Edition 36, Strategy

Learning from the Future to Improve Your Strategy

Por: Antonio Lloret
Professor and Researcher at the Business School, ITAM

Companies can make strategic decisions passively–meaning they replicate some past performance or because they take time to react to changes around them–or actively–meaning they make decisions with a view to the future, promote change ,or react more quickly. Active companies consider the future as a strategic challenge capable of changing current decisions.

When an organization has a competitive advantage over its competitors in the rest of the industry, it is no accident. It is the product of thorough reflection on the set of strategic actions it has taken and will take regarding the use of its resources, trends in its markets, or new product innovation.

This type of competitive advantage has much to do with the company’s capacity to generate both economic and intangible benefits that represent value in the future when they are reflected in the present. A company’s sustainability goes hand-in-hand its capacity to generate value over time. This, of course, depends on its future existence, and because future events may increase or reduce the company’s value, it is important it take these into account.

These future events, whatever they are, may have an impact on the company because executives make decisions either in response to a real event or to the possibility that it will happen. In a perfect world, in which we are absolutely certain of future events, we could analyze the best course of action for the company at every moment. However, in our reality, where uncertainty is an everyday event and decisions made today determine the future of the company, is indispensable that we have the tools for making strategic decisions that generate value at all times. One tool for reducing future uncertainty and maintaining or increasing the value of the company is for the executive and the organization to learn from the future.

But how can we learn from the future if it doesn’t exist yet? The answer is, we have to create it, or parts of it, and simulate possible events, analyzing how these events may generate opportunities or threats for the company and, as a result, take strategic actions to protect ourselves or take advantage of the fact that, if the contingency does occur, the company can not only act immediately, but it can benefit from the circumstances and create a competitive advantage.

Let us assume, for example, that you work for a company in the food and beverage industry, and you are the manager for a brand of fruit drinks. You compete with other companies that also produce fruit drinks. Learning from the future means understanding the main variables around which your business revolves. In our example, some of these valuables may be national or regional trends in the consumption of fruit drinks, the size of the market your company serves, the supply of fruit concentrate and of the necessary ingredients to make the drink, potential regulations, entry of new competitors, etc. We have said that if an organization acts passively or reactively to an event, it could lose the opportunity to adapt to new circumstances. The competitive advantage lies with the company that adapts in the least amount of time to the new climate. In our example, let’s assume a regulatory restriction, in which fruit drinks must have a reduced quantity of sugar or sweeteners per unit. The company that learns from the future should be able to simulate a change in the regulation and take precautions, generate a plan of action and evaluate the implications that such a change could bring to its market or consumer preferences. But the passive company learns only from the past, so it will wait to see the impact of the new regulation and once it understands it, will take precautions. when this happens, the company that learned from the future is already one step ahead, because it has the most efficient response capacity. The passive company will wait for a new opportunity. Learning from the future is precisely an opportunity generator, and it should be viewed as such.

So how can we learn from the future? By designing and simulating possible strategic scenarios, which arise when we analyze how the company would react to various future events, from catastrophes to trends in a relatively well-known variable. We build a scenario in which we posit the occurrence of an event, and decide which actions to take.

Let us return to our fruit drink company and imagine, for example, that the future presents us with a regulatory restriction on calorie content. The scenario would help us to understand how the company would react to this restriction, either by seeking out some sort of substitute sweetener that has a lower calorie content, or by reformulating the beverage to comply with the new regulations.

So what should the company do in the event of a weather-related catastrophe like a hurricane or earthquake? Well, simulating a hurricane is not easy and that is not our task at present, but we can assume that some distribution routes could be closed are flooded and, as a result, we might be unable to serve a particular segment of our market. Learning from the future means, in this case, having a plan of action that reduces the impact of such catastrophes as much as possible and enables the company to maintain supply to all its markets, by finding alternative routes or distribution systems. In short, learning from the future involves simulating the occurrence of an event and generating a plan of action to face it the best way possible, taking advantage of opportunities it may generate and reducing the threats.

To learn methodically from the future, we can sum up the actions to be taken in three phases:

  • Prepare an “X-ray” of the company by understanding and knowing what are its strategic assets or the resources and capacities and give it a value. In the example of the fruit drink company, the formula and the distribution chain are indispensable for generating value in the company.
  • Identify economic, demographic, political, social, labor or environmental variables that may present an opportunity or threat to the company’s strategic assets. In our example, political variables and environmental factors are some of the elements that may be used to learn from the future.
  • Once the variables are chosen, and having understood the conditions under which they might occur, we can generate strategic scenarios. In these, we decide whether the variable in question would have a positive or negative effect on the company’s strategic assets and specific actions or plans of action to implement if that uncertain event materializes.

