20/20 Foresight: Crafting Strategy in an Uncertain World by Hugh Courtney

From Barnes & Noble

How can leaders make decisions with far-reaching consequences when change and uncertainty are seemingly the only constants in today's business world? Hugh Courtney maintains that we must move beyond reducing the world to either certainty or uncertainty, knowledge or ignorance. Instead, he advises executives to make themselves comfortable with uncertainty, to either adapt to it or to shape it as strategic plans are being formulated. If you're faced with making hard decisions in a volatile environment, Courtney's well-received book could prove to be a valuable guide.

From the Publisher

In the midst of a changing economy, most executives continue to use a strategy toolkit designed for yesterday's more stable marketplace. As a result, strategies emerge that neither manage the risks nor take advantage of the opportunities that arise in highly uncertain times.

Now, McKinsey & Company consultant Hugh Courtney argues that managers must move beyond the outdated "all-or-nothing" view of strategy in which future events are either certain or uncertain. Instead, he suggests a simple-yet powerful-alternative: Understand the level of uncertainty you are facing in a given situation, and you will make better, more informed strategic choices.

Based on an international review of the key strategy problems faced by over one hundred leading companies, Courtney reveals how executives can develop 20/20 foresight -- a view of the future that separates what can be known from what can't. While executives with 20/20 foresight can rarely develop perfect forecasts of the future, says Courtney, they can isolate the "residual uncertainty" they face and use this insight to create competitive advantage in today's turbulent markets.

Unveiling a revolutionary framework for diagnosing to which of the four levels of residual uncertainty a specific strategy choice corresponds, 20/20 Foresight shows how readers can leverage this knowledge to answer three key strategic questions: 1) Shape or adapt to uncertainty? 2) Make strategic commitments now or later? and 3) Follow a focused or diversified strategy?
20/20 Foresight also:
* shows strategists how to tailor every aspect of the decision-making process-from formulation to implementation-to the level of uncertainty faced, * describes the strategic-planning processes readers can use to monitor, update, and revise strategies as necessary in volatile markets, and * includes a toolkit for identifying, developing, and testing new strategy options-complete with guidelines for applying the right tool to the right situation at the right time.

A comprehensive approach to strategy development under all possible levels of uncertainty and across all kinds of industries, this is the essential guide for making tough strategic choices in a changing world.

Entrepeneur

You can't escape business uncertainty. But you can learn to deal with it, says McKinsey & Co. consultant Hugh Courtney in 20/20 Foresight (Harvard Business School Press). Courtney says uncertainty ranges in degree from being able to make a fairly exact prediction to having no idea what might happen. For each level, Courtney offers five questions to ask, beginning with whether you should try to shape events or adapt yourself to them, and ending with whether you need a new set of decision-making processes to handle the situation. Tackling uncertainty is tough, but Courtney brings his target down to earth with a solid thump. - December 2001.

Financial Executive

Those willing to tackle a tough subject should find 20-20 Foresight well worth the effort.

Publishers Weekly

In this intriguing, clearly reasoned book, McKinsey consultant Courtney argues convincingly that managers can approach uncertainty systematically. Most managers, he says, either ignore potential problems or try to map out them out in painful detail. The better approach, Courtney contends, is to classify risk (e.g., a relatively clear future, a range of possibilities or true ambiguity) and hone a strategy based on a checklist he provides for each category. This appealing approach could become an integral part of the manager's toolkit. (Oct.) Copyright 2001 Cahners Business Information.

What People Are Saying

Nigel Morris
Hugh Courtney has given me a set of practical tools and advice to drive our business forward. 20/20 Foresight is a must-read for all executives in decision-making roles. (Nigel Morris, President, Cofounder and COO, Capital One)

Paul J.H. Schoemaker
This book represents a major step forward in mastering uncertainty. Most managers tackle risk and ambiguity in the wrong way. Hugh Courtney offers a splendid roadmap toward doing it right at last. Let's embrace uncertainty-rather than sweep it under the rug-since rich opportunities lurk in its furthest recesses."
—(Paul J. H. Schoemaker, Coauthor of Winning Decisions, Research Director, Mack Center for Technological Innovation, The Wharton School, and Chairman, Decision Strategies International, Inc.)

