John Kay and Mervyn King’s new book “Radical uncertainty: Decision-making for an unknowable future” [1] could hardly have been better timed. The book was released on March 5th, 2020 as the world was coming to terms with the COVID-19 pandemic and looking anxiously into an unknowable future.

In their book the authors warn us that invented numbers give us a false sense of security. Their view is that economic advice is often based on bogus quantification emerging from models that treat uncertainty improperly. They also point out that there are things we do not know because we cannot imagine them.

In my own research, I have seen numbers publicly communicated that are wrong more often than they are right, either because the organisation issuing those numbers are deliberately communicating incorrect information or because they genuinely don’t know what is correct. A case in point is the earnings guidance issued by S&P 500 firms. While there are reputational and possibly financial penalties for issuing incorrect guidance, with just one quarter to go before fiscal year-end, 87% of the guidance that S&P 500 firms have issued over the last two decades they have failed to meet. Yes, they might be concerned about negative earnings surprises and hence low-ball their guidance, but the 87% are about evenly split between those who deliver actuals above their guidance (46%) and those that deliver actuals below their guidance (41%) [2].

In the case of COVID-19 we seem to be facing a similar situation where there is possibly deliberate misinformation (for political reasons) and certainly where true information is not known. For instance, what is the mortality rate of this disease? Expert opinions range widely, with some believing the true mortality rate to be as low as 0.6% [3], while others believe it to be more than five times greater at 3.4% [4]. What is the transmission rate under different extents of lock-down? How will the disease play out in India and South Africa, where TB is prevalent? When will a treatment become available? And a vaccine? Those are first-order questions about the direct impact of COVID-19? Closing schools in response to the virus is a second-order effect. Parents having to stay home to look after kids is a third-order effect. And so it goes to higher-order effects.

Second and higher-order effects are numerous, interacting, complex, and sometimes unexpected. There is already no shortage of evidence of dramatic, negative effects. For example, market volatility is almost unprecedented and equity movements are mostly downward. Reduction in economic activity is hitting many businesses hard and hence the fiscal stimuli we are seeing around the world. As mentioned, the closure of schools means some parents cannot work. Many people will lose income, some will lose their jobs. Contractors and workers in the gig economy are probably more susceptible than salaried workers. But, there are also positive effects. An example of a positive second-order effect is the reduction of ill health and death due to the reduction of air pollution in China when draconian lockdown was enforced. This is predicted to have saved 50,000 lives, which stands in stark contrast to the 3,200 deaths to date due to COVID-19 [5]. There would also have been less traffic during the reduced economic activity of the lock-down and hence avoidance of road deaths.

How will this all play out? When will life return to “normal”? What will be our new normal? We don’t know. We cannot know. However, this doesn’t prevent opinions being voiced. It seems that everyone with a social media following is speculating. Lots of noise out there. Who to believe? What to do? It seems that when this is behind us, our lives will have been changed in profound ways. New ways of living, working, learning will have been thrust upon us, and some of these new ways will stick.

In this short article, I am not pretending to offer a perspective on what will happen. Instead, in keeping with John Kay and Mervyn King [1], I am saying exactly the opposite: we are in a period of radical uncertainty and thus we cannot rely on a model to forecast our future. Our business strategies are no longer reliable. In the interests of our shareholders, our customers, our suppliers, our employees, and other stakeholders, we need to revisit our strategies … fundamentally!

How do we strategise when the future is unknowable?

We should start by acknowledging this very point. The future is unknowable because the information we need is missing and/or unreliable and many of the interactions producing higher-order effects are too complex or not known.

Does this mean we can’t do anything? Does this mean we should ignore the radical future scenarios like a global pandemic and the potential impact on our business? Clearly the COVID-19 outbreak has proven that we cannot do this. But, at the same time, we need to be practical. Firstly, companies need to ensure that they have a deliberate strategy. This requires them to invest in the right talent, tools, and techniques to get the job done. In getting the job done, strategy teams need to develop scenarios. Strategies can then be tested against these scenarios and adjusted or revised until there is a robust strategy that accounts for these possibilities in a meaningful and pragmatic manner.

So, what are scenarios? Scenarios are alternative descriptions of future worlds. They are typically developed as three or four diverse narratives that richly describe these alternative futures that we might be heading toward. They are effective when they are believable, even if dramatic (like what we are experiencing now), and when their diversity captures the range of possibilities that we are likely to encounter. Why use scenarios? Well, other than helping us understand the uncertainties that potentially lie before us, scenarios help us ensure that our business is ready to respond to these scenarios and to know what to look for when they start to unfold.

Putting scenarios together is nothing new. But what COVID-19 will have demonstrated, is that many companies lacked any form of scenario planning and for those that did, they massively underestimated future uncertainties. The lesson here is to make sure you use this technique and do so properly.

Once we have a set of scenarios, we can ask “what happens to my strategy when this scenario plays out?” and we can ask that for each of our scenarios. A strategy that performs well under one scenario, but poorly under the others is a fragile strategy. A strategy that performs suitably well under all scenarios is a robust strategy. For instance, a bold strategy based on a belief (i.e. a single scenario) that a rapid economic recovery is around the corner, and thus invests heavily expecting to win market share while others are cowering, is fragile. In fact, in a slow, protracted economic recovery, it could lead to demise. On the flip side, a belt-tightening strategy will perform less well than the bold strategy, if the economic recovery is soon and rapid, but it will be robust under both extremes of economic recovery. The belt-tightening strategy can be improved, without compromising robustness, by employing some of the agility techniques, like real options, discussed in a previous article (Applying a “living strategy”).

In summary, using scenarios helps us see how our strategies need to change to avoid fragility and gain robustness. In these radically uncertain times, we need robust strategies. Scenarios help us shape them.

Kay and King’s book was not the only well-timed book on this subject. Margaret Heffernan’s “Unchartered: How to map the future together” [6] was released just a few weeks earlier and delivers many of the same messages. It starts with the quote below, which I leave you with …

“The only function of economic forecasting is to make astrology look respectable” John Kenneth Galbraith.

The Decision Advisory Group helps organisations strategise in a fast-moving, complex and uncertain world. COVID-19 is far from over. For strategising under radical uncertainty, better late than never.

References:

[1] “Radical uncertainty: Decision-making for an unknowable future” (published in the US under the title “Radical uncertainty: Decision-making beyond the numbers”), John Kay and Mervyn King, March 2020

[2] This is based on research currently in progress. Please contact me if you are interested to know more.

[3] https://samharris.org/podcasts/191-early-thoughts-pandemic/

[4] https://www.worldometers.info/coronavirus/coronavirus-death-rate/#who-03-03-20

[5] https://freakonomics.com/podcast/covid-19-effects/

[6] “Unchartered: How to map the future together”, Margaret Heffernan, Feb 2020