Uncertainty is dominating the world agenda now. Political, economic and social uncertainties threaten to derail progress even as technologies, in particular, digital, are transforming the way consumers behave and businesses operate the world over.
Why do these trends matter? Since 2008, growth and progress in the global economy are neither guaranteed nor promising. Developed North American markets are experiencing little growth with high unemployment levels. Europe is struggling to lift itself from the economic doldrums. Japan is barely keeping its head up. Growth in emerging markets is cooling off.
What do these trends mean for Indian businesses? India's economic future depends largely on harnessing its demographic dividend characterised by nearly half its 1.2 billion population being 25 years or younger. They face an uncertain economic and political environment with nagging infrastructural, cultural and ethical challenges.
At first glance, reshaping strategy under uncertainty appears similar to risk management strategy. However, under risk management strategy the probability of possible outcomes are known. But under uncertainty, only the possible outcomes are known. The challenge for firms is to manage uncertainty by moving it closer to risk as more information becomes available and be better prepared for multiple scenarios when the probabilities of outcomes are unknown.
How can companies manage uncertainty and prepare for the future? The traditional strategy development approach using the five forces model of industry analysis and competitive advantage is insufficient. In the new normal, firms will have to plan for alternative scenarios and dynamically allocate resources. They can follow a five-step approach to reshape their strategies.
- Identify major sources of uncertainties: Uncertainties fall under four major categories: political/regulatory, economic, social and technological. Political uncertainty is a frustrating source of anxiety for businesses. With the general elections round the corner, many government policies are stalled. A silver lining amid these negative trends, according a recent survey by EY, is that Western firms still favour India over other BRIC nations as the most promising emerging market for future investments. But companies are nervously waiting on new projects and capital expenditures. Economic uncertainty is marked by questions over growth that has stuttered to less than 5 per cent.
Firms should first identify and determine the impact of the uncertainties under these categories. One way to do this is to form a think-tank of subject matter experts, scholars, and thinkers and use the Delphi method to identify all sources of uncertainty on an ongoing basis.
Anticipate different scenarios involving uncertainty over different time horizons: Firms need to map all possible scenarios in the short term (next 2-3 years), medium term (4-6 years), and long term (6 years and longer). For instance, Shell pioneered scenario planning in the late 1960s but the exercise was rudimentary then because the pace of change was slow and information was scarce. But in a globally-interconnected information age, anticipating scenarios calls for more sophisticated methods such as trend analysis, prediction models and similarity-based forecasting. Firms should conduct a 'creative destruction' exercise in which they should challenge the brightest minds in their organisations and ecosystem to come up with ideas that destroy current business models.
Craft broad strategies for different scenarios: Companies should craft broad alternative strategies for different plausible scenarios. For example, to safeguard against the possibility that the US government may not extend R&D tax credit - that has enabled thousands of corporations to invest in R&D, making US a global innovation leader- Dell has created plans for R&D centres in alternative countries. Similarly, firms in India should develop strategies for scenarios in which traditional business processes are replaced by mobile-enabled processes, including payment mechanisms and marketing communication methods.
Plan extensively for high-probability scenarios: Companies should first allocate their resources for the high-probability scenarios. For example, most customers need both goods and services but often buy them separately because different companies sell goods and services. Studies show that in uncertain times, most buyers, especially B2B customers, aim to reduce costs by purchasing goods and services together. Companies can reshape strategy by designing and selling hybrid bundles. Research shows that General Electric, Otis elevators and Oracle have improved their long-term profits by offering hybrid bundles. However, managing both types of products calls for rethinking of strategy and capability building.
- Hedge/create contingency plans: It is difficult to prepare for every possible windfall or catastrophe. However, companies should list possible outcomes and outline an approach to deal with each of them. For example, retailing in India is a $500 billion industry that is projected to reach $750 billion in the next few years. Yet, only 7 per cent of this industry is organised/modern retail. By 2020, one can expect this share to go up to 20 per cent. However, faced with the vagaries in FDI norms that allow majority holding for multi-brand retailing but with changing local sourcing requirements, major retail chains have been caught flat-footed. Companies should create different plans for different sets of future FDI regulations. This will enable them to capitalise when the regulations become most favourable and withdraw when they are least attractive.
Although simple in principle, this five-step framework demands that a firm not only anticipate all possible scenarios but also judiciously assign probabilities for their occurrence and be nimble to reallocate their resources when better information becomes available. Importantly, firms should prepare to handle possible scenarios whose outcomes are unpredictable. Creating an interdisciplinary top management team for reshaping strategy is a good first step.
Professor of Marketing, Director of Research, Center for Retailing Studies, Mays Business School, Texas A&M University
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