Earnest W. Deavenport, Jr.
Earnest W. Deavenport, Jr., Chairman and CEO, Eastman Chemical Company
Using financial analogies and concepts, 20/20 Foresight provides rigorous tools and practical solutions for use in the strategic decision-making process. Hugh Courtney thoroughly describes his methods and provides insightful examples that give readers the ability to embrace uncertainty."

Barry Nalebuff
20/20 Foresight is the Swiss Army Knife of tools for handling uncertainty. Hugh Courtney shows how to fit your decisions to an uncertain world and when to mold the world to fit your decisions. Louis Pasteur said that 'Luck favors the prepared mind'-this book won't make you lucky, but it will help you to be prepared. —(Barry Nalebuff, Milton Steinbach Professor, Yale School of Management and Coauthor of Co-opetition)

Financial Executive
"Those willing to tackle a tough subject should find 20-20 Foresight well worth the effort."
--December 2001

Product Details

• Table of Contents
• Read an Excerpt

Table of Contents

Read an Excerpt

CRAFTING STRATEGY IN AN UNCERTAIN WORLD

The business world is changing fast. Remember when the "future" was a year away, or three years-or even five years? No longer. Lewis E. Platt, former Hewlett-Packard chief executive officer (CEO), argues, "Anyone who tells you they have a 5- or 10-year plan is probably crazy."1 Old economy or new, you'd be hard-pressed to find any business leaders who disagree.

With rapid change comes uncertainty. And with uncertainty comes risk-and great opportunities. If you bet big today, for instance, you may fundamentally reshape an emerging market to your advantage. Or you may suffer losses that throw your company into bankruptcy. If you wait for the uncertainty surrounding a possible opportunity to disappear, on the other hand, you may avoid making some foolhardy mistakes-or you may lose your first-mover advantages to a more aggressive competitor.

In choosing strategies under uncertainty, there are no easy answers. Yet many business strategists make it harder than it has to be, simply by relying on outdated strategic-planning and decision-making approaches. These "tried-and-true" approaches, designed to optimize strategic decision making in predictable environments, systematically fail in times of high uncertainty, as we are experiencing today.

Take the typical strategic-planning and decision-making process, which is still extensively used by most large corporations, consulting firms, and M.B.A. programs. This process is built around the business case. Managers describe a potential investment or other strategic action in great detail, and then they build a "fact-based" case to estimate its expected economic return. Since the return to any strategy depends on its impact on future cash flows, the process is naturally forward-looking-and thus reliant on sound forecasts of such variables as market size and share, prices, and productivity.

Foresight-an accurate view of the future-is essential in generating the best forecasts and making the right strategy choices. The typical process assumes that the strategists possess the foresight to translate their knowledge of the future into point forecasts of key value drivers. These point forecasts allow for precise estimates of net present value (NPV) and other financial measures, which, in turn, determine which strategy will deliver the highest return.2

In addition, the typical process assumes that a deep, analytical understanding of today's market environment and today's company capabilities is the key to developing foresight about the future. For example, industry analysis frameworks, like Porter's Five Forces, are at the heart of most prototypical processes because it is implicitly assumed that understanding the microeconomic drivers of today's market environment is essential to understanding the strategies that will win in tomorrow's market.3

In relatively stable market environments-environments characterized by limited uncertainty-these are reasonable assumptions. In such markets, for example, the best indicators of next year's customer needs, competitor conduct, and technology standards are this year's customer needs, competitor conduct, and technology standards. Likewise, in stable market environments, forecasts of future value drivers can be accurately extrapolated from current value drivers. In such cases, strategists with foresight should be able to generate accurate point forecasts.

But in times of great uncertainty, this process is marginally helpful at best, and at worst, downright dangerous: The traditional process encourages managers, who are trying to generate point-forecast assumptions, to ignore whatever uncertainties they may find. As a result, strategies emerge that neither manage the risks nor take advantage of the opportunities that present themselves in highly uncertain times.

20/20 Foresight

It's time to get realistic about strategy under uncertainty. The truth is that foresight does not emerge solely from the painstaking analyses of current market environments. Nor does it emerge from studying the "perfect" forecasting tool, if it existed: a crystal ball that would make all your uncertainties disappear. Rather, the real issue is how to make the best strategy choices you can, accepting the ever presence of uncertainty.

