action for each of them, strategic planning can to a large extent keep risks withinmanageable limits.
Dealing with uncertainty in the environment
The essence of risk management is to help a firm to survive and grow. When theenvironment is unfavourable, the firm will concentrate on survival and when it isfavourable, it will attempt to exploit new growth opportunities. The speed with which acompany adjusts to the environment depends crucially on the ability of its senior managersto observe and understand what is happening outside and respond accordingly.De Geus has argued that strategic planning can accelerate the process of institutional learning provided its aim is not so much to draw up a course of action as tochange the mental models in the heads of people. When managers are encouraged to think of various possibilities, they can better absorb and digest information and most importantly,act as the environment changes. This is especially valid during times of radical change. AsClayton Christensen of Harvard Business School puts it
: “The strategies and plans thatmanagers formulate for confronting disruptive technological change therefore, should be plans for learning and discovery, rather than plans for execution. This is an important pointto understand, because managers who believe they know a market’s future will plan andinvest very differently from those who recognise the uncertainties of a developing market.”Strategic planning in uncertain situations, must take into account various risks. If the prevailing uncertainty is not properly considered, the firm might end up facing threats itis ill equipped to deal with. At the other extreme, the firm may show too much caution andnot exploit opportunities that have the potential to yield excellent returns. Many companiestake strategic decisions relying totally on their gut instincts during times of uncertainty.This is obviously a wrong thing to do. Intuition has to be backed with some numbers for strategic planning to be effective.Courtney, Kirkland and Viguerie
provide a framework for strategic planningduring conditions of uncertainty. They refer to the uncertainty which still remains, after athorough analysis of all the variables in the environment has been done, as
. In a simple situation, strategies can be made on the basis of a single forecast.At the next level of uncertainty, it makes sense to envision a few distinct scenarios. At aneven higher level, several scenarios can be identified. In the most uncertain situations, it isdifficult to even visualise scenarios, let alone predict the outcome.Where uncertainty is less, companies are typically more worried about their competitive position within the industry. They take the industry structure as given and tryto exploit the opportunities available and get ahead of rivals. Where uncertainty is high,firms have two broad strategic options. They can make heavy investments and attempt tocontrol the direction of the market. Alternatively, they can make incremental investmentsand wait till the environment becomes less uncertain before committing themselves to astrategy. In the intervening period, the firm can collect more information, or form strategicalliances to share risks. In short, a firm has to arrive at an optimum portfolio of investments – heavy risky investments, small risky investments and heavy, not very risky investments
.The mix would depend on the degree of uncertainty in the environment.
In his seminal book, The Innovator’s Dilemma.
Harvard Business Review, November-December 1997.
Courtney, Kirkland and Viguerie call a heavy but non risky investment, a ‘no regret’ move. Thisapplies to fairly predictable situations where even though the investment is large, the risk involvedis negligible.2