Making the most of uncertainty

Introduction:
The challenge of uncertainty has always perplexed businesses. With changes across the entire
spectrum of life taking place at unprecedented pace, facing uncertainly and its consequences has never
been more critical to the success of businesses. Business leaders are faced with the cumbersome
challenge of how best to lead their organizations during times of uncertainty. The traditional approach
to strategy requires precise predictions and thus often leads executives to underestimate uncertainty.
Making systematically sound strategic decisions under uncertainty requires rigorous and systematic
thinking as well as an approach that avoids biased and re-active view.
1. Critically evaluate two types of strategy - Shape and Adapt.
The business context is an ever changing one. With fast paced changes in globalization, digitization
and new forms of capital markets, uncertainty in the business world has risen to a new height. This, in
turn, has changed the traditional definitions of opportunities and risks. In consequence, making the
right strategic choice for uncertain future has become a highly complex affair for the business
executives. Whereas the right strategic moves can return significant payoff in record time, the wrong
move can result in the complete collapse of global giants. There is always the option to wait for the
uncertainty to diminish and then take action. But it comes at the cost of foregoing the advantages of
being the first-mover. Determining the dominant solution to tap the most out of future potential thus
remains elusive.
Addressing uncertainty and making the most of it starts with understanding the available alternatives.
This is where choosing between shaping and adapting strategies becomes critical. Shapers
generally attempt to get ahead of uncertainty by driving industry to change in their way. Adapters, by
contrast, take the existing and future industry structure and conduct as given. When a market is stable,
adapters try to define defensible positions within the industrys existing structure. When high
uncertainty prevails, they attempt to win through speed and agility in recognizing and capturing new
opportunities as the market changes.
The level and nature of the uncertainty faced by an organization determines whether it should opt for
a shaping or adapting strategy. When it faces very high levels of uncertainty about variables it can
influence, shaping makes most sense. On the contrary, adapting is preferable when key sources of
value creation are relatively stable or outside the companys control.
In highly uncertain markets, technology standards change frequently, competitors constantly enter and
exit, and consumers display lack of brand loyalty. These characteristics of a highly uncertain market
offer the greatest opportunity to implement successful shaping strategies. These strategies include, but
are not limited to, mergers / acquisitions, ambitious investment in technology, aggressive product-
bundling strategy. These actions re-shape the industry to a companys advantage.
In reality, executives tend to have a higher bias towards adapting strategies when faced with high
level of uncertainty. One probable reason for this tendency is their reliance of strategic planning tools
and processes that are not designed to handle highly uncertain business environment. These tools (e.g.
Michael Porters five forces framework, discounted cash-flow models, core competency diagnostics)
have the potential to provide deep insight into untapped opportunities in relatively stable markets. But
they are not intended to generate similar deep foresight into opportunities in rapidly changing
circumstances.
In order to be successful shapers, organizations need to incorporate tools such as scenario planning
and game theory to have the foresight required to take full advantage of the opportunities offered by
high uncertainty. The organizations risk taking propensity plays an influential role in this case. A
risk-averse organization will not take a shaping strategy even with the most convincing case and
thereby miss out on huge potential gains.
There is lack of agreement among business executives on a dominant answer to the shape-or-adapt
problem. In reality, individual companies have made differing strategic choices that were not
consistent across all issues, business lines, and times. Analysis of historical data also supports that
there is no a one-size-fits-all answer. Under a research project, McKinsey analyzed the 50 "stars" with
the greatest sales, profit, and market capitalization growth from 1985 to 1995. The stars included not
only some computer and retail giants (such as Best Buy, Microsoft, Oracle, Sun Microsystems, The
Home Depot, and Wal-Mart) but also lesser-known industrial companies (M. S. Carriers), business-
services firms (Omnicon), health care companies (Biomet), and financial-services firms (Advanta).
The research suggests that 86 percent of the biggest business winners from the sample period
followed predominantly market-shaping strategies. Yet, the research clearly shows that adapters too
can win big.
2. How can these strategy be applied to manage various uncertainties in a decision making
process?
Uncertainty is the fact of life and business. Probability is the guide for a good life and successful
business. The concept of probability occupies an important place in the decision making process,
whether the problem is one faced in business, in government, in the social sciences, or just in one's
own everyday personal life. In very few decision making situations is perfect informationall the
needed factsavailable. Most decisions are made in the face of uncertainty. Probability enters into
the process by playing the role of a substitute for certaintya substitute for complete knowledge.
