Sunday, July 26, 2015

Probabilistic vs Deterministic Views of Strategy

Intuitively, we are hardwired to embrace certainty in decision making.   In this view, a particular strategy is either right or wrong as determined by conditions and predictor variables.  The task of the planner is thus to apply their knowledge and experience to interpret the internal and external factors in order to determine the correct course of action.
But as Christensen notes, “expert forecasts will always be wrong”, particularly when accounting for the uncertain markets associated with disruptive innovation [1].  This extreme view by Christensen may be hyperbole and actually implies a degree of certainty (that forecasts will always be wrong), but it does provide a very prescient lesson for strategic planning.  Even for sustaining technologies or more well-understood markets, planners must increasingly discard their deterministic views of the future in favor of probabilistic views.

This is largely due to the increasingly dynamic nature of the business environment.  Paraphrasing McGrath, Satell notes that the “Sustainable Competitive Advantage” that had previously been a ‘holy grail’ for businesses is “no longer sustainable or even desirable” as “it allows for inertia and power to build up along the lines of an existing business model, which will soon be defunct” [2].  Rather, businesses need to embrace “Transient Competitive Advantage”, which is short-lived and in my view, can be gained by seeking to create new markets according to Kim and Mauborgne’s “Blue Ocean Strategy” or from disruptive innovation [2, 3].  The key, implied aspect of this view is that there are several possible outcomes and the likelihood for each is dynamically affected by a multitude of factors.

As a result, strategic planners must use different tools to counter uncertainty and must not adopt rigid strategies based on deterministic assumptions.  Scenario planning, for example, can be used to generate a “dynamic series of plausible outcomes that serve to challenge preconceptions, uncover blind spots, and help align organizations around a commonly accepted sense of direction and action” [4].  Further, Christensen identifies “Discovery Driven Planning” as a good strategy for addressing disruptive technologies [1].  By making small forays into disruptive markets, a business can gather information that can be used to guide further action, instead of placing a sizeable ‘bet’ on a particular strategy that may be difficult to pivot from later, as was evident with HP’s approach to the Kittyhawk disk drive [1].

In general, this means that businesses must take a Bayesian view of the world where the assessed likelihoods of success for different outcomes are continuously updated as new information is acquired.  As such, a company would seek to cater its initial strategy to the highest probability outcome, but temper its execution with the flexibility to adopt new strategies as warranted by new information.  As Satell notes, again quoting McGrath, “prediction and being ‘right’ will be less important than reacting quickly and taking corrective action” or otherwise, strategies must be geared towards being “less wrong over time” [5].  In doing so, businesses can capitalize on the information age to combat inertia and embrace the unknown.   

[1]  Christensen, Clayton M.  (2006).  The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail.  Harvard Business School Publishing.  Boston, MA.

[2]  Satell, Greg.  (22 Nov 2013).  The 5 New Rules That Will Change The Way You Run Your Business.  Forbes Web Site.  Retrieved 26 Jul 2015 from: http://www.forbes.com/sites/gregsatell/2013/11/22/the-5-things-you-need-to-know-about-how-technology-will-transform-your-business-strategy/ 

[3]  Kim, W. Chan, and Mauborgne, Renee.  (October 2004).  Blue Ocean Strategy.  Harvard Business Review.  Harvard Business School Publishing.  Boston, MA.

[4]  AT Kearney Inc.  (May 2012).   Scenario-Based Strategic Planning in Times of Tumultuous Change.  AT Kearney Web Site.  Retrieved 26 Jul 2015 from:  https://www.atkearney.com/paper/-/asset_publisher/dVxv4Hz2h8bS/content/scenario-based-strategic-planning-in-times-of-tumultuous-change/10192

[5]  Satell, Greg.  (14 Sept 2013).  The Evolution of Strategy.  Forbes Web Site.  Retrieved 16 Jul 2015 from:  http://www.forbes.com/sites/gregsatell/2013/09/14/the-evolution-of-strategy/2/

    

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