The important thing is not how much we don’t know,
as how wrong we are in what we think we do know.

Mark Twain

Courage to confront uncertainty

Arto Kaunonen, Founder ja Senior Partner|Monday, 21 May 2018

What do we mean by the uncertainty underpinning the future operating environment? How can we deal with this uncertainty? How do the tools we choose to manage the uncertainty affect our thinking and strategy? The rapidly changing operating landscape calls for new paradigms and new tools in the manager’s toolbox to be able to address uncertainty both analytically and creatively. Uncertainty is not the enemy.

Illusion of certainty

Uncertainty about the development of the operating environment is fundamentally related to strategy work. Various tools – such as forecasts, cash flow analyses, sensitivity analyses, or simulations – are applied to manage or tackle uncertainty. The very aim of traditional strategic planning is to bring clarity and control to an uncertain environment: effective analysis tools help predict the future with sufficient precision to formulate the ‘best’ strategy. But in increasingly complex environments, certainty is an (increasingly dangerous) illusion.

“As we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.”
Former US Secretary of Defense Donald Rumsfeld

The process school of strategy – in contrast to the classical planning school – emphasises the role of strategic thinking: it is more important than formal strategic planning. Uncertainty is a fact of life, and in turbulent environments, strategies cannot be systematically planned. Rather, strategy emerges as a result of a creative, intuitive learning process that is partly uncontrollable. While intuition and learning seem theoretically appealing, they are difficult to apply in a practical strategy process without tangible tools – which have been scarcely provided by the process school.

In an uncertain environment, strategic planning can lead to fatal mistakes, if decisions are made under an illusion of certainty. At the other end of the spectrum, decisions are based solely on intuition; uncertainty appears so overwhelming that it’s useless to try and tackle it. Or decision-making is paralyzed when – in fear of any false moves – a wait-and-see strategy seems like the most sensible option. A ‘belt-and-braces’ manager seeks to avoid all potential risks in the operating environment – and at the same time, potential opportunities.

How you think about the future – tools matter

A strategist’s toolkit contains a range of models, frameworks, concepts, methods and – in the future – more and more algorithms. Many of the tools are employed to dispel uncertainty. Data classification and quantification create order in a turbulent environment. But an effort to dovetail complex cause-and-effect relationships with the chosen instrument may result in oversimplification. Even an entirely wrong tool can sometimes be selected.

”How you think about the future creates the framework for what you think about the future. This, in turn, directs the actions you will take for the future.”
Markku Koli, Chief of Defence Command Finland (ret.); Executive Advisor, Office of H.H. Deputy Supreme Commander of the Armed Forces, UAE

A typical approach to confront uncertainty is to treat it as a risk or threat and then exert risk control to mitigate or eliminate the risk. The future may, consequently, appear more certain, but the approach can also narrow your perspective and put you in danger of sinking deeper into an illusion of certainty. Another common way to face uncertainty is to analyse it. Like risk control, analysis can help overcome the uncomfortable feeling of uncertainty. But it does not necessarily support strategy work with practical means to deal with the uncertainty.

A sensible starting point is to recognize that the future is uncertain and use tools that allow you to meaningfully address uncertainty, bearing in mind that the tools you apply come with an underlying logic or philosophy: How is uncertainty manifested in the tools – as an annoying risk to be eliminated or as an inherently neutral but rich and fascinating subject to explore? Tools matter!

Scenario work – explorations into uncertainty

Forward studies, like scenarios, help us study potential, plausible and desired futures and explore the underlying worldviews, myths and assumptions. Uncertainty is not our adversary. And it is not intrinsically negative or problematic. Uncertainty can be addressed as a natural part of the strategy process – and as a source of future business potential. Traditional strategic planning offers very few tools for such an approach. Scenarios shed light on and bring logic to the process of dealing with uncertainty, while complementing the strategy team’s toolbox.

Scenario work involves art, science, and a clear set of tools. As the scenario process integrates systematic strategic planning and creative strategic thinking, scenarios provide an opportunity to prepare both analytically and practically for an uncertain future environment – and an opportunity to escape from the emotional straitjacket of uncertainty.

An essential element of scenario work is to understand which ongoing developments are likely to continue, which will alter their course, and what entirely new developments will emerge. Influencing factors in the operating environment may develop in several ways. Some factors are more stable or predictable than others. Low uncertainty means that we can reasonably well predict what a particular phenomenon or factor of change will look like in the future: there is continuity or stability in its content, direction, strength and/or timing. High uncertainty means that it is difficult to predict how a factor will look like let’s say ten years from now. It has several potential development trajectories. It may be unstable or unpredictable in its content, direction, strength and/or timing. Factors that contain a great deal of discontinuity or uncertainty and, simultaneously, have a significant impact on a firm’s or organization’s future success are the most critical ones. Such high impact/high uncertainty factors are called critical uncertainties in scenario work.

Let’s take robotization as an example. Uncertainties relate, among other things, to the development of artificial intelligence, how widely robots will be adopted, and how fast they will replace human workers. Some estimates indicate that robots will take over about half of the current jobs in Finland in 20 years. ‘Pessimists’ believe that robotization will mainly involve industrial robots, and not much else is likely to happen. ‘Optimists’, in turn, argue that robotization is like a law of nature – an inevitable development that will transform the Finnish working life and society as a whole.