For that reason, this book starts with a very simple but powerful idea: If you want to make better strategy choices under uncertainty, then you have to understand the uncertainty you are facing. Instead of burying uncertainties in meaningless base case forecasts-or avoiding rigorous analysis of uncertainties altogether-you must embrace uncertainty, explore it, slice it, dice it, get to know it. If you do this well, you will reach a wonderful goal: 20/20 foresight

. Having 20/20 foresight doesn't mean that you can always make flawless future predictions. Even with 20/20 foresight you'll be occasionally blindsided, and you'll take some missteps along the way. But think of 20/20 foresight as you do 20/20 eyesight: People with 20/20 vision don't have perfect eyesight. They can't see the craters on the moon without a telescope, or a bird on the tallest tree without a pair of binoculars. But they can see the best that human beings can, given our natural physiological constraints.

Likewise, 20/20 foresight isn't perfect forward vision, but it is surprisingly clear, given the number of uncertainties that are beyond any human's ability to foresee. Business strategists with 20/20 foresight are not prescient, but they are doing the best they can to see the future.

The Four Levels of Residual Uncertainty

To be sure, 20/20 foresight has always been the goal of the best strategic-planning and decision-making processes. Then why have strategists so often fallen short of the goal? You could blame poor execution-inadequate data collection and analysis, inappropriate forecasting techniques, misinterpretations of emerging trends, and so forth. But that's only part of the problem. The biggest problem is that most managers simply don't understand what it means to have 20/20 foresight under uncertainty.

Rather than seeing uncertainty as something that can be analyzed, most managers accept a binary view of uncertainty.4 That is, they believe that uncertainty is nonexistent in some situations, in which case point forecasts can be made with ease. For all other situations, they believe uncertainty exists; and when it does, it is like a steel wall-completely impenetrable and opaque.

It is this binary view of uncertainty that leads many business strategists to either embrace point-forecast based methods entirely or, racked with frustration, decide to abandon systematic, analytical rigor altogether and go with their "intuition." Too bad, because in this fast-changing world, intuition based on previous experience may be dead-on wrong. In uncertain times, neither approach generates the foresight necessary to make sound strategic decisions.

The truth is that uncertainty is not an all-or-nothing phenomenon. Even in the most uncertain business environments, analysis can usually penetrate the uncertainty and withdraw strategically relevant information. It is this residual uncertainty-the uncertainty left after the best possible analysis to separate the unknown from the unknowable-that defines 20/20 foresight. If you can identify the residual uncertainty in your business environment, you can achieve 20/20 foresight.

For those in search of foresight, the good news is that residual uncertainty always takes one of four-and only four-forms. The lowest level of uncertainty, called Level 1, is so low that the traditional methods that employ point forecasts can be used with great success. On the other hand, the highest level, called Level 4, is a situation where analysis cannot even bound the range of possibilities, let alone generate reliable point forecasts of key value drivers.

Between these two extremes, however, are Levels 2 and 3, the levels of uncertainty most likely to face managers. In Level 3 situations, managers can bound the range of possible outcomes. And in Level 2 situations, managers can take this one step further and identify a set of distinct possible outcomes, one of which will occur.

To illustrate the four levels, consider the following example. Suppose you work for a telecommunications company and have been charged with introducing high-speed Internet access via digital subscriber lines (DSL) in a new market area. If you are asked what the DSL penetration rate will be in this market three years from now, there are only four possible forms your answer might take:

· "DSL will penetrate X% of the market in three years," if you face Level 1 uncertainty

· "DSL will penetrate either X%, Y%, or Z% of the market in three years," if you face Level 2 uncertainty

· "DSL will penetrate somewhere between X% and Z% of the market in three years," if you face Level 3 uncertainty

· "I don't know, and there's no reliable way to forecast what the range of possible DSL penetration rates will be in three years," if you face Level 4 uncertainty

This example is not unique. Take any strategic decision facing your company and ask how much can be known today about the future value drivers-like customer buying behavior, regulatory rulings, technology shifts, and competitor conduct-that will determine the success of your strategy. Your answers will always take one of the four generic forms outlined above. Decision makers always face one of the four levels of residual uncertainty.

