MarketLoop #15, January 2003

Facing uncertainty- a new environmental analysis

The dawn of the 21st Century has been marked by a turbulent environment. Complacency has been replaced by uncertainty, a level of flux that impacts on all areas of life. This has turned conventional planning processes upside-down. Strategic planning for the future has to take into account not only a greater number of factors but also known factors with unsubstantiated impacts and an increasing number of “wild cards” or unknown elements. The state of the business environment ranges from near certainty (the number of people over 60, for example) through some uncertainty (a good or bad summer?) to full uncertainty or wild cards such as an environmental disaster or terrorist activity.

Drivers of uncertainty

The forces of change or events that have made the environment uncertain occur on both the macro and micro levels. They are frequently not limited to one country and events occurring in one area can have a significant impact on others. Some examples of such factors are as follows:

• The state of the economy.

• Terrorism has moved from local to global.

• Evolving work and family environment.

• Lack of direction from (former) authorities such as the church and state.

• Food hygiene scares.

• The impact of unstable share prices on long-term investments.

• Confused personal identity (global, regional, national, local, me)!

There are two outcomes of all this. The first is the “ostrich” approach, burying the head in the sand until the danger has passed. This can be viewed in denial strategies, postponing investment decisions and looking to avoid any risk. The alternative is to adapt to what is looking increasingly like the new reality. This involves acceptance of uncertainty and provision for different outcomes.

The business response

Embracing an uncertain future requires the re-evaluation of an organisation’s role. What does it do? What does it do well? Increasingly we are seeing companies retrenching their core competencies and outsourcing all other activities. This enables management time and effort to be focused and efficient and allows for greater flexibility of operation. Outsourcing enables companies to specialise, to focus on doing a small number of tasks extremely well rather than looking to cover a wide range of tasks, most of which are not directly connected with the company’s business.

The retrenchment is one way in which an organisation may seek to relate to an uncertain environment. It eliminates wasted effort while its flexible approach allows it to adapt and evolve as the environment dictates. Lean, mean and highly flexible has become the pre-requisite for an organisation in an uncertain world.

Flexibility will also require that the product and service offer can be changed quickly. Built-to-order, a Dell-type system, will become increasingly important as companies will not only look to minimise or eliminate costly inventory but they will not want to be carrying unsold, obsolete stock. All of this requires closeness to the customer and close relationships with suppliers and partners to be successfully implemented.

At the same time organisations have to change the way in which strategy is developed. A more flexible approach is vital to ensure that the organisation is able to change its strategy, or at least the implementation of it, as the environment changes. Strategy could look to copy the manner of the Internet protocol where it is able to take a number of different implementation routes if one way is blocked. While the long-term strategy should be relatively stable, the paths to implementation or short-term strategies priorities can be very fluid.

The consumer response

The consumer perspective is quite different. While there may also be an element of retrenching such as through delaying purchase of high-ticket items, the consumer economy can continue to thrive. This highlights the fact that despite media scare stories about the world economy and plummeting share prices, consumer sales can remain less affected. Very low interest rates may effectively cushion the consumer economy.

The paradox of responses

The apparent inconsistency between the business and the consumer responses may turn out to one of the elements of the new reality. The paradox can result from the length of the purchase cycle where businesses would have tended to have much longer cycles in the past. This suggests that businesses should be looking at shorter purchase cycles and making investments pay back quicker. Alternatively, there may have to be new ways to evaluate investment opportunities and return on investment. While consumers will be careful about committing to expenditure, they do not face the high levels of capital expenditure that business does and can make decisions much quicker. Possibly this is an area where business purchasing can take lessons from consumers.

Ending assumptions

Strategy formulation has traditionally worked under a number of assumptions. The principal competitors and their behaviour were known, even if complacency could hide the truth. Many markets are now in a state of flux. New competitors have brought different capabilities to existing markets while other markets have been turned upside-down by technological developments. Consequently, existing assumptions about competitive behaviour or market mechanisms may become invalid. Furthermore, new competitors may frequently operate in a different way to the existing business structure. Competition may not be within a category but through a different way of doing things.

Another assumption that has become or is becoming invalid relates to mass production and mass communications. This has meant that companies have looked to sell as many products as possible to the largest group of consumers using broadcast media to inform about products and services. Industries now have to learn to work under a new environment where mass customisation or fragmented product offerings have replaced mass marketing. In this environment new ways of evaluating and compensating communications agencies have become necessary.

Implications

Uncertainty is a factor that will always exist although the level of uncertainty and the implications of unknown or partly known factors will vary. This is the new environment in which marketers have to operate and not merely a temporary phase. The factors that work together to promote this uncertainty are both macro and micro issues that impact on the business environment in different ways.

The result is that businesses will have to rethink their planning processes so that uncertainty is built in and the business is able to take a flexible and adaptable approach. One of the ways in which Through the Loop has worked with clients has been to isolate the key factors that are impacting on the environment and classifying their level of certainty and extent of impact. This enables a company to work with defined variables that are certain and to isolate and prepare for the less certain factors.

Another implication is likely to be moving decision making closer to the customer. This has the effect of making the company more flexible to respond to consumer needs and opportunities.

Action points

• How often do you examine your strategic plan?

• Are you able to flex strategic and marketing plans according to rapid changes in the business environment?

• Do you have systems in place to identify unexpected changes in the environment?

• How can you identify and respond to new competitors?