Strategy in Times of Uncertainty

Chapter And Authors Information

Silvia Vernizzi

Department of Business Administration, University of Verona, Italy

Andrea Beretta Zanoni

Department of Business Administration, University of Verona, Italy
Strategy in Times of Uncertainty
From the Edited Volume
Edited By:
Professor John Metselaar
Content

Abstract

To survive in a context of great uncertainty, companies need to constantly restructure their strategic path, anticipating the environmental changes and adapting their business and organisational models accordingly. But that is not all. Fast-paced and unpredictable environmental transformations also require that strategy be developed in a new way, that is, with logic and tools that enable companies to achieve the agility and speed of decision-making and implementation that is now essential. This chapter is aimed at describing what it means to actually develop a strategy and to do so in a new way. More specifically, the chapter suggests a strategic process framework built around some specific tools that can be used to develop a new and flexible strategic approach able to modify and redefine the strategic path whenever the signals coming from the external environment make it necessary. The tools explored include scenario analysis, contingency plans, sensitivity analysis and continuous challenging of the assumptions underlying plans.

 

Keywords

strategic agility, strategic process, scenario planning, vision, strategic control

Introduction

An historic contraction of GDP, a tightening of public debt, a decline in demand and investments…these are some of the effects that the coronavirus pandemic has generated worldwide. But that is not all. The impact of the global emergency has been so destabilising that it has profoundly affected the way we all live and how we do and participate in business. Product and service purchasing and usage habits have changed, global supply chains have been disrupted, business models are even more liquid and we are witnessing a greater presence of the state in the economy through new rules and new compliance demands, especially regarding social and environmental issues.

The pandemic has also appeared in a context in which significant structural changes were already underway, including:

  • the geo-economic and political variable, characterised by the often challenging and contradictory search for new politico-economic equilibriums;
  • the technological-digital variable, which continues to change the dominant business models in multiple sectors (finance, tourism, transport, health, media, etc.) and to open up new scenarios with new frontiers of technological innovation (think artificial intelligence);
  • the environmental and social variable (environmental, social and governance principles), which in part is also the result of transformations induced by geo-economic and technological trends, and which in any case profoundly changes the scenario in which companies operate.

The global pandemic associated with macro structural trends has increased performance volatility and rendered the global scenario even more uncertain and risky. Consider the first 20 years of the 21st century: three sudden shocks for as many global crises—the Twin Towers in 2001, the Lehmann Brothers collapse in 2008 and now the coronavirus pandemic. The lesson is clear: we are more fragile than the late 20th century had led us to believe. More than uncertainty, we are dealing with ‘black swans’, that is, large or small events that have global impacts and cannot be predicted (Teece & Leih, 2016). However, it is precisely these types of events that businesses must and should account for more and more often. For this reason, at least partially new management approaches are needed that are characterised by agility, speed and, more generally, an openness to changing market demands. To survive in a context of such great uncertainty, companies need to constantly restructure their relationship with the external environment, anticipating its changes (or at least following its movements) and adapting their business and organisational models accordingly because, as Darwin concluded “it is not the strongest species to survive, nor the most intelligent, but the one most responsive to change”. For (all) companies, it has therefore become urgent to move according to strategic logic; in other words, it has become essential for them to actually develop a strategy.

What It Means to Actually Develop a Strategy

A business strategy is the method chosen to regulate the relationship between a company and its environment. As the complexity and volatility of the context increases, so too does the strategic requirement to dedicate time and resources to consciously formulating a strategy (Ansoff, 1979). Since the stability of the environment has become increasingly precarious, the strategy must be constantly challenged and, if necessary, changed daily (Grant, 2010).

Strategy as an adaptation model is characterised by the presence of three basic elements:

  1. an outside-in approach
  2. a sense of direction (or vision)
  3. planning.

The ‘outside-in’ approach involves decision-making based on what occurs externally through continuous, systematic monitoring of what is occurring to the main variables of the context (e.g. the competitive, market, technological, macroeconomic and normative variables). This means establishing a creative process that allows formulation of hypotheses and constant evaluation of their sustainability, and is always ready to review them and formulate new ones (Doz & Kosonen, 2008; Grant, 2010; Rumelt, 2011).

The second element, the sense of direction (or vision), consists in defining an evolutionary direction, in an unambiguous and coherent way with respect to the hypotheses formulated (Coda, 1988; Dossi, 2015). In other words, it means having an orientation, which even in conditions of uncertainty, allows a direction of movement to be outlined. The vision is obviously not fixed; on the contrary, the volatility of the environment in question imposes more frequent remodifications and changes than in the past and at the same time increases its relevance: indeed, the greater the uncertainty and fragility, the more significant the need for anchorage.

