Is your strategy precise or robust?
Precise: “Exactly or sharply defined or stated” (Merriam Webster Dictionary) or “Marked by exactness and accuracy of expression or detail” (Oxford English Dictionary)
Robust: “Capable of performing without failure under a wide range of conditions” (Merriam Webster Dictionary) or “Sturdy in Construction” (Oxford English Dictionary)
It is with some optimism that we are beginning to look forward to a not too distant future where we can eat in restaurants with no restrictions and only medical professionals wear masks. It may be a good time to start making plans again to replace the cancelled gatherings, concerts and vacations we have missed over the last year. More to the point, it might also be a good time to revisit your strategy with an eye towards how markets and customers have changed, and approach the future with some humility about how little your dated projections from 2019 resembled what actually happened in 2020.
Hence our question, “Is your strategy precise or robust?” – we have long felt that the goal of planning should be to produce strategies that are robust, not precise. Yet, too often strategic planning is inseparable from budgeting and long-term financial planning where the output is expected to be detailed revenue and profit projections by product line or by geography by quarter.
Financial projections and expectations are, of course important. But it is equally important to make sure the strategy is robust across several potential future scenarios and anticipate financial outcomes across these different scenarios. It is also important to be clear about the assumptions behind the strategy: what market information should be tracked in order to adjust the strategy over time, what you should expect to see if the strategy is working and what might indicate that it is not working and therefore trigger a reconsideration of the strategy. The problem is that in the quest for precision (“the numbers have to tie”), the disciplined thinking that is needed for robust strategies can be lost.
Forgive us for a brief digression into the difficulty of making precise predictions. Can you fill in the next number in this series: 83, 28, -8, 38, 24, 86, -9, 4, ? This is not a sample Mensa test question, rather it is the annual growth rate (in percentage points) in electric vehicle sales in the US going back to 2013. Yes, sales actually fell in 2019 vs. 2018, and despite a horrible quarter due to coronavirus shutdowns, EV sales were up slightly for the full year in 2020. So, what will they be in 2021? I am certain you can buy a report that projects EV sales to increase at 23 percent per year – but do they give you a confidence range? History suggests that the confidence range should be wide, including the possibility that sales may fall before rising again. We might generate a financial projection assuming EV sales will increase at 23 percent per year, but it would foolish, some might even say dangerous, to base a strategy on this precise expectation.
Strategists cannot get away with blindly accepting some expert’s projection of the future, nor is it reasonable to assume that the future will look exactly like the past. So how should you incorporate uncertainty into your strategic planning? We’ve written previously on the importance of thinking through what is temporary versus what is likely to be permanent and the importance of thinking through second and third-order effects. For example, if half the people working from home continue to do so, what does that do to the demand for office space and the commercial real estate market? Not to mention the demand for office services or office furniture?
Beyond that, as you refresh your strategy in these turbulent times and strive to avoid the precision trap, here are a few thoughts to keep in mind:
- It seems obvious, but make your assumptions explicit. If your strategy is predicated on something like ‘everyone knows that oil prices will keep going up,’ but you have not stated that explicitly, you may not react quickly enough when prices actually fall.
- In general, don’t plan for a point estimate of the future, better to understand the drivers behind the observed trends and how sensitive your intended direction is to changes in them – for example, how much of the fluctuation in electric vehicles sales was due to macro-economic trends vs. the impact of tax incentives and subsidies, or the popularity and prices of individual vehicle models?
- Use ranges of estimates to test the robustness of your strategy – e.g., “if this market is 25 percent smaller than we think it is, is launching this new service still a good decision?”
- If there are multiple major either/or type assumptions (this new regulation goes into effect or it doesn’t) consider scenario planning as a way to prepare for multiple futures, ideally avoiding the debate of how likely those future scenarios may be.
- Identify the key indicators that your assumptions are wrong and try to build in an early warning system to trigger re-visiting your strategy – in fact, during times of great uncertainty, more frequent strategy refreshes seem like a best practice, even without specific outside triggers.
- Lastly, it may seem counter-intuitive, but when there is great uncertainty it may be even more critical to be explicit about what you will NOT do. Responding to the unanticipated requires flexibility and forces difficult trade-off decisions. Clear guardrails are an indication of a robust strategy. And the more robust it is, the more it can guide these tough decisions without time-consuming approvals and allow your organization to respond quickly to the unexpected – for example, a twenty-fold increase in the demand for personal protective equipment.
As Heraclitus said more than 2,500 years ago, “The only constant in life is change.” Yes, much of what we experienced in 2020 was unprecedented. And while no one could have anticipated all of the events and ramifications in detail, those companies with robust strategies have done the best job of making the fast pivots required to survive and thrive and will come out on top.
Separating your strategy process from financial planning and embedding the idea of robustness as opposed to precision will help you weather the next storm. Because however much we don’t know, we can predict with certainty that this will not be the last crisis.