HOW TO TAKE STRATEGIC DECISIONS IN AN AMBIGUOUS WORLD

At the beginning of March, one of my students asked me about the consequences of the COVID19 crisis. I started my answer by discussing the Chinese position in the global supply chain, but he gently interrupts me and asked: I was just wondering if we will have class next week? I said yes and that I didn´t have any reason to believe in something different. The next day in the morning the governor of Rio de Janeiro suspended all the classes in the city for two weeks. We are seven months later and we don´t know when our lives will go back to normal. Or more, will it be the same normal that we used to?

This is a good example of the uncertainty we are facing nowadays. The COVID 19 crisis is characterized by extreme uncertainty and not by high levels of risk. When we talk about risk its means that we know the possibles outcomes of certain actions and their associate probabilities. Yet, we are under uncertain environments when we don´t know the possibles outcomes of action and of course, it is impossible to have any associate probability.

That is why the attempt to forecast scenarios has been an extremely difficult task and the chances of making mistakes are also extremely high. So, how can a company set strategies during this period with very few assumptions of the future? And more, knowing that any assumption about the future probably has a great chance to prove to be wrong.

The good news is that coping whit high uncertainty is daily life for very innovative startups and small and medium companies in international markets. For those, we have the effectuation theory that favors control logic over forecasting logic for the firm's strategic decisions. Indeed, the benefits of planning appear to be significantly reduced and the logic of control seems to be more appropriate in contexts of high uncertainty and ambiguity.

You can apply this control logic in your current business starting by rethinking your business model by

1.      'Who you are?'. That means your capabilities and resources.

2.      'What you know?'. What kind of information and knowledge you have?

3.      'Whom I know?'  What resources you can have access to through your network.

After these reflections, you can answer: 'What you can do?'. In order words, what activities you can perform, what channels you have access to, and how can you create relationships with your clients.

At this time you will notice that you will have to choose among several options for what you can do. For each option make a list of all costs and possible revenues. Since we don't know the risks, the logic of risk and return will not help you to choose. My advice is to think about the affordable loss, indeed, experienced entrepreneurs usually base their investment decisions on how much they would bear to lose, not so much on how much they hope to win. Remember we can't predict the future and control the revenues, but we can control the cost.

By doing this you finally can have the value proposition that you can deliver to your target market. Notice that in control logic you define your target market based on what you can do. That is different from what I am supposed to do to access that particular market.

With that, you will have a complete traditional business model, and more, you will be confident enough that you can implement it even in a very uncertain environment like we are now.

Henrique Pacheco