Roadmaps through the strategic fog

Traditional theory of strategic and financial planning holds that companies travel on highways without sharp bends, roadblocks, exits and forks. These processes for evaluating a company's strategic investment activities are fully applicable when the economic environment is stable and predictable. But at a time when economies and technologies are changing rapidly, these processes are extremely limiting and even dangerous.

Six Features of Contingency Roadmaps

When uncertainty prevents companies from making reliable forecasts, a contingency roadmap is often the best tool for solving problems. A good contingency roadmap has the following six important characteristics:

Contingency roadmaps are constructed for possible events that really matter. Uncertainty in the corporate environment can be numerous, but only a few will have a material impact on a company's strategy. Therefore, businesses need to focus on these events and ignore others.

A solid understanding of each of the key value drivers of a business may have multiple outcomes, and a solid understanding of these outcomes forms the basis of a contingency roadmap. Contingency roadmaps are rooted in facts and are exhaustive studies of possible future outcomes. This is the difference between a contingency roadmap and a contingency plan. In contrast, contingency plans focus primarily on how the business responds to a worst-case scenario for a key value driver.

The contingency roadmap can identify important signals or fuses for each possible event, that is, monitor the most important fuse indicators, and sound the alarm when the fuse is ignited. Taking investment in information technology as an example, the contingency roadmap in the hands of a corporate CIO should closely monitor the latest macroeconomic indicators such as GDP growth rate, investment spending, and key sectors such as telecommunications and computer hardware and software. output value. Major mergers and acquisitions, potential new technology standards, changes in the strategies of key competitors, and changes in consumer spending habits may all point to revisions in corporate IT investment strategies.

Contingency roadmaps identify strategic courses of action for each possible event. Some possible events may require revision of the strategic action plan, while others may maintain the existing strategic action plan.

The contingency roadmap is constantly revised and improved based on new market and competitive intelligence. It should be seen as a flexible plan, not just a static scheme describing future actions.

A contingency roadmap is not limited to making recommendations on how to change a company's strategy, it also creates change. This is because they are directly linked to the strategic capital allocation and decision-making process.

If there are several roads intersecting at a certain fork, and it is easy to know which way to go, then using a contingency map to deal with uncertainty is a better choice. But for more complex situations, such as a road that pops up out of nowhere, the principles of multi-option portfolio management can better guide the development of the right investment strategy.

Case Deduction Contingency Roadmap

A petrochemical company called Polypo developed a contingency roadmap with these six characteristics to manage an investment with a highly uncertain business outlook. The business has historically been loss-making, and management has been considering whether to sell it or shut it down -- until it develops a strategy that appears to bring in additional profits of $100 million a year.

The strategic plan relies on an improved catalyst technology to improve cost/performance ratios and increase revenue. However, the company faces three notable uncertainties: the technological and commercial success of the new catalyst, the speed of penetration in differentiated product segments, and the ability to maintain high profit margins.

So in 1996, Polypo developed a contingency roadmap based on these three uncertainties to make "go" or "give up" decisions. If the new catalyst does not make a technological breakthrough by the end of the first quarter of 1997, the company will sell the business or form an alliance with a partner with advanced technology. But if the catalyst crosses the technical threshold, the company will continue its marketing efforts to bring it to different product markets. At the end of 1997 came the second hurdle: if Polypo's market penetration was satisfactory, the company would continue with the strategy. Otherwise sell the business or implement an alliance. At the end of 1998 there was a third hurdle: if profit margins could be maintained, additional investments would be made to consolidate the business, otherwise the business would be exited.

Four Stages Drive Strategy Evolution

The contingency roadmap method assumes that possible future outcomes are identifiable. But how do you decide what to do when these outcomes are hard to identify? That's when it's time to adopt a set of best practices called the Strategy Evolution approach. The strategy evolution method is used to help managers make quick decisions and bold investment in a rather uncertain environment. It consists of four stages: scan, experiment, monitor and invest.

"Scanning" means having a fairly sophisticated network for collecting, communicating and synthesizing market information. A successful network should be a system that provides early warning signals to prevent problems before they occur. Such a network has three characteristics: first, the network includes external stakeholders, such as important partners, venture capitalists and customers; second, the network focuses on the edge of the existing business, where the greatest opportunities and Where the threat exists; the third is that the network is always in working condition.

Take Cisco as an example. The company has a particularly efficient network despite its current difficult situation. The network, which builds on the company's close relationships with bankers and venture capitalists, helps Cisco learn about promising new technologies, laying the foundation for the company's "acquisition-for-growth strategy."

"Experimentation" is to learn more about new opportunities and threats. When Intel realized the market potential for multimedia-capable microchips, it made venture capital investments totaling $500 million in 50 different companies, treating each investment as a fairly low-cost experiment. Charles Schwab relied on experimentation to explore new brokerage opportunities. Experiments can provide relevant information and build relevant capabilities even if they fail.

"Monitoring" relies on reliable data obtained from experiments. When Charles Schwab piloted an online banking service (E-Schwab), it measured daily website hits, transaction volume and transaction size.

A company "invests" in its markets, capabilities and assets as a result of its scanning, testing and monitoring activities. Companies that set clear, ambitious performance goals can motivate themselves to be fully engaged. For example, 3M's "30% rule" (that 30% of sales should come from products launched in the past four years) provides a high standard of innovation that avoids bad decisions.

In an environment of high uncertainty, companies are able to make sound decisions based on many organizational principles. One of these principles is how the company creates and captures the desired value. For example, Sun Microsystems' value description of "the network is the computer" drove the company to provide software over the Internet; Philips' "control of living intermediaries" drove the company's rapid foray into Internet TV.

The original text is excerpted from the March 2002 issue of Optimize magazine with permission. Copyright CMP Media LLC in 2002. This article may not be reproduced without the company's permission. Translated by Li Jian.

Author Hugh Courtney is a global strategy consulting practice leader at McKinsey & Company and author of 20/20 Foresight: Crafting Strategy in an Uncertain World.