The third element of ‘developing a strategy’ is planning, understood as a concrete and operational translation of the strategy into action (Doz & Kosonen, 2008; Rumelt, 1995, 2011). Developing a strategy means more than just exercising thinking and formulating ideas; it also means designing and planning in order to translate ideas into choices and actions. Only in this way does the strategy stop being just an exercise in method and becomes an organisational asset able to guide the action of all the company’s components, ensuring that the entire organisation moves, like a team, in the chosen direction.

Developing Strategy in a New Way

Developing a strategy (really doing so) has become essential. However, it is no longer enough. Because of the fast-paced and unpredictable environmental transformations, it must be done in a new way, that is, with logic and tools that enable that agility and speed of decision-making and implementation that is now essential (Brueller et al., 2014; Lafley et al., 2012; Lewis et al., 2014; McGrath & Nerkar, 2004). Developing a strategy in a new way therefore means having a flexible strategic approach that enables designing and planning a strategic path and at the same time modifying and redefining it whenever the signals coming from the external environment make it necessary. In other words, developing a strategy in a new way means having strategic agility (Brueller et al., 2014; Grant, 2010; Weber & Tarba, 2014)

There has been much debate by scholars over the concept of strategic agility. Brueller et al. (2014) studied the relationship between mergers and acquisitions and strategic agility, and conceptualised strategic agility as the capability to make knowledgeable, nimble, rapid, strategic moves with a high level of precision. Doz and Kosonen (2008) focused on the importance of a business model evolution and defined strategic agility as the capacity of an enterprise to be agile, open to new evidence, always ready to reassess previous choices and able to change direction in light of new developments. Lewis et al. (2014) emphasised the contradictory nature of strategic agility and noted that it is synthesised by a complex balance between a stable commitment to future vision, the importance of a strategic planning process and an ability to be adaptable and open to emerging decisions.

Despite such differing perspectives, it is possible to identify some recurrent themes, including that:

  • Strategic agility is an attitude. It is a way of managing enterprises. It is not about a reaction to a major threat or event; rather, it is a constant ability to reshape the course of action and to continuously check and renew an enterprise’s business model.
  • Strategic agility involves overall organisation design and not just the rearrangement of some products or categories.
  • Strategic agility entails some requirements in terms of capabilities (i.e., being superior in sensing evolutions, threats and opportunities, and in terms of leadership, being able to rapidly transform the enterprise via decision-making processes and organisational change).
  • Strategic agility does not exclude strategic planning processes; rather, it integrates planning processes by making them more flexible and avoids rigidity and inertia (Huff et al., 2007; Rumelt, 1995, 2011).

The growing emphasis on strategic agility in the literature demonstrates its significance and highlights the urgency to systematise the concept for both theoretical and practical reasons. Strategic agility is a core issue in the strategic management literature that cannot be left to theory. The framework suggested in the following paragraphs is aimed at a continuous implementation of strategic agility, to constantly redesign strategic pathways.

The proposed framework

The proposed framework (Figure 2.1) is divided into four main pillars that are combined in a logic of reciprocal influence:

  • Work by scenarios.
  • Identify a vision.
  • Activate a process of continuous learning.

Have flexible planning tools.

Figure 2.1. The proposed framework

Work by Scenarios

The first step consists in working by scenarios (scenario analysis). This involves elaborating alternative scenarios, in other words, imagining ‘different futures’ before they occur and using environmental cues (the so-called weak signals) to implement appropriate countermeasures.

In operational terms, the first stage of scenario planning is based on an analysis of the environment in question, following the approach we have referred to as outside-in. In essence, this involves understanding the context (e.g. the drivers of change, macro trends, key uncertainties and interactions) in order to identify the (two or more) significant dimensions required to create a matrix of the scenarios—the initial brief specification of ‘possible future worlds’.

Scenarios are coherent descriptions of how future events could manifest themselves (Godet, 1997). Scenarios are not predictions, but rather learning exercises based on the formulation of hypotheses and simulation of future events: therefore, they are also not strategies, because they still belong to the analysis, evaluation and conceptualisation stage of the strategic process. Their function, therefore, is to enrich the decision-maker’s knowledge base regarding the possible evolution of the environmental context.

