One thing is certain: these are uncertain times.
Making decisions in unstable environments is nothing new for today’s leaders. Yet when uncertainty skyrockets – powered by a global pandemic, financial crisis or technology threat to an established business model – leaders can become paralyzed.
“This state of ‘paralysis by analysis’ happens all too frequently,” says IMD Professor of Strategy Arnaud Chevallier, “and can have disastrous implications for organizations.”
Often leaders will respond by gathering more data or relying on financial models that work in deterministic environments – areas in which there is no variability in outcome. These standard responses take up precious time because leaders are often delayed as they gather new evidence in a never-ending cycle of validation.
But by combining scenario planning and Bayesian thinking – in essence, using probabilistic rather than deterministic methods – Professor Chevallier says senior executives can bolster their decision-making abilities, enabling them to move forward.
Here is the three-step process that will set companies on the path to success in uncertain times:
1. See what can’t be seen
Leaders should identify the range of scenarios that might unfold in the next months, from the worst-case to the best-case. “It is important to remember the critical factors that push the future toward one extreme or the other, including what drives them,” says Professor Chevallier. The challenge here is not forgetting to add certain factors, but rather to include a broad enough spectrum of them from the get-go. “Accept that the factors will be extensive,” suggests Professor Chevallier. “For example, an organization facing COVID-generated uncertainty might decide to monitor the longevity of the virus, the globalization of mindsets and the willingness of its customers to adopt digital alternatives.”
2. Remember anything is possible
Leaders should identify what it would take for their organization to be successful in each future scenario, and what the rollout timelines would look like. “To be successful a year from now, an airline should be prepared for an environment in which they transport very few passengers,” says Professor Chevallier. “Or conversely, they might need to quickly accommodate a significant rebound in demand.” Identifying what the company would need to have in place for good performance for each of these wildly different scenarios, and by when, is critical.
3. Be fit and flexible
Leaders should adopt an agile decision-making style. This includes monitoring indicators and continuously modifying resource allocation to match the scenarios that are becoming more probable. This third step starts with a rollout out of all success plans – in other words, keep your options open. “Remember that as new evidence is uncovered, the likelihood of extreme scenarios will change,” reminds Professor Chevallier. “Some will become more probable while others will become less so.” Leaders must then update their thinking in light of any new evidence, which will in turn inform their responses. This means refocusing strategy away from the futures that have become less likely and toward those that are more probable.
Managing skyrocketing uncertainty is no easy task. But the shift from a Boolean mindset where things are black and white, to a Bayesian mindset where leaders learn to think using probability, is crucial.
Professor Chevallier says it also requires a change from the popular lean management principles that have dominated organizational operations for the past two decades. Leaders must step away from improving efficiency (achieving more results with less) to, at least momentarily, advancing effectiveness (achieving the desired results).
“With the threat of recurring pandemic waves, the United States in social turmoil and international instability, it is likely that extreme uncertainty will prevail,” he notes. “Wait and see is not the answer.”
In an upcoming webinar, IMD Professor of Strategy Arnaud Chevallier will explore how to combine scenario planning and Bayesian thinking to make better decisions in uncertain times. Please register here.