Building on his experience with more than one hundred consulting projects in fields ranging from health care to manufacturing, from utilities to financial services, Schoemaker shows how major corporations throughout the world have used his pathbreaking methodology to prepare for an uncertain future and profit from it. In this first comprehensive approach to the subject, Schoemaker shows the reader (1) how to develop and analyze multiple industry scenarios, (2) craft nimble strategies with just the right amount of flexibility, (3) implement them using an options approach, and (4) make real-time adjustments through dynamic monitoring. As a leading academic thinker and practitioner, the author draws on the frontiers of decision science, organization theory, strategy, and cognitive psychology to integrate the most practical contributions these various fields have made to navigating uncertainty.
More than any other capability, skill in seizing initiatives in shifting, unpredictable circumstances is the key to success. Profiting from Uncertainty provides a road map to do just that. This book was first published in 2002, well ahead of the mega turmoil that befell the world in 2008 and beyond. The methods and tools described here have been used by many companies and are even more relevant today than when originally published. You can’t do without them.
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About the Author
Read an Excerpt
Preface: Tumultuous Times
I was in the midst of writing this book when the events of September 11, 2001, dramatically raised the level of uncertainty in the world, both real and perceived. Following the terrorist attacks on the World Trade Center and the Pentagon, book buyers cleared the shelves of works by Nostradamus in hopes of finding clues as to what might happen next. Most people crave certainty, yet we live in an increasingly uncertain world. Since it is not possible to know much for certain anymore, we must become skilled at sailing into the unknown.
It is hard to look uncertainty in the eye without blinking. Three weeks before the September 11 terrorist attacks, I was working with managers from a major property and casualty insurance company on scenarios for their business. There was a heated discussion about whether to include in the scenarios major catastrophic losses from terrorist acts or other disruptions. Some argued that such risks were already priced into the premiums and that adequate reserves existed to cover them. Time will tell whether property and casualty insurance companies, and their reinsurers, were in fact sufficiently well capitalized to absorb the shocks from various catastrophic events. (In November 2001, Warren Buffett blamed a large loss at Berkshire Hathaway on what he called a "huge mistake" by its insurance companies in not anticipating the need to collect extra premiums for terrorist acts before September 11.) But I am sure that we gave it far less weight in our discussions than we would today.
Life is inherently uncertain -- from the moment of our birth to the unknown moment of our death -- and yet we hate uncertainty, particularly in business. Business leaders traditionally have viewed uncertainty as the enemy. Skilled management is often seen as the process of avoiding unpleasant surprises. Uncertainty is something to be nailed down and rooted out, an evil that detracts from one's ability to manage with control. Uncertainty creates obstacles for the organization in generating profits and ensuring consistent performance.
As managers, we seek to reduce uncertainty. We gather facts and figures. We turn to experts for predictions. We hope to pin down uncertainty like a butterfly in a scientific collection. We use insurance to buffer uncertainty. We use denial to avoid uncertainty. And we put gates around our communities and our lives to keep risk at bay. We long for certainty with such passion that we very often bend reality to fit our desires. Instead of looking at the complex and chaotic soup that is reality, we make up a story, and we stick to that story under cross-examination, no matter how much the facts argue otherwise. We believe that our business is just on the verge of an upswing -- until the movers come in and begin carting out the furniture. We believe our current business model will be successful in the future -- it always has been -- and so we fail to see that the world has shifted and that new competitors have arrived.
Uncertainty cannot be pinned down or coaxed into cages. It is only partly tamable, and we must learn to live with the beast. We cannot avoid surprises. Instead, we must be ready for them when they come. We need to be able to manage surprise and roll with the punches.
Certainty has never been more elusive than in today's tumultuous times. In recent decades we have lived through shocks such as the fall of the Berlin Wall, the explosion of the space shuttle Challenger, the mapping of the human genome, mad cow disease, Asian financial and political crises, Balkan wars, introduction of the euro, the boom and bust of the dot-coms, electricity blackouts and brownouts in California, and terrorist attacks of various kinds. Technology, deregulation, and other shifts in the global competitive environment continue to reshape the world in unpredictable ways.
Some shocks come completely out of the blue. When I was at Royal Dutch/Shell in the 1980s, our planning group in London had anticipated a major shift in the Soviet Union if a rather obscure bureaucrat named Mikhail Gorbachev came to power. But the Shell scenarios completely missed the subsequent fall of the Berlin Wall and its repercussions for the world (as did Gorbachev and most of the U.S. intelligence community). There will always be surprises, and the most difficult uncertainties for managers are those unimagined and those deemed to be possible but unlikely. But while we cannot fully know the future, we can better anticipate and prepare for the possibilities that we can foresee, factoring them into our strategies.
The silver lining of our turbulent environment is that we need uncertainty to create profit. Only modest profits can come from taming traditional uncertainty such as life insurance risks. Common risks lead to common returns. Consider the financial markets. If we knew the future income stream of a company for certain, its stock price would be largely fixed. There would be little opportunity to buy or sell at a significant profit or loss. In the end, the opportunity to profit comes from uncertainty. Of course, some companies do earn high profits in environments of high predictability, but these profits are drawn from having a better hand of cards or superior execution, not from mastering uncertainty. However, the vast value created by innovation, through distinctive strategies that set a company apart from its rivals, depends upon knowing how to profit from uncertainty.
Profiting, in this context, is different from profiteering. The goal is not to profit by capitalizing on tragedy and hardship, but rather to profit from anticipating different futures and preparing better for them. Such profit can be in the form of money, but it can also take nonpecuniary forms such as universities being better prepared for distance learning, hospitals staying abreast of technological change, and churches anticipating better the evolving needs of their parishioners. The strategies and methods we discuss extend far beyond the for-profit enterprises that constitute our primary focus.
Profiting from Uncertainty offers frameworks and approaches that help business leaders prepare for uncertain futures and find opportunities within them. The following pages offer a systematic approach for understanding uncertainty and capitalizing on it. The book is based upon a comprehensive approach -- using scenario planning, options thinking, dynamic monitoring, and other strategies -- pieces of which have been employed by major corporations around the world to think about and prepare for the future. This book shows how these approaches can be used not only to cope better with ambiguity but also to profit and prosper from it as well.
Paul J. H. Schoemaker
Copyright © 2002 by Paul J. H. Schoemaker
Table of Contents
|Preface: Tumultuous Times||xiii|
|Chapter 1||Embracing Uncertainty||1|
|Chapter 2||Preparing the Mind||24|
|Chapter 3||Experiencing Multiple Futures||40|
|Chapter 4||Preparing for the Unknown||67|
|Chapter 5||Building a Robust Strategic Vision||92|
|Chapter 6||Creating Flexible Options||114|
|Chapter 7||Dynamic Monitoring and Adjustment||139|
|Chapter 8||Implementation: Living with Uncertainty||172|
|Chapter 9||Case Study: Flying through Turbulence||198|
|Conclusion: Navigating the Future||219|
|Appendix A||The Psychology of Uncertainty||223|
|Appendix B||Uncertainty Tool Kit||232|