Making strategic decisions under uncertainty: The case for non-predictive strategy

The goal of strategy is to decide what to do in a given situation to achieve a given objective.  Basically, strategic decisions comes down to the question “what to do next?”. In environments characterized by uncertainty (defined as objective lack of information), this is no simple question, and several approaches are possible to address it.  Two dimensions characterize these possible approaches: prediction and control.

Prediction asks  to what extent does my approach rely on a forecast of the future environment. Strong prediction corresponds to either a planning-type approach – I create a detailed prediction of the future before initiating action – or a vision type:  I imagine the future and I strive to make this vision a reality.  Low prediction corresponds to a more adaptive approach:  I do not try to predict the future environment, but instead I move on and I adapt to changes along the way.
Control asks how I can control the evolution of my environment.  The over-arching assumption of classic strategy is that the firm has little influence on its environment, which is for the most part given (or “exogenous”).  All a firm can do is to find a place in this environment (planning /positioning) or adapt when it changes (adaptation).  Hence the importance of the notion of “fit” that the field insists upon (e.g. Michael Porter in 1996).  On the opposite side of the spectrum, the field of entrepreneurship observes that a firm can change its environment in profound ways, sometimes from an ex ante defined vision, or through the logic of future-agnostic gradual transformation of the environment.  There are many examples of entrepreneurs starting with odds apparently stacked against them and completely transforming their environments:  Michael Dell, Richard Branson, Sam Walton, to name just a few.

So there are four possible approaches, illustrated in the figure below:

What to do next? Prediction vs Control (Wiltbank et al, 2006)

Let’s review these approaches.

Strong prediction, strong control (top right):  in this configuration, I am a visionary, I have a strong vision of the future environment and I am committed to making this vision a reality through my actions because I am able, or I think I am able, to change the environment.  This configuration is assumed by strategy practices that take a vision and mission as a starting point.

Strong prediction, low control (top left):  In this configuration, I develop a strong vision of the future market, but I am basically unable to influence it significantly.  The paradigm is that corresponding to classical strategy, planning, based primarily on the discovery of a possible acceptable position (fit) for my firm in an environment over which I have little influence.  Therefore, the quality of my prediction is essential, and most of the strategic work is devoted to it (this phase is called strategic analysis).  If I get my prediction right, I succeed.  If I get it wrong, then I am in trouble; hence this strategy is also fragile, especially in uncertain and turbulent environments.  Note that for spectacular success, such strategies depend on a unique ability to make an accurate prediction, or you’re simply one more trend-follower.

Low prediction, low control (bottom left):  As in the previous configuration, I am a “taker” of the environment, about which I do not develop a vision or a prediction.  But I can not exert any influence on it either.  It is part of classic strategy, but upgraded to handle the case of industries affected by turbulence, such as high-tech sector.  The paradigm is that of adjustment or trial and error.  The key to success in this configuration is flexibility, i.e. the ability to adapt to a new situation quickly and at low-cost.  While this approach is popular (especially in today’s seemingly unpredictable world), its limitation is that adaptation by definition reactive, i.e. taking the risk of always being late.  This is because most reliable indicators are lagging, and because it takes time to react, however nimble one may be.  Also, being purely reactive means taking the risk of not having the right assets (knowledge, experience) at the right time. As such, adaptation is important, but it cannot be a firm’s sole approach in the long run.

Low prediction, strong control (bottom right):  Most interesting is the final configuration, in which I do not develop vision or prediction of the future environment, but I nonetheless seek to exercise a strong control on its evolution.  This can be done through partnerships, coalitions, influence on standards, etc.  The approach is said to be transformative, because in it I transform (at least in part) my environment, if only to a limited extent.  More specifically, I co-create it with selected stakeholders.  The approach – which has much in common with “integrated strategy” – corresponds to Effectuation, a theory of entrepreneurship.  Effectuation describes how entrepreneurs create new markets when faced with a situation of strong uncertainty.  It is this non-predictive approach to strategy that today offers the most prospects for strategy development, and it also works well for large companies:  they can learn from entrepreneurs who, after all, are the experts in dealing with uncertainty.  We will develop the concept of non-predictive strategy in future posts.