Strategic Uncertainty

Here we go again

As I write this, the stock market is down almost 10% from its all-time high, with no clear signals about whether we are headed for a recession, depression or a miraculous recovery. We’ve been through this before and survived although not without considerable pain, which we would prefer to avoid experiencing again. These times bring strategy into the forefront as we do our best to position our organizations for the possibility of different scenarios occurring.

Although this is familiar territory for experienced veterans of 2007-2009 and the covid years, it doesn’t hurt to reflect on what we learned from those experiences. Wisdom is the product of reflection, as I have written about many times here.

First, let me declare that although I once was a teaching assistant for an economics course as a graduate student, I am not an economist. Therefore, whatever you read here should be taken with a healthy dose of salt. I don’t want anyone showing up later asking for their retirement savings back. If you agree with my conditions, continue reading.

Step one in any looming crisis is to determine the level of panic that is appropriate. Some people go flying off the deep end at the slightest suggestion of a downturn, fearing that it is the end of their career or worse. Cooler heads are able to keep things in perspective, continue to watch for signs as things develop, and gradually reach a well-informed considered opinion. This is not to say that there aren’t times when a quick response is called for but historically speaking, those times are rare.

If the threat level is low and we have time to watch as things develop, there are multiple options we can pursue. We have the luxury of following the advice of those who suggest that in times of great uncertainty, we should undertake a series of strategic probes that test how the market will respond. Rather than make big bets that commit us to a course of action from which there is no return, we stick our toe in the water first to check the temperature. Based on what we learn, we either double down or pull back and try something else. The market, affected by larger forces in the world, is always changing. Therefore, even in periods of relative stability, we should be testing options for pivoting should the need arise. The best time to prepare for an uncertain future is when we have adequate time and resources to plan for disruption. In addition to small experiments, we should be engaging in scenario planning to help us keep our eyes on the horizon, anticipating as much as possible the unimaginable happening. We should also be making those long-term investments in research, like the ones that allowed the covid vaccine to be developed just when it was needed.

If the threat level is medium, meaning that we are facing a risk that could disrupt our business for a year or more and require a change in some of our fundamentals to respond, we want to continue to experiment but also consider bolder moves. Closing units, reducing expenses, repositioning assets, forming new alliances, or bringing late-stage innovations to market are on the table for consideration. With medium levels of threat, two mistakes are common. First is doing too little too late. We see the threat but don’t take actions that are sufficient to address it. Many of these actions are things that we probably should have done sooner had we not been reluctant to risk disturbing a steady flow of good results. When the crisis is upon us, we may panic and do the minimum required to try to return things to where they were rather than undertake a thorough review of our options and carve a bold path to the future. No doubt, taking bold action by making bigger bets entails risks that we would under normal circumstances want to avoid. The trick is to see things clearly rather than through rose-colored glasses. Outsiders and our board can help to challenge our thinking and awaken us to threats.

The second mistake we can make when facing medium level threats is to under-estimate the responses of our competitors, customers or regulators to our actions. We focus on saving our skin rather than on others saving theirs. In panic, we jump into action before we have considered the consequences by undertaking a full analysis of the situation, which often doesn’t take as long as we imagine. We sense the house is on fire and want to take full advantage of being a first mover, which can be a mistake. Staying calm is a good idea in the face of medium levels of threat. In fact, there’s something to be said for doing nothing at all until we are certain that a response is necessary. If we are prepared to execute a strategic response if and when the need is apparent, we can do so providing we don’t wait too long for the response to still be effective. If there was a formula for knowing when to make the call, we would all know it by heart. Executives get paid for their judgment, not for sitting in weekly meetings where endless PowerPoint presentations are made about past achievements.

Finally, if we sense the threat is grave, it’s time to face the music and pull out the stops. Like the operators of a nuclear facility, we shouldn’t ignore the alarms going off and wait for things to get much worse before we respond. Psychologically, we are so invested in continuing the status quo that we can’t imagine taking actions that would redefine the business as we know it, no matter how necessary. Nokia, Netflix, Apple and Tesla are just a few examples of companies that were able to do that successfully. Each would either be out of business or performing poorly if they had not acted to diversify their business while the opportunity to do so was still on the table. Although I’m starting to sound like a broken record, the time to plan for an emergency is before it happens. Knowing what your backup strategy will be in the face of a crisis is a comforting thing. While your ideas for a radical shift in the business may not receive support from shareholders when times are flush, knowing what your first and second options are when the crisis materializes will make you look like a genius.

For students of game theory, a cool thing is that we can trial strategies without ever actually implementing them. Signaling a potential move can be enough to determine how the market and competitors will react. While we may want to keep some strategies under lock and key, with a little creativity we can devise probes that test the likely response before we dive in. You can be sure that there are leaders who wish they had done so before they bet the farm and lost their hold on things as a result.

While no one knows where current events will take us, continued uncertainty is guaranteed. Investing in medium and big bet backup strategies should be on every organization’s list of priorities. As a reminder, the most difficult contingencies to plan for are the slow-moving, ever-present threats that are there for all to see. Like earthquakes waiting to happen, we should be prepared for the eventuality even though everything seems perfectly calm today. Artificial intelligence, climate change, major supply chain disruptions, cyber-attacks and new pandemics pose threats that we should be prepared for even if they never happen. Even squirrels know they should store nuts for the winter.