identifies the various alternative outcomes. It is easy to determine the scenarios at the extreme ends but more difficult to decipher all of the the alternatives in the middle. Therefore it is hard to determine how many and which scenarios to analyze. To increase confidence, ignore the entire range and pick 4 or 5 unique and highly probably scenarios to assess.
Use game theory, scenario planning, quantitative analysis and systems modeling to determine your best path forward.
Multiple dimensions of uncertainty interact to create an environment that is virtually impossible to predict. The range of potential outcomes cannot be identified, let alone scenarios within that range. It might not even be possible to identify, much less predict, all the relevant variables that will define the future.
It is hard to predict what potential laws or regulations will govern and there can be other external variables coumpounding the uncertainty.
Many people either are paralyzed with indecision in this stage or they give up deciding all together.
One way to move foward with more confidence in this stage is to study
how analogous markets developed in similarly uncertain situations, determining the key attributes of the winners and losers in those situations and identifying the strategies they employed. While it is hard to quantify the risks and returns of different strategies, asses what information you would have to believe about the future to justify the investments you are considering. Use early market indicators and analogies from similar markets to assess which beliefs are realistic or not. Finally, catalog what you do know and what is possible to know. There is often a subset of variables that can be identified. You can track these variables in shorter bursts of time and use them to give you an indication of the future.