Accessible strategically appropriate information tends to fall into two categories. First, it is often
possible to identify clear trends, such as market demographics, that can help define potential demand
for a company's future products or services. Second, with the right analysis, many factors that are
currently unknown to a company's management are in fact revealed - for instance, performance
attributes for current technologies, the elasticity of demand for certain stable categories of products,
and competitors' plans to expand capacity.
The uncertainty that remains after the best possible analysis has been undertaken is known as residual
uncertainty. The outcome of an ongoing regulatory debate or the performance attributes of a
technology still in development are examples of residual uncertainty. In practice, residual uncertainty
facing most strategic-decision makers falls into one of four broad levels.
Level 1 - A clear enough future
Level 2 - Alternative futures
Level 3 - A range of futures
Level 4 - True ambiguity
The following tables illustrate what can be known in each of these levels of uncertainty and what tools
can be used to analyse the outcomes, along with relevant examples.
A clear enough future Alternative futures
What can be known?
A single forecast precise enough
for determining strategy
A few discrete outcomes that
define the future
Analytic tools Traditional strategy toolkit
Decision analysis
Option valuation models
Game theory
Examples
Strategy against low-cost airline
entrant
Long distance telephone carriers
strategy to enter deregulated
local-service market
Capacity strategies for chemical
plants

A range of futures True ambiguity
What can be known?
A range of possible outcomes,
but no natural scenarios
No basis to forecast the future
Analytic tools
Latent demand research
Technology forecasting
Scenario planning
Analogies and pattern
recognition
Non-linear dynamic models
Examples
Entering emerging markets, such
as India
Developing or acquiring
emerging technologies in
consumer electronics
Entering the market for consumer
multi-media applications
Entering the Russian market in
1992

Strategy in level one: A clear enough future
In predictable business environments, most companies become adapters. Analysis is designed to
predict an industry's future landscape, and strategy involves making positioning choices about where
and how to compete. When the underlying analysis is sound, such strategies by definition consist of a
series of no-regrets moves.
Adapter strategies in level-one situations are not necessarily incremental or boring. For example,
Southwest Airlines' no-frills, point-to-point service was a highly innovative, value-creating adapter
strategy, as was Gateway 2000's low-cost assembly and direct-mail distribution strategy when it
entered the personal-computer market in the late 1980s. In both cases, managers identified
opportunities, in low-uncertainty environments, that could be developed within the existing market
structure. The best level-one adapters create value through innovations in their products or services or
through improvements in their business systems, without fundamentally changing the industry.
It is also possible to be a shaper in level-one situations, but that is risky and rare, since level-one
shapers, hoping fundamentally to alter long-standing industry structures and conduct, increase the
amount of residual uncertaintyfor themselves and their competitorsin otherwise predictable
markets. Consider the overnight delivery strategy of Federal Express. When the company entered the
mail-and-package delivery industry, a stable level-one business, FedEx's strategy in effect created
level three uncertainty for itself. In other words, even though the chief executive officer, Frederick W.
Smith, commissioned detailed consulting reports that confirmed the feasibility of his business
concept, only a broad range of potential demand for overnight services could be identified at the time.
For the industry incumbents, such as United Parcel Service, FedEx created level-two uncertainty.
FedEx's move raised two questions for UPS: Will the overnight delivery strategy succeed? And will
UPS have to offer a similar service to remain a viable competitor in the market? Over time, the
industry returned to level-one stability but with a fundamentally new structure. FedEx's bet paid off,
forcing the rest of the industry to adapt to the new demand for overnight services.
Strategy in level two: Alternative futures
In level two, a shaping strategy is designed to increase the probability that a favoured industry
scenario will unfold. A shaper in a capital-intensive industry, such as pulp and paper, for example,
wants to prevent competitors from creating excess capacity that would destroy the industry's
profitability. Consequently, shapers in such cases might commit their companies to pre-empt
competition by building new capacity far in advance of an upturn in demand, or they might
consolidate the industry through mergers and acquisitions. But even the best shapers must be prepared
to adapt, such as Microsoft Network (MSN).
