Strategy under uncertainty.

TLDR

Traditional strategy assumes predictive analysis can guide decisions, but in highly uncertain environments this assumption fails, raising the question of what constitutes a good strategy. The authors propose a new approach that distinguishes four discrete levels of uncertainty any company may face. They describe generic strategies—shaping the market, adapting to it, or reserving the right to play later—applied at each uncertainty level using big bets, options, and no‑regrets moves. The framework guides managers in selecting appropriate analytic tools for uncertain decisions and provides a disciplined, systematic way to think about uncertainty’s impact on strategy.

Abstract

At the heart of the traditional approach to strategy lies the assumption that by applying a set of powerful analytic tools, executives can predict the future of any business accurately enough to allow them to choose a clear strategic direction. But what happens when the environment is so uncertain that no amount of analysis will allow us to predict the future? What makes for a good strategy in highly uncertain business environments? The authors, consultants at McKinsey & Company, argue that uncertainty requires a new way of thinking about strategy. All too often, they say, executives take a binary view: either they underestimate uncertainty to come up with the forecasts required by their companies' planning or capital-budging processes, or they overestimate it, abandon all analysis, and go with their gut instinct. The authors outline a new approach that begins by making a crucial distinction among four discrete levels of uncertainty that any company might face. They then explain how a set of generic strategies--shaping the market, adapting to it, or reserving the right to play at a later time--can be used in each of the four levels. And they illustrate how these strategies can be implemented through a combination of three basic types of actions: big bets, options, and no-regrets moves. The framework can help managers determine which analytic tools can inform decision making under uncertainty--and which cannot. At a broader level, it offers executives a discipline for thinking rigorously and systematically about uncertainty and its implications for strategy.