Responses to Uncertainty

Organizations deal with major uncertainties — improbable but high-impact events, trends and situations — in a number of ways, few of which are effective:

Deny    Ignore the uncertainties to the extent possible and deal with whatever comes along when it arrives.

React    Keep as much as you can short-term. Stay lean. Stay flexible. Do just-in-time planning.

Follow the Herd    Find out what industry leaders or our peers are doing and do the same.

Stay the Course    Follow plans already in place, making quarterly (or even monthly) adjustments as needed.

Opportunistic    View change as the bearer of valuable opportunities to grow. Invest.

Be Prepared    Identify the most likely changes, along with a few important outliers (see Black Swans), determine the impact on your business, and sketch out some basic plans for handling each one.

Where does your organization fit in this response spectrum?

Proactive Strategy

Most organizations fit into one of the first four responses. These have an implicit fatalism that argues for dealing only with what happens, not what might happen. They are mainly reactive except in limited measures.

The "opportunistic" and "be prepared" responses are proactive. They involve analysis of major uncertainties to see which ones might have a serious enough impact to justify at least some preparation or might present a good growth or strategic opportunity.

To generate a proactive strategy for dealing with major uncertainties, the process of analysis, impact assessment and response planning must be very different from the annual planning and budgeting exercises. It is generally handled at a very high level and out of the mainstream business activities. A small task force or committee usually handles the process, reporting periodically to the full management team.

For more detail, you may want to look at a typical process — The Planning Process.

 

Human Nature

Very few of us enjoy trying to deal with major but unlikely events. We tend to focus on the "unlikely" aspect and forget about the "major" part.

Hubris sometimes also plays a role — think Enron, Arthur Andersen, and Lehman Brothers — but not in most organizations.

Daily pressures demanding short-term responses crowd out efforts to deal with anything very far out and unlikely. There are usually good intentions to plan for these but action is rare.

Most organizations settle for annual business or strategic planning which typically has a 3-5 year horizon. The weakness in this is that a stable environment is nearly always assumed.

This works well for the normal year-ahead planning but not for major uncertainties. A different and separate planning process is needed.