The first scenario-building exercises, at least in the modern sense, were conducted right after the Second World War, and were developed from the 1960s onwards mainly in the United States and France (Bradfield et al., 2005). One of the first and best known business cases is Royal Dutch Shell, which started adopting scenario planning techniques for strategic purposes in the late 1960s. Shell publicised the results it obtained by using scenario techniques, and for this reason became the benchmark for applications in corporate strategy settings, even though other large corporations, such as General Electric, had started using scenario techniques for strategic purposes in approximately the same period.

In general, in terms of content, scenarios are classified according to two dimensions: the temporal and the teleological (Martelli, 2005). Based on the temporal variable, the following can be distinguished:

  • exploratory or trending scenarios, which seek to derive coherent configurations of the future based on current conditions; and
  • Anticipatory scenarios, which identify events that could have certain consequences in the future.

The logic of developing trending scenarios consists in starting from the present to reach the future, while that of the anticipatory scenarios follows a reverse path (from the future backwards to the present conditions). In contrast, from the perspective of the teleological dimension, scenarios can be classified as descriptive (not containing any normative evaluation) or normative, that is, with value judgements. Joining the two dimensions results in the creation of four baseline situations (Martelli, 2005), in which cause and effect are combined with resources and objectives (Figure 2.2).

Figure 2.2. Scenarios classification

For example, in descriptive exploratory scenarios, scenario builders start from certain phenomena (causes) in order to derive some future effects (in a descriptive way). In contrast, in the case of exploratory scenarios of the normative type, they start from certain resources (current constraints) in order to understand which objectives would be achievable in the future.

In terms of methods that can be used for scenario building, various approaches can be identified (Bradfield et al., 2005; Martelli, 2005):

  • The logical, intuitive approach. Scenario builders do not have a formalised methodology, but based on their own experience and analytical sensitivity, use a combination of mostly non-qualitative methodologies, such as PESTEL analysis, SWOT and stakeholder analysis.
  • Trend impact analysis. Factors external to the system being examined are identified, following which relationships of cause and effect between the external factors and some critical variables in the system are established (usually using statistical regression). Finally, future trends of the external factors are projected to evaluate the effects on the key variables.
  • Cross-impact analysis. The main factors determining the nature or behaviour of a system are identified. The different, alternative evolutionary paths of the factors are identified. These different evolutionary alternatives intersect (for example, with the matrix), thus identifying the scenarios and formulating, although not necessarily, the probability of their occurrence.
  • Morphological analysis. The system being investigated is subdivided into subsystems and thus into components. For each component, the different possible configurations that create different scenarios when appropriately grouped are identified.

In the field of strategic analysis, the intuitive approach is the most widely used (starting with Shell’s experience), and to a large extent is based on identification of two or more critical change factors, from which various possible configurations can be predicted for the future. Undoubtedly, the choice of change factors represents the most critical moment for the success of the scenario analysis: if the factors are insignificant or irrelevant, the analysis becomes essentially useless. Usually, three criteria for identifying change factors are observed:

  • potential impact
  • degree of uncertainty
  • Degree of the factor’s independence from other factors.

Generally speaking, the logic of the ‘scenario cube’ (Johnson et al., 2017) needs to be adopted, which means that the factors selected should:

  • have a strong potential impact in terms of environmental change, or in any case of the company’s position
  • be characterised by a high level of uncertainty
  • Change independently from other factors.

To understand the probability of different scenarios occurring, the ‘vector’ concept can be used, understood as a force (of the social type, naturally) that increases or decreases the probability that a certain scenario will occur. Vectors can, for example, be the political influence of workers’ unions, the evolutionary state of a certain technology, the price trends of raw materials, the growth rate of imports, and so on.

Vectors can also be associated with quantitative parameters that help to evaluate over time whether the vector acts on the probability of occurrence of one scenario rather than another, and with how much intensity. For example, for the raw material price vector, one can hypothesise a threshold value beyond which the thrust of the vector in a certain direction (assume a type A scenario) becomes very strong, making the occurrence of the type A scenario more likely. For other vectors, such as the influence of workers’ unions, specific parameters can be identified, such as the unemployment rate, again in this case determining threshold values.

Whichever approach is used, identification of different scenarios implies having more potential strategies; moving in this ‘range of possible futures’ requires being equipped with tools that are useful for detecting the direction in which to move. In conditions of uncertainty, it is difficult to imagine a strategy that is valid under all conditions; instead, it is appropriate to think in terms of multiple strategies, that is, strategies that change in relation to different possible scenarios. In other words, it is a matter of being able to gather the weak signals so as to understand which direction the environment in question is moving toward in order to calibrate the consequent strategic choices. To do this, it is necessary to identify:

  • The drivers, which are those significant vectors that guide the movement within the matrix of the scenarios in one direction rather than another
  • The trigger points, which are threshold values that when reached, it is reasonable to hypothesise the activation of drivers and thus of movements.