These three steps can be broken down into greater detail to learn from the future starting today.

To prepare an x-ray of the company, we must be very clear about our strategy, and specifically the type of competitive advantage that our company exploits. For example, do we operate lower costs, or offer greater benefits, or are we different in some other way?

Next, we must evaluate our company’s resources and capacities; this means intangible and tangible resources that allow the firm to create value, like a brand, a plant, the distribution chain, exclusivity contracts, or concessions the company holds, and which are subject to opportunities or threats from future events. The idea here is to distinguish those resources and capacities that allow us to pursue our strategy, in other words, our strategic assets. Without these, we will not get very far.

The next step is to distinguish our agents of interest (vendors, clients, competitors, regulators, substitute and complementary products) in order to understand the industry and its main players so that when we assemble our scenario we can also understand the impact it might have on other players. The x-ray of the company can help us to understand its value generators and those of the main players in the market.

Since we already have a lot of information about the company and its environment, we must now list the uncertainties the company could be affected by in general terms. An important question is whether what the organization does with its value chain could be affected by some event.

This type of analysis could prove tedious because of the wide number of events that could affect the value chain in the future, so our analysis should be limited to the most important variables and a brief description of their effect on the value chain. The list of variables may be:

  • Economic (inflation, GDP, devaluation)
  • Demographic and social (population growth, change in preferences, dietary trends, ethics)Labor (strikes)
  • Environmental (extreme weather, climate change)
  • Political and regulatory factors (taxes, trade agreements)

This will help us to distinguish what variables could have the greatest impact on given processes.

To select our variables, we should list them and go over them in different ways while considering how they would affect or benefit agents of interest and out strategic assets. This exercise is useful for considering how important each variable is, because many of them may not be that significant. It is also important that they meet the following criteria:

  • That they be relevant (they would change the course of our actions)
  • That they are consistent in time (that they exist in a time period relevant to the firm)
  • That they are consistent in space (that they have to do with the region or regions about which the firm makes decisions) and,
  • That they are exogenous (the company cannot change their course)

With regard to this last point, it is very important to remember that uncertainty comes from without, something that does not depend on the company–otherwise it would be endogenous and controllable. An example of an endogenous event is a company’s financial situation. Although this may be affected by external events, it is not in itself an uncertainty, because it is something internal that the company can improve. Having picked the strongest variables, we then proceed to build strategic scenarios. To do so, we must choose the most relevant pairs of uncertainties for our scenarios. Now we cross pairs of uncertainties and check them for consistency, meaning that they are relevant in combination, that they are not correlated, and finally, that they say something in terms of possible events. Having crossed two uncertainties, we can think of them as coordinate axes on a Cartesian chart and rate each quadrant as positive-positive, negative-negative, positive-negative and negative-positive. For example:

Once the quadrants are mapped out, it is time to prepare scenarios. The idea in creating scenarios is to evaluate the impact of an event on strategic assets. It is best to take each quadrant independently and evaluate whether it is requires strategic action to maintain the company’s value. It is also a good idea to list the repercussions each scenario will have on the agents of interest.

Once we have various panoramas laid out, it is time to evaluate the cost of the actions that may be taken. For example, the cost of formulating a new beverage with lower caloric content or developing new distribution routes. Finally, once we have developed scenarios with various pairs of alternatives, we should go over the actions that appear in several the scenarios and then decide whether or not it is worth taking them. For example, if our scenarios repeatedly reveal a need to establish an alternate distribution route, this may well be an action that would be worth the trouble to implement, regardless of whether or not the event actually occurs in the future.

Generating and simulating future events is not an exercise that should lead to paranoia. It is important to see that the future is a great ally, and learning from it is an opportunity generator.

References

Courtney, Hugo; Kirkland, Jane; & Viguerie, Patrick (1997), “Strategy under uncertainty,” Harvard Business Review, vol. 75, no. 6, pp. 67-79.

Schoemaker, Paul (1995), “Scenario planning: A tool for strategic thinking,” Sloan Management Review, vol. 36, no. 2, pp. 25-40.

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>