Microsoft Network (MSN) began as a shaping strategy, but in the battle between proprietary and open
networks, certain trigger variablesgrowth in the number of Internet and MSN subscribers, for
example, and the activity profiles of early MSN subscribersprovided valuable insight into how the
market was evolving. When it became clear that open networks would prevail, Microsoft refocused
the MSN concept on the Internet. Microsoft's shift shows that choices of strategic posture are not
carved in stone and underscores the value of maintaining strategic flexibility under uncertainty.
The best companies supplement their shaping bets with options that allow them to change course
quickly, if necessary. Because trigger variables are often fairly simple to monitor in level two, it can
be easy to adapt or reserve the right to play.
Strategy in level three: A range of futures
Shaping takes a different form in level three. If shapers at level two are trying to promote a discrete
outcome, at level three they are simply trying to move the market in a general direction because they
can identify only a range of possible outcomes. The battle over standards for electronic-cash
transactions is a good example in this case.
Mondex International, a consortium of financial-services providers and technology companies,
attempted to shape the future by establishing what it expected to become universal e-cash standards.
Its shaping posture was backed by big-bet investments in product development, infrastructure, and
pilot experiments to speed customer acceptance. In contrast, regional banks, which did not have the
deep pockets and skills necessary to set standards for the e-payment market but wanted to be able to
offer their customers the latest electronic services, mainly chose adapter strategies. An adapter posture
at uncertainty levels three or four is often achieved primarily through investments in organizational
capabilities designed to keep options open
Strategy in level four: True ambiguity
Level four situations involve the greatest uncertainty. But paradoxically, they may offer higher returns
and lower risks for companies seeking to shape the market than situations in levels two or three. Level
four situations are transitional by nature, often emerging after major technological, macroeconomic,
or legislative shocks. Since no player necessarily knows the best strategy in these environments, the
shaper's role is to provide a vision of an industry structure and standards that will coordinate the
strategies of other players and drive the market toward a more stable and favourable outcome.
Mahathir Mohammad, Malaysia's prime-minister, was trying to shape the future of the multimedia
industry in Asia's Pacific Rim during late 90s. This was truly a level four strategy: potential products
were undefined, as were such factors as the players, the level of customer demand, and the technology
standards. The Malaysian government was trying to create order out of this chaos by investing at least
$15 billion to create a Multimedia Super Corridor, a 750-square-kilometer zone, south of Kuala
Lumpur, that would include state-of-the-art "smart" buildings for software companies, regional
headquarters for multinational corporations, a "multimedia university," a paperless government centre
called Putrajaya, and a new city called Cyberjaya. By leveraging incentives such as a ten-year
exemption from the tax on profits, the corridor received commitments from more than 40 Malaysian
and foreign companies, including such powerhouses as Intel, Microsoft, Nippon Telegraph and
Telephone, Oracle, and Sun Microsystems. Mahathir's shaping strategy was predicated on the notion
that the corridor would create a web of relationships between content and hardware providers and that
this web would generate clear industry standards and a set of complementary multimedia products and
services.
3. Why is it very important to understand the uncertainties under current business context to
identify the best-fit strategy?
The business environment is becoming increasingly complex and business leaders are continuously
challenged with escalating uncertainty. In recent years, numerous unforeseen and unpredicted events
have taken place, causing many businesses to fail. Business leaders have a better chance of avoiding
failures in future by prioritizing residual uncertainty (both short-term and long-term) on their agenda.
Leaders with the right mind-set will be able to track and evaluate multiple variables and global events
in preparing for facing an uncertain future and tackling the challenges head-on. It is these leaders who
will have a better chance of success the ever-changing business environment.
A good strategy in highly uncertain business environments begins with the plan for change. Planning
for change, as a process, is more disciplined, analytical and technical than many leaders realize. The
following four stages make up a successful plan for change:
1. Assessing the business context,
2. Organizing the dimension of change,
3. Designing the best fit approach to change and
4. Delivering change.
Some executives seek to shape the future with high-stake bets. Eastman Kodak Company, for
example, spent $500 million per year during the late 90s to develop an array of digital photography
products it hoped would fundamentally change the way people create, store, and view pictures.
Meanwhile, Hewlett-Packard Company, during the same time, invested $50 million per year to pursue
a rival vision centred on home-based photo printers. Such industry-shaping strategies have the
potential to create enormous wealth, but most companies, in reality, lack the industry position, assets,
or appetite for risk necessary to make such strategies work.
