How do you set a direction for your team in an uncertain and volatile market?
The Age of Uncertainty
Over the past year, we’ve all watched as oil prices dropped by more than two-thirds, China’s relentless growth appeared to slow, geo-political tensions grew between Russia and the West, refugee and debt crises threatened stability in Europe, the long-standing Progressive Conservative government of Alberta was toppled, and the Federal Government policy shifted dramatically with the new Liberal government. In the U.S., non-mainstream candidates are growing in popularity, and it’s not clear who will be the next President, nor how they will be able to work effectively with Congress. Photos of the drowned refugee child, washed up on the beach, show the impact that individual events can have on public perceptions and stakeholder demands, enabled by social media in particular.
This has all led to greater uncertainty. The markets appear skittish, with intraday moves of plus or minus 2% or more now commonplace. Forecasts for economic growth are under regular revision (often downwards). Businesses have cut capital plans and sought out savings in day-to-day operations, hoping to ride out the worst that may come.
But you can’t stick your head in the sand. As much as uncertainty brings risk, it also brings opportunity.
So, how should you proceed? How do you make decisions and develop forward thinking strategy in a world where uncertainty appears to be the only constant? The answer is driven, in large part, by what type of uncertainty you face.
First, you may be facing a situation where the future is likely to be one of several discrete and definable potential outcomes. For example, carbon tax vs. cap and trade. While you may be able to provide a good picture of each outcome, you do not know which is most likely. Ideally, you can develop an estimate of the likelihood of each outcome, but until some further events occur, there is no further clarity.
Or, similarly, you may be facing a situation in which the future cannot be defined in discrete outcomes but will lie somewhere along a spectrum of one or more identifiable variables. For example, you may be facing a choice that will be most impacted by future oil price and interest rates. You cannot know exactly what value either of these variables will take in the future, but your choices may be very different if the future sits at one part of the spectrum or the other.
Finally, you may be facing a situation where there are many unknowns – where the future cannot be defined by only a handful of variables.
Once you understand what type of uncertainty you face, you can determine the best approach to evaluating different strategies and direction-setting choices.
Develop Effective Scenarios
If you are facing either discrete potential outcomes or a spectrum of outcomes on a limited number of variables, a scenario-based approach is often best. Developing scenarios is not always as straightforward as it might appear at first. Effective scenarios are:
• Limited in number
• Plausible and realistic
• Easy to describe and understand
• Clearly different from each other
• Lead to different actions or decisions
When faced with a spectrum of outcomes, many people will tend to create scenarios that reflect the extremes of the range of outcomes. While these can be helpful, often scenarios that sit inside the range of potential outcomes are more informative, and perhaps more likely.
Evaluate the Strategic Options
Once you’ve developed and agreed upon your scenarios, the next step is to evaluate your strategic choices within each scenario, considering rewards, risks and likely competitor responses in each situation.
If you are facing a greater level of uncertainty with multiple substantial unknowns, scenario analysis is often not effective. The number of scenarios that you would need to create would be too high, and may be overly simplistic – not reflecting the interactions between different variables. As a result, a different approach is required.
Narrow the Variable Factors
Instead, as you consider your strategic options, you should identify what you would need to believe about the external environment to pursue each choice. Focus on those variables that are both most uncertain and most impactful to the strategic choice you face. Often, we don’t fully understand the “bets” that we are making, and the purpose of this exercise is to help bring those “bets” to the surface. Once exposed, it becomes much easier to evaluate how reasonable each of the required beliefs might be, and therefore, which course of action provides the greatest potential for success, or maximizing rewards, given the uncertainty present.
Clearly, we’ve only begun to scratch the surface of the challenges of uncertainty. Beyond these decision-making steps, successful companies will also need to be monitoring key variables in their environment, looking out for red flags and managing emerging risks.
Ultimately, to be successful, all businesses need to be more comfortable operating in a world of uncertainty and risk. Those that are able to do so effectively have the potential to capture unique opportunities for growth and profitability, while those that wait of more certainty are likely to get left behind.
If you would like to learn more about how to move forward in an uncertain world, please contact John Galloway or Richard Nott.