A Flexible Strategy Delivers the Greatest Return
October 19, 2022
If there is one thing certain it’s that businesses are more unpredictable than ever before. The drivers of uncertainty are more intense, and the range of likely outcomes has grown much larger than it was even a decade ago. Executives can no longer chart a course and stay fixated on the path, rather they must treat their strategic plans as ever-evolving and remain flexible throughout the journey. Business leaders should think of strategy as a direction plus an initial set of steps, with flexibility built in to enable the company to adapt as new information becomes available. The following post is largely excerpted from two recent Harvard Business Review articles (here and here) articulating the merits of remaining both flexible and adaptable when implementing various market, product, and go-to-market strategies.
Let’s explore the drivers of unpredictability in more detail.
1. The vast number of variables in play
Balancing variables and likely outcomes isn’t a foreign concept to successful businesses but if you carefully examine the factors that drive unpredictability in complex systems, you’ll discover that in most sectors of the economy they have intensified. This means that leaders are spending more time analyzing the potential future states and creating a road path for each simply to ensure that they do not fail.
For each variable in play, there is typically a wide range of forecasts for both outcomes (that is, the likely end-state on the variable) and timing (how long it will take to reach the end state). Think about that with a simple math equation. If an industry considers six likely variables and each of those variables has five forecasted outcomes for the future state, we are looking at 30 different outcomes that would need to be considered in making strategic choices. Add in the impact of just five projections for the time required to reach a steady state along each of the six variables, and the number of future state outcomes grows to 150. 150 different outcomes that must be considered before decisions and implementations can even begin and that’s just in this simplified example. The reality of the volatile world in which we are conducting business is that most sectors face far more variables than this – each with many forecasts and various timing considerations to get there.
2. The interconnections between variables
Globalization combined with advances in telecommunications and data processing technology has increased interconnections in all aspects of our lives creating ripple effects throughout the economy. So now not only do we need to consider the sheer number of potential outcomes for decisions, but we also need to consider how all of those variables are interrelated and how shifts in one area exacerbate changes in other areas.
Look no further than the food delivery industry to illustrate this concept. How the world eats has changed dramatically. Restaurants and delivery services are confronting a myriad of important changes impacting their business – from the dramatic shift in consumer demand to order-in, the emergence of new competitors and business models, brand awareness, operating efficiency, breadth of offerings, oil price volatility, the supply chain instability, and so on.
Many of these changes are interrelated. For instance, if the Department of Labor’s recent proposal to reclassify third-party delivery drivers as employees passes, it could, and likely will, threaten the business models of companies like DoorDash and Uber Eats, which rely heavily on independent contractors to deliver restaurant food and other products. First, there is a likely chance that there will be less desire for individuals to work for these companies. Second, we could see a dramatic dip in consumer demand. Each of these likely variables will impact not only the third-party delivery service business but also the entire restaurant industry as a whole. A location currently serving both in-person dining and delivery is considering how this will impact their in-person dining room demand, their delivery demand, and therefore their overall patron demand. That demand is what drives their forecasts for food, supplies, and labor. In short, the future of food delivery is massively unpredictable. The variables in place, and the interconnected relationship of those variables, make it harder than ever for operators to develop winning strategies.
3. The new approach to strategy
Companies are constantly confronting changes on multiple fronts. Many of these changes are interrelated and in the midst of this chaos, leaders are being asked to make choices that will impact the profitability and growth of their companies for many years into the future. This heightened unpredictability is forcing leaders to think about their approach to strategic decision making and while that approach needs to remain flexible, there are methods and ways of thinking that can help executives make decisions in today’s unpredictable environment.
Executives and decision-makers alike need to adopt new methods for making strategic choices. First, define extreme, but plausible scenarios. More simply put, this means developing best-case, worst-case, and base-case scenarios that are probability-weighed to assess strategic moves. Additionally, identifying strategic hedges and options has become increasingly important because in an uncertain world, flexibility – in the form of hedges and options – has tremendous value. Running experiments before locking in investments is a cost-effective method because you’ll learn as much, if not more, from the failures as you do from the successes. Importantly, remember to set concrete guidelines for where and when to run these experiments, because running small experiences can quickly degenerate into placing many small bets – a losing strategy that is costly as best.
Identifying trigger points and signposts is another strong method because the value of an option depends a lot on when it is exercised. In sectors where the winner takes most of the future profit pool, moving ahead of the competition can lead to enormous advantages. Finally, provide prescriptive surveillance – a method that requires leaders to understand the root cause of any performance shortfalls truly and assumes they have prepared contingency plans that can be put into motion quickly to address any significant changes in the market or competitive conditions. A grading signpost (green, yellow, or red) can be an effective strategy to signal a change in direction (red) or a need for deeper investigation (yellow).
As every decision-maker is aware, today’s world has become increasingly unpredictable. We all know it has long been proved both impractical and inappropriate to strategize based on experience and/or gut feeling alone. Strategy-making is about careful assessment and analysis in order to identify the right direction — and to specify the market-driven signposts that need to be monitored in order to ascertain whether (and when) to adjust course. The bottom line: strategies must be dynamic and relevant — just like the business environment in which they are intended to capitalize. If you are interested in learning more about market-informed strategic planning and data-driven best practices, we’re here to help.
