Friday, February 24, 2012

Strategic Planning Analogy #439: The Certainty Within Uncertainty

Every so often, I’ll check out some of the online discussion boards on the topic of strategy. A common discussion topic is about whether long term planning is useful anymore.

The line of reasoning usually goes something like this: There is so much uncertainty in the world that the future is completely unknowable. Therefore, any projections into the future are worthless.

What I find interesting is this: These people seem so certain that the future is uncertain. So doesn’t that make “uncertainty” a certainty? And if that is the case, then there is a measure of certainty to the future (certainty about uncertainty), so that you can make long-range plans.

The connection between what happens in those discussion boards and what happens in corporations is fairly straightforward. If you have a defeatist attitude towards the viability of planning, then you will not take planning very seriously. However, if you take a more positive approach, you can still extract significant value from the discipline.

Planning takes place within a context. You plan to win within the future marketplace (your context). Yes, it is true that nobody ever knows 100% of what that future will look like. But that is no excuse to abandon planning. There are still many certainties embedded in that uncertainty—enough so that smart people can take advantage of them in their planning.

And even knowing in advance that uncertainties will rule is knowledge you can use to develop your context. The “certainty of uncertainty” lets you know a lot about the type of world you are trying to win in. Just having that knowledge can make long range planning viable.

The principle here is that there is a way to do effective planning in a world of uncertainty. Long range strategic planning can still put your company at a competitive advantage when the world is full of uncertainty. You are still better off doing the strategic planning than not.

1) Regardless of Infinite Causes, there are Finite Outcomes
Uncertainty means that a lot of different things may or may not happen. There are an almost infinite number of unknown situations that could occur. Since one cannot realistically create an infinite number of plans, this knowledge of near infinite unknowns can be intimidating to a planner.

But it needn’t be. Fortunately for the planner, even if there are an infinite number of unknown factors causing change in the world, there are a relatively small finite number of effects which these factors cause.

The most important thing is usually not the cause, but the effect, because the effect is what effects your ability to win.

For example, regardless of the cause, most of the effects fall into a few simple categories like:

a) Markets Open or Markets Close
b) Competitors Get Stronger or Weaker
c) The Economy Gets Better or Worse
d) The Current Business Model Becomes Obsolete (a Better Model or a Different Technology Comes Along)
e) The Supply Chain is Disrupted
f) Government Regulations Change the Rules

Since the effects make up a much smaller list, you can manage them from a planning perspective. For example, in a previous blog we looked at how Caterpillar built a strategic plan in advance for what to do when an economy suddenly turns bad (regardless of why). When the economic crisis occurred in 2008, they pulled out that plan and weathered the great recession better than they would have otherwise.

Similarly, when the automakers in Japan were hit in 2011 by the Tsunami in Northern Japan followed closely by the flooding in Thailand, supply chains were severely disrupted. It pointed out the flaw in the close-knit just-in-time supply strategy. A more flexible strategic approach to the supply chain would have been beneficial regardless of what caused supply chain disruption.

2) Not Everything in the World Can Change Suddenly
If uncertainties act slowly enough, there is time to make these unknowables “knowable” before it is too late. Things like world dependence on oil and climate change can change, but the transition will be over decades, so there is time to build strategic plans around them.

And then there are knowables like the age of a population. Aging is tied to the chronological year. People cannot suddenly age faster or slower than the pace of the calendar. Therefore, age-related strategies can rely on a relatively stable and knowable environment.

Similarly, future adult population growth depends upon births which have already occurred. This adds some level of certainty to market-sizing of adults.

And finally, many core attitudes don’t change much. Maslow’s hierarchy of needs stays constant over time. Regardless of what is going on around them, people want to feel loved, they want to feel a sense of self-worth, they want to eliminate guilt, and so on. Although the manifestations may change, the underlying motivations are fairly constant and can be counted on.

3)There Are Still Things Completely Under Your Control
Yes, there many things outside our control. But there still many things under our control. The question is how we should act regarding those things under our control. We have options and alternatives regarding those decisions. Some of those options and actions would create better long-term outcomes than others. Strategic planning can help determine which alternatives to take.

For example, we have control over where we spend much of our company’s time and money, where to invest our efforts. Companies do not have enough resources to do everything. Therefore, they have to make choices, make trade-offs.

In particular, we can choose which position we want to own in the marketplace. We can choose which attributes we want to win on. We can choose who we want to target and what the message should be.

In addition, we can choose our corporate culture and management style. To a large extent, we can even choose our business model. We can also choose where to focus our R&D efforts.

In other words, businesses still have to make a lot of decisions. Choosing one path means rejecting another. In the absence of a long range strategy, these decisions will tend to be more erratic and more contradictory. Instead of reinforcing each other to build a stronger long term position in the marketplace, they become almost random—swaying back and forth in the winds of the latest fad. Everyone (customers, employees, other stakeholders) becomes confused about what you stand for, so you end up standing for nothing.

By contrast, strategic planning helps get all those decisions aligned so that they reinforce each other. You can move more quickly, because everyone knows the general direction. And being able to move quickly is important in a world of uncertainty.

We do not have to be victims of our environment. We can take control. As Peter Drucker said, “The best way to predict the future is to create the future.” Spend some time making decisions to create the future you want.

Here’s The Action Plan
Given what has been mentioned, how should we use strategic planning in a world of so-called uncertainty? There are five steps.

Step #1: Choose
Choose your position, your point of differentiation, the place where you will win in the marketplace. Choose the general direction of your trade-offs. Take command of those things under your control.

Step #2: Institutionalize Flexibility
In a world where frequent small adjustments are necessary, one needs a flexible operating structure. Make becoming flexible a part of your strategy—flexible supply chains, flexible factories, less cumbersome decision-making procedures, flexible balance sheets, etc. The certainty of uncertainty makes this essential.

Step #3: Prepare for Scenarios
From the finite list of potential effects, build a list of scenarios. Then create the proper strategic response if those scenarios are to occur. That way, like Caterpillar, you can immediately respond in a rational and proper manner when a particular scenario comes to pass.

Step #4: Encourage & Discourage
Although there are uncertainties in how the future will unfold, that does not mean that we are helpless in our ability to influence that outcome. Through efforts like lobbying, public relations, charitable giving, investing, and other such actions, we can help influence the course of history. Rather than being a victim of change, we can help mold how that change comes about. Have as part of your strategy actions to encourage a future more to your benefit and to discourage a future less to your benefit.

Step #5: Keep Monitoring the Situation
If you assume that the world is changing all the time, then keep watching it so that you know what is going on as soon as possible. Frequent change is not an excuse to ignore the environment, but to watch it ever more closely. In particular, find the key leading indicators that scenarios are changing and monitor them on a regular basis. That way, you know when to

a) Pull one of those scenario plans off the shelf; or
b) Where to place your encouraging/discouraging efforts; or
c) When and how to make adjustments in order to stay on course.

Just because there is a lot of uncertainty in the world does not mean we should abandon long-range planning. There is still a lot of certainty within that uncertainty, even if the most certain thing is the knowledge of continued uncertainty. Long range planning allows a company to rise above the seemingly random swings of change and stake out a position of strength. Rather than being a victim of the whims of change, you can take charge and even help influence how that change occurs (to your benefit).

Look at the world as being like an ocean constantly in change, and your company as a small boat. If you don’t want to be tossed around and out of control, you need an anchor. Strategic Plans can be your anchor.

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