More risk-averse executives hedge their bets by making a number of smaller investments. In pursuit
of growth opportunities in emerging markets, for example, many consumer-product companies have
been forging limited operational or distribution alliances. But its often difficult to determine if such
limited investments will work-out or not. Alternatively, some executives favour investments in
flexibility that allows their companies to adapt quickly as markets evolve. But the costs of
establishing such flexibility can be high. Moreover, taking a wait-and-see strategypostponing large
investments until the future becomes clearcan create a window of opportunity for competitors.
Executives facing great uncertainty need to decide whether to bet big, hedge, or take a wait and see
stance. But making this decision based on a traditional strategic planning process is most likely to be
ineffective. The standard practice is to lay out a vision of future events precise enough to be captured
in a discounted-cash-flow analysis. Of course, managers can discuss alternative scenarios and test
how sensitive their forecasts are to changes in key variables, but the goal of such analysis is often to
find the most likely outcome and create a strategy based on it. That approach serves companies well
in relatively stable business environments. But when there is greater uncertainty about the future, it is
at best marginally helpful and at worst completely precarious.
One danger is that this traditional approach leads executives to view uncertainty in a binary wayto
assume that the world is either certain, and therefore open to precise predictions about the future, or
uncertain, and therefore completely unpredictable. Planning or capital-budgeting processes that
require point forecasts force managers to bury underlying uncertainties in their cash flows. Such
systems clearly push managers to underestimate uncertainty in order to make a compelling case for
their strategy.
Underestimating uncertainty can lead to strategies that neither defend against the threats nor take
advantage of the opportunities that higher levels of uncertainty may provide. In one of the most
colossal underestimations in business history, Kenneth H. Olsen, the-then president of Digital
Equipment Corporation, announced in 1977, There is no reason for any individual to have a
computer in their home. The explosion in the personal computer market was not inevitable in 1977,
but it was certainly within the range of possibilities that industry experts were discussing at the time.
At the other extreme, assuming that the world is entirely unpredictable can lead managers to abandon
the analytical rigor of their traditional planning processes altogether and base their strategic decisions
primarily on gut instinct. This just do it approach to strategy can cause executives to place
misinformed bets on emerging products or markets that result in record write-offs.
Risk-averse managers who think they are in very uncertain environments do not trust their gut
instincts and suffer from decision paralysis. They avoid making critical strategic decisions about the
products, markets and technologies they should develop. Instead, they focus on re-engineering,
quality-management or internal cost reduction programs. Though these are valuable programs, they
are not the substitutes for a sound strategy.
Making systematically sound strategic decisions under uncertainty requires a different approach one
that avoids the risky binary view. It is rare that managers know absolutely nothing of strategic
importance, even in the most uncertain environments. In fact, they can usually identify a range of
potential outcomes or even a discrete set of scenarios. This simple insight is very powerful because
determining which strategy is best, and what process should be used to develop it, depend vitally on
the level of uncertainty a company faces.
Conclusion:
The relationship between uncertainty and business opportunity has been vague in empirical and
theoretical treatments. As executives make shape-or-adapt choices, uncertainty, perceived first-mover
advantages, and the organizations capabilities and aspirations play important roles. No algorithm
exists to weigh each factor, nor can a one-size-fits-all answer suit all organizations in all situations.
One thing, however, is certain: executives who develop a thorough understanding of the level and
nature of the residual uncertainty their company faces can develop a richer set of feasible alternatives
and make better-informed choices to shape or adapt. While it is not possible to accurately predict
future developments and resulting outcomes, planning and developing a point of view at every level
of the organization - is essential. This approach helps executives to remain open and receptive to new
ideas, to interact with a wider range of people, and thus assist in taking action even in the most
unstable times. Likewise, this approach gives a clear direction on how to prioritize the allocation of
key resources within the organization in preparation for the uncertain future.

Works Cited
Courtney, Hugh. "McKinsey and Company." June 2000. 13 June 2014
<http://www.mckinsey.com/insights/managing_in_uncertainty/strategy_under_uncertainty>.
Courtney, Hugh, Patric Viguerie and Jane Kirkland. "Strategy Under Uncertainty." Harbard Business
Review (1997): 5-9.