20/20 foresight

When developing business strategy in an uncertain environment, there are three key questions that must be answered in order to take full advantage of perfect foresight: Should attempts be made to shape industry changes or simply adapt to them? Should major investments be made immediately or postponed? Should the focus be on catering to specific outcomes or diversifying to benefit from a range of outcomes? With regards to the first question on shaping versus adapting, most leaders would argue that a balance of both is ideal. However, shaping and adapting represent opposing strategic approaches in practice. There are five main shaping strategies: establishing an industry standard which gains critical mass through incentives, introducing disruptive innovations that redefine competition, restructuring the industry via mergers and acquisitions, replicating existing offerings in new markets, and influencing competitor behavior by altering production capacity.

On the other hand, there are four adaptive strategies: following the lead of an influential market shaper by matching their offers, hedging against multiple future outcomes by developing versatile product versions, consistently experimenting with new offerings that evolve in line with industry changes, and building a flexible organization capable of rapidly changing tactics. When deciding between shaping and adapting, four factors have significant influence: The level of uncertainty, with shaping typically better at higher levels and adapting better at lower levels. The external environment, with shaping working best where information flows freely across transparent markets with a range of likely outcomes. Internal capabilities, with adapting usually preferred to leverage existing strengths, unless rapid upheaval devalues those strengths. And finally, organizational aspirations, with shaping suiting those desiring market leadership.

Effective business strategy must be tailored to the level of uncertainty faced. Similarly, there are strategy toolkits suited to different levels of uncertainty. Access to appropriate tools is key if insights about uncertainty are to provide benefits. The process involves three main components: A situation analysis paints a picture of the present and future world, generating outputs to facilitate sound strategy choices using systematic decision-making models. Situation analysis tools commonly used to develop and evaluate strategy options include Porter's five forces framework, market research like focus groups and surveys, cost benchmarks for estimating economies of scale, SWOT analysis of strengths, weaknesses, opportunities and threats, diagnostics on core competencies and competitive advantage, and statistical projections of discounted cash flows and net present value.

With low uncertainty, outputs will be point forecasts for all key value drivers. These feed into strategy scenarios reflecting different approaches regarding industry structure and performance, the path to each scenario including trigger events and variables, the relative probability and projected valuation model of each scenario, and how one scenario unfolding will impact the likelihood of others.

The decision-making model is straightforward in low uncertainty conditions – analyze the scenarios and select the strategy promising maximum strategic benefit. Reality is rarely so clearcut. Residual uncertainty around drivers means sensitivity analyses are prudent to test alternative strategies' payoffs. With one dominant strategy that is best regardless, uncertainty plays out.

Higher uncertainty lacks dominant strategies despite well-defined objectives and choices. Additional Level 2 tools are needed for residual uncertainty in terms of combined outcomes – decision/event trees summarizing scenarios, scenario planning exercises exploring implications, game theory analyzing competitors' incentives, and decision tree valuation techniques evaluating management's flexibility to reoptimize later with better information. With low uncertainty, outputs were point forecasts of key drivers. Under higher uncertainty, the unknown must be separated from the unknowable. Level 2 outputs include a full set of industry scenarios covering structures, triggers, probabilities and valuation models; an assessment of payoff uncertainty in each scenario versus strategic uncertainty in the best strategy depending on specific uncertain variables; scenario probability analysis; and ranking strategies on risk tolerances and interdependent choice impacts on outcome probabilities.

In the face of today's fast-paced and unpredictable business landscapes, it's crucial to regularly review and adjust strategy to ensure its relevance. By doing so, businesses can maintain the flexibility needed to seize emerging opportunities or tackle new challenges. There are three practical methods to determine when and how to revise a business strategy.

Firstly, in situations of moderate to high uncertainty, contingent roadmaps can be beneficial. These roadmaps outline possible scenarios and corresponding responses. Effective contingency roadmaps highlight the most significant uncertainties, show a deep understanding of these uncertainties, identify trigger events or indicators, detail strategic actions for each scenario, update with new information, and connect to decisions and resource allocation. Secondly, in unstable contexts, businesses can employ option portfolios. Options are minor commitments to future actions that can be easily reversed. Companies compile a portfolio of strategic options, assessing each based on factors such as market volatility and the value-to-cost ratio. By consistently managing this portfolio, the leadership can adjust the strategy to align with changing conditions.