Mckinsey Valuation
25814-P.R.(081-090)Uncertainty
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Strategy under uncertainty
Hugh G. Courtney, Jane Kirkland, and S. Patrick Viguerie
The traditional approach to strategy requires precise predictions and thus often leads executives to underestimate uncertainty. This can be downright dangerous. A four-level framework can help.
A
t the heart of the traditional approach to strategy lies the
assumption that executives, by applying a set of powerful analytic tools, can predict the future of any business accurately enough to choose a clear strategic direction for it. The process often involves underestimating uncertainty in order to lay out a vision of future events sufficiently precise to be captured in a discounted-cash-flow (DCF) analysis.
When the future is truly uncertain, this approach is at best marginally helpful and at worst downright dangerous: underestimating uncertainty can lead to strategies that neither defend a company against the threats nor take advantage of the opportunities that higher levels of uncertainty provide. Another danger lies at the other extreme: if managers can’t find a strategy that works under traditional analysis, they may abandon the analytical rigor of their planning process altogether and base their decisions on gut instinct.
Hugh Courtney is a consultant in McKinsey’s Washington, DC, office; Jane Kirkland is an alumnus of the New York office; and Patrick Viguerie is a principal in the Atlanta office. This article is adapted from one that appeared in Harvard Business Review, November–December 1997. Copyright © 1997
President and Fellows of Harvard College. Reprinted by permission. All rights reserved.
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THE CHANGING LANDSCAPE
Making systematically sound strategic decisions under uncertainty requires an approach that avoids this dangerous binary view. Rarely do managers know absolutely nothing of strategic
8/8/00
8:56 AM
Page 81
Strategy under uncertainty
Hugh G. Courtney, Jane Kirkland, and S. Patrick Viguerie
The traditional approach to strategy requires precise predictions and thus often leads executives to underestimate uncertainty. This can be downright dangerous. A four-level framework can help.
A
t the heart of the traditional approach to strategy lies the
assumption that executives, by applying a set of powerful analytic tools, can predict the future of any business accurately enough to choose a clear strategic direction for it. The process often involves underestimating uncertainty in order to lay out a vision of future events sufficiently precise to be captured in a discounted-cash-flow (DCF) analysis.
When the future is truly uncertain, this approach is at best marginally helpful and at worst downright dangerous: underestimating uncertainty can lead to strategies that neither defend a company against the threats nor take advantage of the opportunities that higher levels of uncertainty provide. Another danger lies at the other extreme: if managers can’t find a strategy that works under traditional analysis, they may abandon the analytical rigor of their planning process altogether and base their decisions on gut instinct.
Hugh Courtney is a consultant in McKinsey’s Washington, DC, office; Jane Kirkland is an alumnus of the New York office; and Patrick Viguerie is a principal in the Atlanta office. This article is adapted from one that appeared in Harvard Business Review, November–December 1997. Copyright © 1997
President and Fellows of Harvard College. Reprinted by permission. All rights reserved.
81
25814-P.R.(081-090)Uncertainty
82
8/8/00
8:56 AM
Page 82
THE CHANGING LANDSCAPE
Making systematically sound strategic decisions under uncertainty requires an approach that avoids this dangerous binary view. Rarely do managers know absolutely nothing of strategic