More CEOs than not will tell you they were thoroughly surprised by how decisive their organizations turned out to be in the heat of the Covid-19 crisis.
With no choice but to act, management teams scanned the horizon, quickly assessed what was changing, and made commitments based on the best information at hand. Not all decisions were the right ones, but course correction became part of the drill. Many acknowledge the freedom of movement was liberating.
In a postpandemic world, the challenge is keeping that energy alive.
As the global economy recovers, the expected surge in demand will produce unprecedented opportunities for companies prepared to act decisively. Yet many CEOs know from long experience that more time to plan and deliberate is often the enemy of action. Traditional approaches to strategy—analyzing trends, making detailed forecasts, and committing to only the “best” course of action—aren’t calibrated for the high degree of instability we face today. Those processes tend to be as ponderous as they are cautious, looking at the world incrementally and searching for certainty where there’s none to be found.
The hallmark of companies that chart the right course through turbulence is that they embrace uncertainty; they don’t try to fight it. They focus on the vital few uncertainties that matter, lay out the possible scenarios that could develop, and identify the critical trigger points or signposts that signal swings in direction. Planning becomes a cycle of “execute, monitor, and adapt” that dynamically redirects the company toward the best opportunities over time.
A strategy for uncertainty
A scenario-based strategic planning process proactively prepares for a range of futures by:
- defining which uncertainties the company faces and cutting through the noise by separating them into those that matter and those that don’t (see Figure 1);
- creating a set of probable scenarios for how the future might unfold and determining the threats—and opportunities—that these scenarios present;
- devising a specific set of strategic playbooks that balance commitment to a course of action with the flexibility to adjust and thrive amid different future scenarios; and
- identifying a clear set of signposts that will signal important changes in the marketplace and trigger a set of actions already foreseen during the scenario-planning process.
Consider how a large consumer products company recently worked through the long list of uncertainties it faced as it charted a course toward 2030. The firm was a well-established global leader in the food sector. But its markets were mature and ripe for disruption.
Low-cost competitors were emerging with attractive unbranded products. And sustainability concerns were prompting consumers and regulators to demand more environmentally friendly solutions. An unknown, but significant, portion of the grocery business was transitioning online, creating deep uncertainty about profitability throughout the value chain. Each set of pressures threatened to alter the market in a different way.
In all, the company identified 30 relevant uncertainties and ranked them in terms of how likely it was that they would affect margins in a meaningful way. It then sorted the most plausible and disruptive into three future scenarios: an “environmental” scenario that would demand more product innovation; a “next-gen solutions” scenario where new technology transforms production; and a “localization” scenario where stricter trade barriers and nationalist sentiment give rise to local producers.
Defining these scenarios and building a detailed fact base around them allowed the company to devise a set of strategic moves tailored to each version of the future and to develop a set of signposts, or indicators, that management could monitor on a regular basis to understand how things were unfolding.
This kind of scenario-based process brings analytical rigor to a number of key questions: What are the most likely possible scenarios to emerge from the major uncertainties the company faces, and what would it take to thrive in each one? How could the world evolve in a way that could either disrupt current strategy or create new opportunities? How can the company act quickly depending on which possible future unfolds?
That puts the company on its front foot and prods leadership to monitor change on a regular basis—not just once a year as in the traditional planning process. Rather than adopting a wait-and-see approach to planning and investment, leadership is aligned and “precommitted” to take specific action under different circumstances. If the world is evolving toward scenario X, the company has already laid plans to roll out a strategy to capitalize on it.
Flexibility not ambiguity
Effective scenario planning requires a degree of flexibility that makes some leadership teams uncomfortable. The breadth of strategic choices seems at odds with developing a coherent strategy the organization can understand and get behind.
In practice, however, preparing for a set of different futures and defining a clear strategy aren’t mutually exclusive. The object isn’t to stray far from the company’s core strengths or long-term vision. On the contrary, our experience suggests that those strengths and values provide the best compass for adapting to changing circumstances.
Strategies that account for uncertainty are no less devoted to a bold, long-term ambition. But they do strive to balance commitment to this vision with an explicit set of options that prepare the company to seize the future as it unfolds. The alternative is to scramble reactively when confronted with disruption and accept the risk that better prepared rivals will define the rules of competition. The best strategies avoid this by balancing three kinds of investments:
- No-regret moves. These are actions like ongoing cost management or increasing operational effectiveness that will benefit the company under any scenario.