The four levels of residual uncertainty constitute this book's core framework. The four levels framework defines the different degrees of foresight possible in an uncertain world. It will be fully developed in chapter 2.

But the four levels framework is more than just a foresight gauge. All aspects of strategy-including the processes you use to formulate strategy as well as the actual investments you make to implement your strategy-should be tailored to the level of residual uncertainty you face. Identifying your level of residual uncertainty, in fact, will help you determine the best possible answers to the five questions, seen below, that define strategy under uncertainty.

Strategy under Uncertainty: Five Key Questions

As my colleagues and I at McKinsey have worked with clients across numerous industries-old and new economy alike-we have identified a set of five common issues that make strategy making under high uncertainty differ from strategy making under low uncertainty. Each issue raises a fundamental question about strategy under uncertainty that we have addressed time and again in the past several years. Chapters 3 through 7 present what we have learned about the best possible answers to these questions.

Shape or Adapt?

In a stable market environment with low uncertainty and a slow pace of change, companies typically try to find the best fit between existing market opportunities and company capabilities when formulating strategies. They take industry structure and competitive conduct as it is, and then they choose a strategy that adapts to the market environment. Much less attention is usually devoted to assessing strategies that might fundamentally shape industry structure and conduct to create changes that play to a company's advantages. This emphasis on adapting rather than shaping is natural in stable market environments, where key elements of industry structure and conduct-such as technology platforms, regulations, competitors, and customer purchasing patterns-appear to be locked-in and difficult to change.

In more uncertain markets, however, many of these key elements may be ill defined and in flux, and hence susceptible to being shaped. A company's decision to adopt a new technology, for instance, may help establish that technology as the industry standard.

Under what circumstances should companies attempt to proactively shape uncertain industry structure and conduct, and when is it better to reactively adapt to industry changes over time? Chapter 3 addresses this fundamental strategy-under-uncertainty question. Several factors come into play, and there is no one-size-fits-all answer for all companies in all situations. Perhaps the most important factor-and the one largely ignored-is the level of residual uncertainty facing the decision maker.

Now or Later?

Whether you choose to shape or adapt, strategy invariably involves making at least some major commitments that are hard to reverse. These include acquisitions, capital investments, and choices about the design of the business system. The timing of such commitments is often the key to building and sustaining competitive advantage.

When faced with high uncertainty, deciding when to commit is no easy task. A company that postpones a commitment may learn more about the economic viability of its proposed strategy as market uncertainties unfold, and it may thus be able to make a wiser, less risky decision in the future. On the other hand, postponement may also increase the risk that a more aggressive competitor will preempt a company's proposed strategy.

Business strategists must manage this trade-off between gathering more information but potentially losing an opportunity when choosing when to commit under high uncertainty. In contrast, deciding when to commit under low uncertainty is relatively straightforward. Delays increase the probability of competitive preemption while providing limited incremental information about the future. The prescription: Commit now.

Under what circumstances should companies postpone or stage major commitments over time, and when is it better to make more immediate, full-scale commitments? Chapter 4 addresses this "now or later" question. Applying lessons and tools from recent work on real options, chapter 4 shows how understanding the levels of residual uncertainty and competitive intensity in a market environment is the key to the better timing of commitment decisions.

Focus or Diversify?

When faced with high uncertainty, a focused strategy might enable a company to reap the highest upside returns in some scenarios, but it may also expose it to large downside losses in other scenarios. Betting on one technology rather that another is one example. If a company wants to ensure against such downside losses, it might assemble a more diversified strategy portfolio-for example, making a series of smaller bets on each feasible technology. This insurance may decrease the company's exposure, but at the price of a lower expected return.

When determining how focused their strategies should be under high uncertainty, business strategists must manage this risk/return trade-off. In contrast, under low uncertainty, no such trade-off exists. If key value drivers can be forecast with great precision, diversifying one's strategy portfolio to limit downside risk makes no sense. In such circumstances, a company might still maintain a diversified set of businesses or products in a market. But the rationale for such diversification would most likely be revenue and cost synergies across business or product lines, not risk management.

