Does your strategy embrace uncertainty?

A central challenge of strategy is that we have to make choices now, but the payoffs occur in a future environment we cannot fully know or control. A critical step in embracing uncertainty is to try to characterize exactly what variety of it you face-a surprisingly rare activity at many companies. Four levels of uncertainty have been identified over years of analysis:

• Level one offers a reasonably clear view of the future: a range of outcomes tight enough to support a firm decision.
• At level two, there are a number of identifiable outcomes for which a company should prepare.
• At level three, the possible outcomes are represented not by a set of points but by a range that can be understood as a probability distribution.
• Level four features total ambiguity, where even the distribution of outcomes is unknown.

Companies often oscillate between assuming, simplistically, that they are operating at level one (and making bold but unjustified point forecasts) and succumbing to an unnecessarily pessimistic level-four paralysis. In each case, careful analysis of the situation usually redistributes the variables into the middle ground of levels two and three.

Rigorously understanding the uncertainty you face starts with listing the variables that would influence a strategic decision and prioritizing them according to their impact. Focus early analysis on removing as much uncertainty as you can-by, for example, ruling out impossible outcomes and using the underlying economics at work to highlight outcomes that are either mutually reinforcing or unlikely because they would undermine one another in the market. Then apply tools such as scenario analysis (see IMPETUS' MediScenes web application) to the remaining, irreducible uncertainty, which should be at the heart of your strategy.