Strategy-Making in Turbulent Times
In crafting strategy, companies often struggle to cope with volatility. Using the traditional strategic-planning model, managers attempt to forecast how markets will evolve and competitors will respond, and then define a multiyear plan for winning in that future state. The organization is then called upon to execute that plan. Performance is routinely monitored, ostensibly to keep everyone on track.
That approach worked well when markets were more stable and the primary factors influencing future growth and profitability were easier to forecast. Consider commercial aviation. From 1980 to 2000 growth in that sector was relatively constant, with air traffic miles growing at just under 5% a year. Manufacturers and airlines employed discrete models to assess investments in new commercial-airplane programs and to plan fleets. Airbus and Boeing expanded aggressively over those two decades: The global fleet tripled from 5,000 to nearly 15,000 aircraft.
But then came the 9/11 terrorist attacks, wars in Iraq and Afghanistan, oil price spikes, the global financial crisis, environmental concerns, SARS, and Covid-19. Forecasting commercial air travel became arduous and complex and was frequently wrong. And that’s just one industry.
Most companies have stuck with conventional techniques for strategy-making, to the detriment of customers, shareholders, and other stakeholders.
The world is now changing so quickly that no business can plan for every eventuality. Scholars and practitioners have spent years crafting tools and frameworks for strategy development under uncertainty—including, most notably, scenario planning, Monte Carlo simulation, and real options analysis. Each of those represented a significant advance. Scenario planning, which became popular in the 1970s, encouraged executives to consider multiple future states in assessing strategic investments, rather than rely on a single, deterministic forecast. Monte Carlo simulation went even further, specifying a probability distribution for each critical variable and then running thousands of simulations so that executives would focus on the distribution of potential outcomes as much as on any prediction of the most likely one. Real options analysis emerged as a further refinement in the 1980s, explicitly incorporating flexibility in the consideration of strategic investments.
But none of those techniques has caught on widely. Fewer than a quarter of large organizations regularly apply them in capital budgeting, fewer still in strategic planning. Executives tell us that the tools require data that is impractical to gather and analysis that is too expensive to perform routinely. Moreover, the output can be counterintuitive and complicated to explain to senior leaders and a company’s board. The upshot: Most companies have stuck with conventional techniques for strategy-making—even in the face of extreme volatility—to the detriment of customers, shareholders, and other stakeholders.
We believe that business leaders need to reconsider what good strategy looks like in turbulent times—and to think of strategy-making as a continuous process that generates a living, dynamic plan. In this article we describe what it takes to produce great results during uncertainty and propose a practical model for strategy development that we have seen work at several leading companies.
A Continuous Process
Dell Technologies is one company that has made the shift. In 2014, shortly after Michael Dell took his company private, its leaders put in place a new, continuous approach to strategy development and resource allocation. At its core is the “Dell agenda,” a backlog of strategic issues and opportunities that must be addressed to improve the long-term performance and intrinsic value of the company. Rather than devise a “strategic plan” to address the agenda, Dell’s executive leadership team defines a multiyear outlook (MYO) for each of the company’s businesses. The MYO establishes a forecast for the performance trajectory of each business on the basis of decisions leadership has already made; it does not incorporate decisions that leaders might make in the future.
Read More at https://hbr.org/2022/09/strategy-making-in-turbulent-times