Under what circumstances should companies craft strategies that are robust across the range of possible future outcomes, and when should they prefer more focused strategies? Chapter 5 addresses this "focus or diversify" question. A number of company-specific factors should drive this choice, including assets, capabilities, and attitudes toward risk. A capital-constrained start-up, for example, can rarely afford to hedge its bets across competing technologies. But a big company, like Cisco Systems, can. Just because a company can successfully hedge doesn't mean it should, however. External market conditions, especially the nature and level of residual uncertainty, are often the deciding factors.

New Tools and Frameworks?

Under low uncertainty, the traditional strategy toolkit described earlier-including frameworks like Porter's Five Forces and tools like discounted cash flow models-works well. This toolkit is designed to generate strategic insights in relatively stable market environments. But if your goal is 20/20 foresight under higher levels of uncertainty, it is not up to the task.

In recent years, a number of high-uncertainty tools and frameworks have been offered as solutions to this foresight problem. But to date, this new toolkit has produced inconsistent results at best. Why? Each element of the toolkit has been oversold, leading companies to apply the wrong tool to the wrong problem at the wrong time. How many times have we heard that real options or scenario planning or game theory or complex adaptive systems is the solution to generating and evaluating strategies under high uncertainty? It just isn't true. No one framework or tool is universally applicable.

Which specific tools and frameworks should business strategists use to supplement the traditional strategy toolkit? Chapter 6 and the appendix address this fundamental strategic-planning and decision-making question. Once again, the answer depends on the level of residual uncertainty facing the strategist. Decision analysis, for example, is particularly relevant when facing Level 2 uncertainty. Scenario planning, on the other hand, can help define possible future outcomes under Levels 2 and 3 uncertainty, but it is inappropriate for Level 1 issues.

Chapter 6 provides a brief overview of the relevant toolkit for each level of residual uncertainty, and the appendix provides more details on five of the most common tools. Together they provide a road map for identifying the right set of tools for making any given strategy decision under uncertainty. They do not, however, provide enough information to ensure that novice readers will become expert practitioners of each tool or framework. Therefore, the appendix provides a set of references for those interested in further study.

New Strategic-Planning and Decision-Making Processes?

Typical strategic-planning and decision-making processes run on an internal calendar cycle, repeating every one to five years. Key elements of the strategy are reviewed and updated during each cycle. But there is often a reluctance to make major changes, at least for a few years.

These processes can serve companies well in environments that are predictable. But these same processes are limited, and even dangerous, under Levels 2-4 uncertainty. Why? Because the standard planning cycle limits the ability of the company to change direction in response to-or in anticipation of-new opportunities or threats.

If typical strategic-planning and decision-making processes are inappropriate in highly uncertain business environments, what alternative processes should companies use to monitor and update their strategies over time? Chapter 7 addresses this question and offers three distinct approaches that companies can use to monitor, update, and even revise strategies in turbulent markets. Not surprisingly, the best approach for your company depends on the level of residual uncertainty it faces.

Developing Your Own Answers: Some Hints for Using This Book

As outlined above, this book is built around the five questions that business strategists, in my experience, find most vexing about strategy under high uncertainty. Most senior business decision makers, their consultants, and their staffs face these questions on an ongoing basis. They should find the book immediately applicable to their day-to-day activities and decision making. First and foremost, this book is written for them.

The book offers no one-size-fits-all answers to these fundamental strategy questions. However, there is a common framework-the four levels of residual uncertainty-which should help you achieve the foresight necessary to craft your own value-creating answers. This is primarily a "how to think about it" book, one that provides principles, frameworks, and examples to guide your own deliberations rather than bold, oversold prescriptions.

If you are an experienced business strategist, familiar with the prototypical strategy toolkit and increasingly frustrated by its inapplicability to many of today's strategy problems, then this book is for you. If you are new to business strategy, however, some prereading on basic strategy approaches and vocabulary might be a better place to start.5

This book is intended for strategists across a broad range of industries, from high-tech sectors like electronics, telecommunications, and biotechnology to industrial sectors like chemicals, transportation, and pulp and paper. The latter are often characterized as slow-moving, predictable sectors. However, McKinsey's consulting experience across a wide range of industries suggests that strategists in even these industries face crucial decisions that must be made under uncertainty, decisions that can't be adequately addressed using prototypical strategic-planning and decision-making processes. That's why the book features examples and principles derived from a variety of industry settings rather than focusing solely on currently "hot" sectors like e-commerce.6

The book not only helps senior executives think about uncertainty in new ways, but also gives consultants and strategic-planning staffs the "how to do it" knowledge they need. While the book does not provide detailed step-by-step instructions for completing staff work, it is organized around a four-step process for developing, monitoring, and updating strategies over time.

