Increase strategic payoff and reduce risk by increasing your strategic agility

Posted by on May 3, 2011

In last week’s article on strategic planning for crises, we raised two questions:

1. How can you improve the quality of your strategic decisions about uncertain future events and conditions?

2. How can you minimize the inherent risks without giving up good opportunities?

This week, we’ll provide our answers.

Most articles about planning under uncertainty move quickly to the probability of risks and their anticipated impact.

Having run many Monte Carlo simulations, we know how subjective the inputs to these calculations can be. We prefer a different approach. We think planning under uncertainty depends on two important characteristics – the speed with which opportunities and threats emerge, and your organization’s agility in recognizing and responding to them.

In an ideal world, leaders would be able to recognize an emerging opportunity or threat, plan their response, and act in time to capitalize on opportunities and avoid threats.

Sudden, unpredictable threats
But the world is seldom so benign. Many opportunities and threats emerge with little warning and materialize too quickly for prudent leaders to rely on reactive response. Even when events emerge more slowly, some organizations can’t respond quickly enough to avoid losses. Just as a great hockey goaltender relies on good positioning, even the best organizations can’t simply rely on their reflexes to make saves.

The importance of planning in advance for some events can be seen by considering catastrophes like earthquakes, tsunamis and fires. Each could take many lives and cause millions or even billions of dollars in damage. The right advance preparation strategies could be very wise insurance against disaster. But there is a limit to how much one should invest, depending on the loss you can afford to take and the cost of the insurance.

We can guard against earthquakes, for example, by constructing buildings and infrastructure to resist their forces – that is, not by avoiding quakes, but by hardening against the threat. And we reduce quake damage when they eventually (and inevitably) occur by ensuring trained emergency responders are available, positioned and equipped to mitigate damage through rehearsing and executing programmed response strategies that allow organizations to react quickly and effectively to mitigate losses.

Similar thinking applies to other sudden, unpredictable threats. The time and money spent planning for these threats should depend on the catastrophic effect they would have on your business.

Less sudden, partly predictable threats
There’s a second class of threats that materialize slowly enough that we can see them unfold, but still too quickly for many organizations to respond in time to avoid damage. To guard against such threats, organizations often engage in scenario planning and create contingency plans, which are intended to be quickly executed once an anticipated scenario arises, without the need to stop and plan. Contingency plans are useful when fast response is critical, but the organization lacks the agility to respond quickly enough to maximize benefits.

Scenario planning is time consuming, and to be effective it must use carefully thought-through scenarios. It is most appropriate where the threat is foreseeable, such as loss of key staff, IT system failure, loss of key suppliers, etc.

When applied to more general threats, however, contingency planning can deteriorate to blind planning – guessing at what will happen before enough information is available to identify the outcome of a threat and plan for it. This is only justifiable where the investment of time and effort is considered a worthwhile “insurance” investment to guard against risks that materialize too quickly to allow an ad hoc response.

More organizations choose to plan with one eye on opportunities and the other on threats. They choose a course of action that allows them to pursue gains while avoiding the potential for big losses. This precludes “all or nothing” strategic choices, electing instead to choose a middle path, then navigating carefully to provide early warning of a change that allows plans to be adjusted.

Plans some of our clients pursued in the face of the US sub-prime mortgage debacle in the Fall of 2008 are good examples of this. Many business people knew there was a problem, but its impact and timing were both uncertain. It would be impossible to say in advance whether a contingency plan was too optimistic, just right, or too conservative. However, it was possible to make a strategy to pursue opportunities while hedging to reduce risk. Some of our clients did just that – lowering expectations and avoiding high leverage opportunities, and then responding quickly with their own differentiated response strategy when the dimensions and direction of the resulting crisis became apparent.

Slowly evolving predictable threats
There is a third class of threats that both telegraph their arrival and materialize so slowly that most organizations have time to respond. One example is the aging of the workforce and subsequent shortages of skilled and qualified employees.

Some of our clients have been ruminating about this since the early 1990s. Initially, some planned to respond by becoming an “employer of choice”. As former colleague Mark Adams (now consulting in talent management and OD centric risk management) observed, competing for scarce resources by adopting the same strategy as your competitors may not be wise. This is clearly a threat for which a differentiated response strategy is required.

The figure below summarizes this contingency framework.

Increasing organizational agility
All types of external events for which strategic responses are called for can be navigated with better outcomes and reduced risk by increasing organizational agility – the ability of the organization to recognize, plan for, and respond effectively to, developments in the external environment. Organizations that can develop and execute their strategies more quickly will benefit. Those in competitive markets are likely to benefit even more.

Simply put, faster execution brings faster growth faster and more profit. What you gain from speed far outweighs the effort and cost to accelerate implementation. To maximize both, you must choose the right strategies, and you must execute them quickly.

Many people think fast execution comes from urging people to work faster. If it were that simple, every company would execute quickly. But most don’t. Getting fast payoff and sustaining it longer requires much more than a desire for speed. 

But that’s a topic for another day.

The danger of unknown unknowns
One last lesson that we’d all do well to keep in mind relates to the unpredictability of crises. Some of the most serious risks come not from the worst dangers you know about, but from those of which you are blissfully unaware – the “unknown unknowns”. They can’t be predicted because they’re not even on your radar screen. You can’t adjust for them in your strategy except by ensuring your plan accelerates strategic payoff, thus decreasing your vulnerability and increasing your reserves for such unexpected contingencies. The less time you spend in the danger zone, the better off you’ll be.

This is yet another strong reason to make accelerating strategic payoff a key feature of your strategic plan.

Copyright 2011 Knowlan Consulting Group Inc.