The monitoring of trigger points and their effects on drivers of change enables determination of the scenario that will be the most likely to occur. Only once the most likely scenario is understood will it be possible to activate the corresponding strategy, by specifying the guidelines and the actions necessary for its implementation.

Identify a Vision

Once the different potential scenarios have been identified, it is possible and necessary for the company to draw conclusions that can be applied across all the different scenarios; it is essentially a question of identifying a vision, understood as the great objective (the “big strategic picture”) towards which the entire organisation should aim. In other words, it is a question of a direction of movement sufficiently ‘high’ to be compatible with the different scenarios identified and at the same time sufficiently clear to make it possible to plot a course by orienting the strategic decisions that will feed the so-called base plan, understood as a plan that disregards, momentarily, the scenario configuration that will prevail and that constitutes the baseline framework of the entire strategic approach.

The vision resembles a polar star that guides the company’s journey: the star guides the traveller but is not the destination of the journey. In this sense, therefore, the vision:

  • Cannot be formulated with a precise temporal deadline, but only as an indication
  • Identifies a value model to aim towards in a sufficiently clear way to indicate the direction of the strategic path, but still in an ‘open’ way, so as to make it possible to approach it potentially in several alternative ways.

The vision takes shape through a process that has two components: one analytical and one cultural. The first is the result of an analysis that through identifying various strategic options leads to the choice of ‘direction of movement’ to follow. The second is cultural and can also be called pre-analytic: in fact, in organisations, as in individuals, there exist ideas, orientations, beliefs and expectations that are not the result of fully controlled and conscious processes but rather of lived experiences, including emotional ones, involving the entire existence of the strategic decision makers.

The significance of the cultural dimension in determining strategic choices and thus in defining the vision has long been known and is widely documented also in the strategic field of the behavioural strand (Cyert & March, 1963), from which numerous theories and models have arisen, including those based on the incremental strategy (Quinn, 1980), the emergent strategy (Mintzberg & Waters, 1985) or strategic learning (Collins & Porras, 1996; Hamel & Prahalad, 1993; Normann, 1977) and the underlying strategic orientation (Coda, 1988). More specifically, the cultural dimension of the vision can be linked with three aspects:

  • The underlying cultural orientation (Coda, 1988), which is that set of values rooted in the key actors (the core ideology) in relation to the role and purpose attributed to the company (e.g. the importance attributed to profit, growth orientation and the nature of the relationship with stakeholders), the company’s field of activity (e.g. diversified, focalised, concentrated on financial activity rather than production) and the managerial and organisational philosophy (e.g. leadership style, organisational culture).
  • The implicit vision of the future, which is again a set of beliefs, more or less firm or clear, about what the future will be like (not only for the individual company) and how they would like it to be. It is an implicit vision because it is pre-analytic, often not fully expressed and not necessarily shared at the organisational level (in the sense that different key actors can also have differing implicit visions).
  • The competitive philosophy, which is a broad guideline on how the competition should be managed (e.g. aggressively or conservatively, concentrating on one country or venturing into internationalisation, opening up to networks or closing in on relationships, with a propensity or an aversion for operational or financial risk).

The relationship and weight that the two components—the cultural and the analytical—have in the process of formulating the strategic vision, and through it on the entire corporate strategic framework, changes in relation to the different contexts. In other words, the significance of the cultural component varies in relation to the organisational context: its importance in particular can depend on the degree of structuring of the analytical process and how active it is in guiding the strategic decisions of the actors.

Activate a Process of Continuous Monitoring and Learning

In parallel to the choice of vision and launching of the base plan (through its components that cannot be influenced by the evolution of alternative scenarios), the strategic process will proceed through continuous monitoring of what occurs outside the firm with particular regard to the drivers and trigger points already identified (O’Leary, 2020). This continuous monitoring activity is a central element of the process and is the basis of the strategic flexibility (agility) of the firm. This is a learning activity, whose objective is to acquire the information and awareness required to make the strategic decisions that could not be made with sufficient clarity when the base plan was prepared (Day, 1994).

On the one hand, the learning operates upstream of the planning process, on the basic design of the strategic framework (allowing, for example, identification of newly available strategic options), and on the other, it enters into the heart of the planning process, integrating it through reaching the information objectives and the point of decision.

The information objectives are knowledge goals that must be achieved in order to make decisions. The information objectives can change over time, or others can be added to those already identified. They can be alternative, complementary or interdependent (and thus the achievement of one determines the achievement of the other).

