The economic shock of 2008 and the Great Recession that followed did not just create profound uncertainty over the direction of the global economy. They also shook the confidence of many business leaders in their ability to see the future well enough to take bold action.
It’s not as if CEOs don’t know how to make good Decisions Under Uncertainty. One of the tools used is scenario building. Scenarios are a powerful tool in the strategist’s armory. They are particularly useful in developing strategies to navigate the kinds of extreme events we have recently seen in the world economy. Scenarios enable the strategist to steer a course between the false certainty of a single forecast and the confused paralysis that often strike in troubled times. These approaches are extraordinarily valuable amid today’s volatility, and many well-run companies have adopted them, over the years, for activities such as capital budgeting. The very process of developing scenarios generates deeper insight into the underlying drivers of change. Scenarios force companies to ask, “What would have to be true for the following outcome to emerge?” As a result, they find themselves testing a wide range of hypotheses involving changes in all sorts of underlying drivers. They learn which drivers matter and which do not—and what will actually affect those that matter enough to change the scenario. Sudden spikes in raw-material costs, unexpected price drops, major technological breakthroughs—any of these might take down many large businesses. Companies can’t build all possible events into their scenarios and should not spend too much time on the low-probability ones. But they must be sure of surviving high-severity outcomes, so such possibilities must be identified and kept on a watch list.
The analysis generated by scenario building or any other techniques is not enough. What is very important is making decisions when the time is right and before any of the competitors. What CEO must do is to set a goal which is considered as robust scenario even in a downturn without being over optimistic. He must provide inspiring leadership and communicate single goal.
One must have innovative strategies to achieve the goal. This will be possible by bringing senior leadership on the same page. The smaller the number of leaders, the easier it is to have the intensity of interaction needed to make critical decisions effectively and collaboratively. On the other hand, the number must be large enough so that the people involved in decision making can collectively access the full spectrum of knowledge embedded in a company’s people and its relationships with other organizations. The knowledge, skill, and experience of these leaders make them better suited than anyone else to act decisively when the time is right. Such executives are also well placed to build the organizational capabilities needed to face critical issues early and then use the extra lead time to gather intelligence, to conduct the need analyses, and to debate their implications. This will require moving toward more dynamic management style which includes migrating away from rigid, calendar-based approaches to budgeting and planning. This will require collectively significant, shifts in their operating practices
Since determining what to do under uncertainty usually requires careful debate among many people across the entire company, you need processes and protocols to determine how issues are raised, how deliberation is conducted, and how decisions are made. You also need to clearly lay out the obligations of managers, once the debate and decision making are over, to put their full weight behind making the resulting actions successful.
Just-in-time (JIT) decision making:
Much of the art of decision making under uncertainty is getting the timing right. If you delay too much, opportunity costs may rise, investment costs may escalate, and losses can accumulate. However, making critical decisions too early can lead to bad choices or excessive risks. The timely decision is more important in the early identification of opportunities and threats from external factors on which company has no control. Which includes changes in demand, technology microeconomic factors, valuation of currency, changing interest rate etc. If a critical issue surfaces early, there is usually enough time to use proven problem-solving approaches to making decisions under uncertainty.
Structuring of decisions:
Decision tree help managers think about the structuring and sequencing of their decisions. Probabilistic modeling is useful for understanding the economic consequences of potential outcomes. Breaking big decisions into smaller, well-sequenced ones, helps organizations move forward without taking excessive risks. Identify and implement decisions which are valid in any scenario at the earliest.
Unique and compelling solutions valued by customers’ create competitive advantage and differentiate shareholder value. This should be supported and achieved trough Operational and Customer Excellence Excelling the customer expectation from the company, its brands, products, and services are a three-step process. The three steps are: Know a customer, Be a customer, Serve a customer.
The above approach of Innovation and excellence helps the company to grow even in a downturn. Maruti, MARICO, and Whirlpool are examples of above average performance even in a downturn in the process delighting all its stakeholders
one must understand what it really takes to be a leader. Clever words and concepts are not necessary. Simplicity is the key: be real, be aware, be fair, be human, be balanced, be mature, be ethical, be inclusive, be truthful, and be responsible. Know yourself, try to know others, know what matters and what does not.
Engage people to make the best possible contribution to the business and wider society. This means sharing power, information, and responsibility and, of course, rewards. Leaders must ensure that everyone has a voice and an opportunity to contribute
Efficiency in External risks management is key to success and survival in uncertain time. The organisation which has robust systems for early identification and corrective actions to external threats is the one which survives in an uncertain time. In a downturn, it will be good policy to support premium brands which can bring in higher profit even on lower volume. Similarly, the organisation which can identify opportunities arising out of external factors will have above average returns for all its stakeholders.
We quote below from statement given by Castrol India Ltd’s management at the time of announcement Q3FY09 results, which clearly identifies threats and opportunities and take appropriate steps
‘This performance is attributable to the consistent execution of our long-term strategy and is underpinned by ‘in year focus’ on margins, attacking cost inefficiencies and reducing working capital. We have held volumes in the current quarter reflecting the underlying robustness of our strategy and intrinsic brand strength which has enabled us to leverage the early indications of an upturn in the economy. Despite the challenging environment, the company elevated its level of marketing investment in key brands. The current quarter saw the launch of a new 360-degree campaign for Castrol Activ – the market leader in four-stroke motorcycle oils, with the benefit of all-around protection. This was positively received by the consumers and the sales of the brand have shown a significant growth”.’
Similarly, corporate social responsibility needs to be taken seriously by all companies. Competition, profit, wealth creation, and innovation remain critical to business, but in the coming decade, ethical behavior, accountability, sustainability, longer-term focus, and community awareness will become more critical. It is a leader’s duty to make these issues part of the business agenda and make sure they stay there.