How can business leaders plan in the face of rapid change and unpredictable risk?
Strategic planning assumes a future that validates the plan. But when there is so much uncertainty, the default response is not to plan at all. But as the Cheshire Cat said to Alice, if you don't know where you are going, it doesn't matter which way you turn. We believe a good plan today is better than a perfect plan tomorrow, and the way to good is through more effective risk management.
'Companies with more mature risk management practices are outperforming their peers financially.' Turning Risk into Results
When we base facts on assumptions, we start to ignore or overlook uncertainties, leading to 'risk blindness'. A very recent and all too close example is the way the UK has managed the COVID-19 pandemic. The Strategic Risk Institute reported in their research paper (Strategic Risk Governance and Management: Lessons from the COVID-19 Pandemic), that advisory groups assumed a '5 day infection doubling time' when in reality the doubling time was 3 days or less. They also report that the UK Government prepared themselves to tackle the spread of an influenza virus, instead of addressing the uncertainty of the spread of the novel coronavirus.
In traditional risk management an overall assessment of risk is arrived at by 'multiplying' probability by its impact. However high impact risks with a low probability (such as a pandemic) result in a low-risk assessment and are often disregarded, even when the impact could be catastrophic. People have 'limited tolerance for uncertainty', which means that for many, a probability lower than 40% will lead to an assumption that the risk will never materialise.
A way to achieve more effective risk management is to embrace the 'What ifs' of life. Asking What if? will allow you to prepare for any possible outcome. In Anthony Hodgson's paper Strategic Thinking with Scenarios, he introduces the concept of thinking about 'multiple futures'. Each question creates a different scenario that will 'challenge the assumptions upon which our default scenario is based'.
'Organizations need to have the ability to identify and address key risk areas.' Turning Risk into Results.
No matter which scenario unfolds, for a company to mitigate risk, they need to be prepared for anything and asking What if? questions will give them new options and opportunities to help them succeed.
In times full of uncertainty, particularly during a global pandemic, we need to avoid poor decision making. We need to be prepared for any scenario, rather than reacting when events are escalating. It is vital that when facing future risks, we must adopt a 'strategic view and plan for long term survival and success' (Strategic Thinking with Scenarios) whilst also understanding that it is impossible to predict the future - 'any forecast or plan will rapidly be overtaken by events'.
'Strategy ceases to be a fixed plan but rather a learning process.' Strategic Planning with Scenarios
The world is accelerating towards ever greater complexity. The rapid take-up of new technologies is driving change in politics, economics, the environment, society, and the law. We need to learn to adapt, strategise and identify the 'unknown unknowns' – or, as the Strategic Risk Institute puts it, to 'forage for surprise'. We require a contingency plan, 'a vision of a way that is capable of being modified at every twist or turn of events' (Strategic Thinking with Scenarios) that can still help us achieve our goals. In planning for the future, we must focus on 'raising awareness of external challenges' which will aid in future decision making.
When it comes to planning in the face of rapid changes and unpredictable risk, many businesses fail with their strategic thinking. Unprepared companies fall into the trap of placing reliance on overly simplistic scenarios that do not focus on areas that will affect the success of a business. To achieve objectives, business leaders must move their businesses from 'risk-averse to risk-ready' (Turning Risk into Results).
Planning in times of uncertainty – moving away from reactive decision making - is not easy. At hgkc we believe that a good plan today is better than a perfect plan tomorrow, and a mediocre plan today is better than no plan at all. We also accept that it is OK for plans to be wrong, and it is OK for plans to change – every plan or forecast will be overtaken by events.
To talk about your future plans for emerging with greater resilience, get in touch with our consultants.