When we address robotization as an uncertainty, we can let go of the value judgments involved in pessimism and optimism and break free from the non-analytical black-and-white thinking. Logical and creative scenario work allows us to treat robotization as a genuine uncertainty. We can generate a range of development options for the uncertainty, using the best experts and information available to identify and describe the options.

We can also tackle the future of robotization as a systemic issue through alternative scenarios. We analyse which factors in the environment are affected by robotization and which forces influence its future development. We can then assess the effects of the alternative scenarios and consider the necessary measures to deal with the effects.

Apocalypse – invisible turning visible

Apocalypticism is a literary genre or worldview which suggests that the future is beyond our senses, as if covered by a veil. An essential feature of apocalyptic thinking is that the future is not just an extension of the present, but that the unfolding future always holds something new. The veil also illustrates that we do not fully know what remains concealed: there is uncertainty about the future.

In Ancient Greek mythology, Calypso – etymologically ‘she who hides’ or ‘she who veils’ – is the goddess known from Homer’s Odyssey. Calypsis refers to the act of covering, concealing or hiding information. Apocalypsis, or apocalypse, originates from the Greek verb apokalupto, which means taking off the cover when, for example, a sculpture or a painting is unveiled.

In the context of future, apocalypse denotes information being revealed or hidden data becoming public. However, when used literally, apocalypse refers to ‘something previously invisible turning visible’. When the uncertain future becomes the present, something entirely new and hitherto unseen may be revealed, as we raise the curtain on the future.

Fascinating uncertainty

The Prussian general and famous military theorist Carl von Clausewitz contemplated uncertainty extensively. In the fog of war, there’s a limited amount of information available. Alternative facts and downright false information are circulating – along with an air of suspicion and excitement and a fear of the unknown and uncertain. In Clausewitz’s view, the more courage and confidence we have to confront uncertainty, the more room we can leave for alternative developments, and there is less need to try and control or manage everything. This was also understood by the German military strategist Helmuth von Moltke, who famously observed: “No battle plan ever survives first contact with the enemy.”

“Although our intellect always longs for clarity and certainty, our nature often finds uncertainty fascinating.”
Carl von Clausewitz

During a period of radical uncertainty, we need the courage to build flexible business strategies that enable us to take aim at a moving target in a turbulent environment. Scenarios help us systematically and carefully prepare for the bold decisions we need to make. Scenarios are a powerful tool for exploring the paths from the present to the unfolding future. They allow us to envision alternative futures based on the organization’s competencies, knowledge and creativity as well as on external expertise. So, our courage to confront uncertainty does not depend on a few decision-makers’ personal experience, intuition or thinking, but is supported by a shared, structured view of an uncertain future.

 

arto

Arto Kaunonen
Founder, Senior Partner

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Master’s Thesis: Generation of strategic growth alternatives – Empirical evidence from large companies listed on NASDAQ OMX Helsinki

Tuomas Paananen, Aalto University School of Business|Thursday, 22 December 2016

“The investor of today does not profit from yesterday’s growth.” – Warren Buffett

In order to serve the underlying purpose of any business, to make a profit for its shareholders, companies regardless of size, industry or geographical location need to consider and seek growth. However, creating growth is not a simple task but requires thorough thinking and decision making from top executives steering their businesses.

Objective of the study

The objective of this study is to find out the factors or approaches that companies take into consideration when generating strategic growth alternatives. Also the sources of these inputs are examined. In addition, the study aims to address the ways in which the growth alternatives are communicated to the decision makers.

Methodology

The theoretical foundation of this thesis lies on rational strategic decision making and strategic growth alternatives. The empirical data for the study was gathered from 13 semi-structured thematic interviews with top level executives responsible for strategy in their organizations. At the time of the research, all the companies were listed on NASDAQ OMX Helsinki and had a market capitalization in excess of 250 million euros. The interviewed strategy executives represented the following companies: TeliaSonera, Neste Oil, Elisa, Cargotec, Valmet, Tieto, Sanoma, Aktia, Oriola-KD, Basware, F-Secure, Finnair and Lemminkäinen. The interviews were interpreted through thematic analysis using a systematic coding process. Data collection and data analysis were conducted as an iterative process building on the theoretical framework constructed based on earlier research on the topic.

Findings

Generation of strategic growth alternatives is a multi-dimensional process including various inputs. Based on the findings, the outside-in approach, in which external operating environment is essential, is emphasized when creating strategic growth alternatives. Especially customers are seen as an invaluable source for growth opportunities. High priority factors from the external environment are also market growth and the competitive field. In addition, the relevance of widely discussed static positioning strategies seems to be eroding. Core competencies, capabilities and even organizational culture are replacing the older underpinnings when it comes to new business development. Growth generation needs to be continuous – not tied to the calendar year.

 

Keywords: strategic management, strategic decision making, new business development, strategic
growth alternatives, growth, NASDAQ OMX Helsinki

Download the full article.

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