- Options and hedges. These are strategic tactics aimed at specific scenarios. They might include a range of smaller-scale pilots or experiments that can be ramped-up or scaled down quickly, joint ventures that provide lower-cost market entry, or changes to projects that might add cost but provide additional flexibility.
- Big bets. These are large-scale commitments that are valuable in the prevailing scenario, but may have different payoffs depending on how uncertainties are resolved. Companies might not pull the trigger until there’s more clarity around which scenario is most likely to play out. But advance planning gives them the critical flexibility to move quickly when appropriate.
For one global chemical company looking to set itself up for more robust growth in the decades ahead, prioritizing strategic investments first required understanding how a variety of disruptive forces were likely to affect its diversified end markets. A specialist in plastics, its compounds were used in consumer products, agriculture, medical applications, and a number of other sectors. That left it open to some of the biggest disruptive forces of our era—climate change, sustainability concerns, heightened regulation, and digital innovation.
By fully developing a set of scenarios from a future-back perspective, the company zeroed in on the most critical uncertainties it faced. Among them was a future in which global pressure to reduce carbon emissions and plastic waste led to serious declines in oil supply and increased pressure from consumers and regulators to develop alternatives to plastic packaging.
The company had already developed a unique technology to recycle chemicals that was just gaining traction. Investments in “circularity” made sense in every scenario, so doubling down on this innovation to bring it to scale was among the first no-regret moves the process identified.
At the same time, the company began to prioritize a set of hedges—investments in bio-based plastics (made from renewable biological resources like starch), exploration of paper-based packaging products, and biodegradable materials that eliminate the need for recycling.
It also began to lay out a range of big bets—major strategic shifts that done right would produce a second engine of growth as the world transitions away from its dependence on petroleum. These included exploring the use of hydrogen, both in existing operations and by finding other ways to participate in the hydrogen value chain. It meant investing around promising but still immature technologies to capture, store, and utilize carbon (CCUS).
The scenario work led to more than a dozen signposts that the company could use to keep abreast of how things were changing. They ranged from monitoring carbon dioxide (CO2) reduction commitments to tracking venture capital activity to see which relevant technologies were getting the most investment. This played to the company’s strength in analyzing market trends. But it also required a shift in mindset. Like many companies, this one needed to accept the notion that the disruptive forces it faced might very well blow up many of the old correlations and assumptions it had historically relied on in planning.
Moving with purpose
There’s another important shift most large companies face when it comes to effective scenario planning: Not only do they need to get better at monitoring the right signposts, but they also need to link those insights to strategy. When a signal trips, in other words, the most effective planners are prewired to make a decision—let’s investigate this further, let’s run our playbook, let’s back away and pivot in another direction.
For one large tech-intensive industrial equipment company, this sort of bias to action in planning has been critical. The pace of change in its industry is so rapid that leadership simply assumes the business will be essentially unrecognizable five years from now.
Two disruptive developments stand out from the many that have the potential to determine future winners and losers. The first is a threat to the core business—the advent of an open-source alternative to the company’s proprietary flagship products that is gaining traction with its customers. The second is a potential opportunity: an emerging new category of equipment that would allow the company to open an entirely new enterprise channel among companies looking for integrated solutions.
Within this context, the company has created a set of playbooks that are both defensive and offensive. On the defensive side, it has laid aggressive plans to address the open-source threat from within its core business. On offense, it is targeting the enterprise networking opportunity with three separate approaches to business building: one plan based on M&A, another more focused on organic growth, and a third that could establish it as a major player in the enterprise space overnight.
Although one of the plans currently holds sway, the company has put meaningful investment into all three to ensure that if conditions change, it won’t be left without an attractive, viable way to establish leadership in the enterprise channel. What’s critical is to link signposts to action plans and use these indicators to guide investment.
There was a time when turbulence and uncertainty were most prevalent in industries like technology or pharmaceuticals, where innovation and disruption present daily challenges. Or disruption was episodic—a temporary supply shock or a cyclical lull in the economy. Increasingly, however, disruption is a steady state for all businesses. Finding a way to sustain profits and reach full potential amid a constantly shifting landscape is the central challenge in every market. The companies that make the future—not just take it as it comes—will be those that can embrace uncertainty and turn it to their advantage.