In uncertain times, the best strategy is to adapt

Executives often lament, “If we had better forecasts, we could have made better plans.” Teams are pressured to make more accurate forecasts of how the market is evolving, how competitors are reacting, and how consumers are reacting – arguing that forecast accuracy is key to defining winning strategies. But trying to formulate precise forecasts is futile. Meteorologist Edward Lorenz demonstrated this nearly 60 years ago when he popularized the “butterfly effect.” He suggested: “A butterfly flaps its wings in the Amazon jungle, followed by a storm that engulfs half of Europe.” While the phrase is often interpreted as “little things can make a big difference,” Lorenz’s insight actually required Much deeper: in complex systems, a small change in a variable can have no effect, or it can be a huge change , and it is almost impossible to predict what the outcome will be like . Prior to Lorentz’s work, forecasters assumed that an approximate specification of initial conditions would yield approximate predictions of future outcomes. Lorenz’s model proved this assumption to be completely wrong. He found that predictions are useless without a perfect description of the initial conditions. Today, the butterfly effect is almost universal. Our world is more complex and interconnected than ever. Increasing globalization, advances in telecommunications technology, shifting consumer preferences, geopolitical instability, and countless other factors make the future largely unpredictable. It is impractical to capture all these relationships in reliable predictions. So, what should executives do? In our work with clients at Bain, we advise executives operating under extreme uncertainty to ensure that their strategy development is characterized by a willingness to adapt, inherent flexibility and dynamic planning.

Willingness to adapt

Stephen Hawking’s famous quote: “Wisdom is the ability to adapt to change.” If it is impossible to predict what is about to happen , then the secret to success is adapting quickly to what comes up. The Covid-19 pandemic has demonstrated the importance of adaptability. In early 2020, few companies had strategic plans predicting the business impact of the global pandemic. The most successful companies (e.g. Zoom, Amazon, GrubHub, Disney) quickly adapted to the impact of work-from-home orders and other restrictions on workers and consumers. Some capacity expanded in response to sudden surges in demand; others changed their delivery models to serve customers in new and different ways. Less successful businesses (e.g., most commercial airlines and hotel operators) cannot – or do not – adapt. Revenues and profits for these companies plummeted. If Covid-19 has taught us anything, it is the importance of being able to adjust quickly to sudden changes in the external environment.

Inherent flexibility In turbulent times, flexibility has enormous value. As an analogy, consider sailing. In rough waters, sailing against the wind can be extremely challenging – getting as close to the wind as possible can mean hitting the waves, slowing the boat down. Conversely, falling out of the wind will give you a better face against the waves and get you up to speed. Although the distance is longer, this maneuver is almost always faster, mainly because it is more agile. In the face of extreme volatility, some industries have recognized the value of flexibility and have changed their strategies accordingly. Take aluminum production, for example. Future returns on capital projects, such as investments in new smelter capacity, depend on highly volatile prices for electricity and aluminium. Price uncertainty means that sometimes cash inflows from aluminium sales are not enough to cover production costs, or (expressed in various ways) lower than what can be earned from the sale of cogeneration or contracted electricity. Most aluminum producers have strategies that allow them to temporarily halt production during periods of high energy prices and sell available power to the grid. The few aluminum producers that stick to a strict, production-only plan have had significantly lower returns than those that opted for a more flexible strategy. Another example: purchasing strategy. Today, supply chains are being hit by a range of exogenous factors. Russia’s invasion of Ukraine, for example, cut off the flow of raw materials such as titanium, nickel and neon. China’s zero-virus policy has temporarily halted manufacturing in certain industries, hampering the production of everything from cars to smartphones. Companies with flexible supply networks that can source from multiple suppliers in different regions find it easier to deal with these — and other — disruptions. Businesses with rigid supply chains continue to struggle in the current volatile environment.

DYNAMIC PROGRAMMING

In an unpredictable world, you may be tempted to raise your hand and give up planning altogether. But great performance is rarely the result of chance. It needs a direction, even though the exact path cannot be defined. To better handle the extreme volatility of strategy development, companies must change the way they approach strategic planning. They must evolve from a static, plan-before-do model to a dynamic and continuous approach to strategic decision-making and execution. Dell Technologies was one of the first companies to adopt this new model shortly after Michael Dell took the company private in October 2013. The company shifted from a traditional planning model, in which managers create a fixed strategic plan each year, to an approach focused on continuous identification. and make key decisions. This new model, combined with new technologies for making strategic decisions under uncertainty, has more than quadrupled Dell Technologies’ operating profit since 2013. Dell’s leadership hasn’t given up on planning. Instead, it tweaked the company’s model to make it more fit for purpose given the growing uncertainty in the tech world. ••• Today’s unpredictable times require new strategic concepts. As I argue here (in a Harvard Business Review article with my Bain colleague Mark Gottfredson, Strategy in Turbulent Times) is based on Rigorous planning for deterministic forecasting must be abandoned in favor of a more dynamic and decision-centric approach. Flexibility and adaptability must move to the forefront of leadership thinking. Otherwise, too many businesses will fall prey to the vagaries of the butterfly effect.