Uncertainty is simply a fact of making decisions about the future. It isn’t inherently good or bad. What matters is whether we understand it.
Every strategy is built on assumptions about what we expect to happen.
How quickly revenue will grow.
What margins can be achieved.
What resources will be required.
How customers and competitors will respond.
A forecast brings those assumptions together and shows us their expected financial consequences. It helps us determine whether the strategy, on those assumptions, is financially viable and sustainable and capable of achieving its objectives.
But we also know that reality is unlikely to unfold exactly as assumed.
Revenue may grow more slowly. Margins could be higher or lower. Costs and working capital requirements will differ. Some assumptions will prove conservative and others optimistic.
That does not necessarily invalidate the strategy.
A strategy built around 10 per cent revenue growth may still comfortably achieve its objectives at 8 per cent. The important question is not whether reality will differ from the forecast. We should expect that it will.
The important questions are where the uncertainty lies, how much it matters and what, if anything, we should do about it.
Some assumptions carry considerably more uncertainty than others.
An established business entering a new market, for example, may understand its costs and operating capacity extremely well but have much less certainty about customer demand.
But the degree of uncertainty is only half the story.
Suppose customer demand could reasonably vary by 20 per cent, yet the strategy remains viable across that entire range. Compare that with an assumption about gross margin that is relatively predictable but where a fall of just two percentage points causes the profit objective to be missed.
The first carries greater uncertainty. The second may carry greater consequence.
What matters is the combination of uncertainty and consequence.
Once we understand both, we can ask much better questions.
How differently can things turn out while we still achieve our objectives?
Where are we most exposed?
What happens if several assumptions move against us together?
How confident should we be in the outcome?
Then we can decide what, if anything, to do.
Management might change the strategy, preserve additional funding capacity, alter the timing or scale of an investment, monitor a particular driver closely or establish a point at which action will be taken.
Or it might quite reasonably do nothing.
If the strategy can comfortably absorb the uncertainty, understanding that provides valuable information in itself.
Understanding uncertainty does not give us a better prediction of the future. It gives us a better basis for making decisions about it.
A Thought to Leave With You
“We don’t need certainty to make good strategic decisions. We need to understand the uncertainty well enough to know whether it matters and what, if anything, we should do about it.”