Step 1: Define the Strategic Issue and the Level of Residual Uncertainty

After clarifying the strategic issue at hand-for example, whether and how to enter a new market-strategy development under uncertainty should always start with an attempt to achieve 20/20 foresight around the factors that drive this choice. The unknown must be separated from the unknowable, identifying the level of residual uncertainty. Chapter 2 provides the framework for doing so.

Step 2: Frame Possible Solutions

Once the level of residual uncertainty is identified, strategists can begin framing and refining possible solutions. Knowing the level of uncertainty helps define feasible opportunities to shape or adapt, bet big today or stage commitments over time, or build a strategy that is robust to the range of possible outcomes. Chapters 3-5 address these fundamental choices and should help you frame possible solutions to your company's strategic issues.

Step 3: Analyze Possible Solutions and Make Strategy Choices

The analytical tools, frameworks, and decision-making models discussed in chapter 6 and the appendix allow you to tailor your approach to the level of uncertainty you face and make the right choices.

Step 4: Monitor and Update Strategy Choices over Time Given the rapid pace of change in highly uncertain business environments, you will undoubtedly have to monitor and update strategy choices over time-in essence, repeating steps 1-3 over and over again. Chapter 7 identifies the systems and processes necessary to do this most effectively.

If you are interested in "how to do it," reading chapters 2-7 in sequence will take you through this four-step process. If you are interested in "how to think about it" instead, you should start with chapter 2, because understanding the material on the four levels of residual uncertainty is a prerequisite to effective use of the rest of the book. But you may then choose to read subsequent chapters in an order determined by your most pressing strategy interests and needs. For example, if you are certain you want to shape, but don't know whether to do it now or later, you might jump directly from chapter 2 to chapter 4. In any event, whether you bought this book seeking advice on "how to do" or "how to think about" strategy under uncertainty, it is organized in a way that should meet your needs.

Finally, while 20/20 Foresight is a practitioner's book, it should also prove useful to business school academics and their M.B.A. students. As a supplementary text in required or advanced business strategy and policy courses, it will help students understand the need to tailor strategic analyses, choices, and ongoing management processes to the level of residual uncertainty. And for academics, it provides an integrating framework for classifying uncertainty and assessing the applicability of competing one-size-fits-all prescriptions to strategy under uncertainty.

Crafting Strategy in an Uncertain World

As you work through this book you won't walk away with any universally applicable approaches. But you will become equipped with a powerful arsenal of approaches that, with a little bit of work, can be tailored to your organization's core strategy issues. It may take a bit of time and effort to embed these approaches in your organizations, and the immediate return on this investment is unclear. But given the enormous upside to making the right strategy choices at the right time, this is one investment under uncertainty you can bank on.

Chapter One - End Notes

Chapter 1 1. Peter Coy, "Exploiting Uncertainty: The 'Real Options' Revolution in Decision-Making," Business Week, 7 June 1999, 118.

2. The typical process often includes sensitivity analyses to determine the impact of alternative assumptions on the strategy's expected return. In my experience, however, decision makers focus primarily on the base case forecasts when making their strategy choices.

3. Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: The Free Press, 1980), 4.

4. I call this a binary view of uncertainty because it indicates that there are only two possible states of nature: certainty and uncertainty. With this binary view, uncertainty can be translated into a simple digital expression where 0 indicates uncertainty is "off" and 1 indicates uncertainty is "on."

5. Pankaj Ghemawat, Strategy and the Business Landscape (Reading, MA: Addison-Wesley, 1999), provides a concise overview of business strategy concepts and frameworks.

6. Most examples in this book are derived from real-world cases. Examples derived from McKinsey's consulting work, however, disguise company names and some aspects of the situation to maintain client confidentiality. In cases where a real company is named, the example was developed using only public sources.

Excerpted from Chapter One, 20/20 Foresight: Crafting Strategy in an Uncertain World, by Hugh Courtney, Harvard Business School Press, 2001. Copyright 2001 President and Fellows of Harvard College. All Rights Reserved.