The point of decision, in contrast, is a temporal moment when the company can operationalise the strategic choices. The point is reached either thanks to the monitoring activity and achievement of the relevant information objectives or by the occurrence of relevant environmental events (e.g. the promulgation of a law, the introduction of new technology).

The continuous monitoring activity allows the signals arriving from outside to be read and interpreted, thus enabling the company to identify the scenario that has become more and more likely (O’Leary, 2012; 2020).

Have Flexible Planning Tools

Finally, as the evolution of the scenarios slowly becomes clearer, applying flexible planning tools enables the company to evaluate the potential impacts of the scenarios being defined, thus allowing it to update and remodel the strategic choices that make up the base plan.

Flexible planning is a dynamic process that uses variables to make changes in plans (i.e. the base plan) as events happen or are anticipated. Through a flexible planning process all the elements of the plan (targets, choices, actions) are continuously challenged and compared with actuals for validity. In this way, the planning process is “change enabled” and it can be quickly reshaped according to changes in variables.

There are several instruments a firm can adopt to implement an efficient flexible planning process.

A first example deals with a focal issue of strategic planning: i.e. assumptions, understood as the hypothesis from which decisions, choices, actions and economic and financial projections are driven (McGrath & Macmillan 2000; Ohmae 1982; Scholes et al., 1998; Magretta 2002; Whittington, 1993). Assumptions regard a lot of phenomena: from industry dynamics to key value drivers, from investment decisions to economic, social and political trends and so forth. As specified by Whittington (1993), assumptions act deeply within the strategy process helping to form pathways for the business and for organization actions. They are starting points for strategic choices and challenging them is fundamental because it boosts planning processes making them flexible and prompt to anticipate or easily respond to relevant changes. From an operating point of view, the challenging of assumptions relies on the continuous check of their reasonableness and on the measurement of the impact of their change to specific strategic planning outputs (choices, actions, results).

Added to assumptions’ challenging, another tool widely used both on theory and practice is contingency planning (Hoque, 2004), that is a proactive strategy, designed to face some disruptive events so the company is prepared if and when they arrive. Contingency plan is something more than reaction plan which is a reaction to something that happened. By definition contingency plan is not something unmoving and static: it must be continuously revised and maintained to reflect relevant changes inside and outside the organization.

Like contingency planning and assumptions’ challenging also sensitivity analysis (Rappaport, 1967, McConkey, 1987; Tsanakas & Millossovich, 2016) is a key flexible planning tool that helps to bring change within strategic processes and plan. Sensitivity analysis is a financial model that determines haw target variables are affected by changes in input variables. It is also known as “what if” or simulation analysis. Sensitivity analysis measures the impact of uncertainties of one or more inputs to the outputs. It can be extremely useful in strategic planning processes because it improves the robustness of the model and, in particular, of the economic and financial projections over a specific time horizon measuring the results response to some change in input variables.

Within the suggested framework these instruments, together with the scenario analysis and the continuous learning process enable firms to measure the impact of the scenarios being defined allowing the constant reshape of every strategic choice. In other words, flexible planning tools put the unpredictability and uncertainty variables into the planning process making it agile and dynamic.

Conclusion

Too often business strategy and the concomitant annual plans are set in stone, but in an era of great discontinuity this kind of planning is inherently outdated (Reeves, 2016, Scoblic, 2020, Rindova and D’Amore, 2020).

The framework suggested in this study overcomes this weakness by introducing unpredictability and uncertainty as core and unavoidable variables of every strategic planning process. It represents a concrete translation into practice of strategic agility, understood as the attitude based, not on adapting the strategy in response to a specific threat, but on its constant remodelling. Said in other words, the suggested framework can be interpreted as the way strategic agility finds its implementation within strategic planning process.

Moreover, the model responds to two core dimensions of strategic planning: the first one aimed at maximising the performance achievable in the current competitive situation and the second one aimed at addressing discontinuity and guiding change. These two sides of strategic process are the core concept of an issue that in recent years has gathered momentum within the strategic management debate: i.e. ambidexterity, understood as the ability of an organisation to simultaneously and effectively address problems that require conflicting skills and orientations (Birkinshaw et al., 2016; O’Reilly & Tushman, 2008, 2011; Raisch & Birkinshaw, 2008; Tarody, 2016).

For the sake of synthesis, we can say that the suggested framework allows firms to both achieve current objectives and reshape strategic planning consistently to changing circumstances. In times of uncertainty, this is “Strategy”.

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