Martin posted this article first on LinkedIn
Many years ago, I worked on a strategic plan for Citi, during which time I was privileged to spend a day with Peter Drucker, the elder statesmen of management gurus. I asked Drucker how to predict the future and he quoted Abraham Lincoln: “The best way to predict the future is to create it.”
So, in these uncertain times of pandemic and panic, how should we as senior managers be thinking about the future? Two thoughts come to mind: (1) we must better understand the future, and (2) we must make better decisions regarding risk.
Understand the future by identifying drivers of change
Scenario-construction and analysis is the perfect tool. Scenarios are “what if” stories about the future that allow us to consider almost anything that can happen, both positive and negative, and help us plan various possible responses.
Begin by listing the possible drivers of change, then divide them into two broad domains: The first domain includes those things we think we know something about — usually trends that can be extrapolated from the past. We can, for example, make pretty good assumptions about long term shifts in demographics, based on past and present shifts. The second domain includes uncertainties such as interest rates, changes in political power, and as yet unforeseen innovations. Good scenario planning requires a careful blending of these two domains – the known and the unknown drivers of change – which bound the realm of possibility in the future.
Make better decisions by considering risks
Whenever I hear someone say they see “a light at the end of the tunnel,” my first thought is that it might be the headlight of an oncoming train. Perhaps a mineshaft is a more appropriate metaphor than a tunnel. We’re moving forward in the dark, looking for gold.
We cannot make decisions about the future based solely on what we see or what we think we know. In reality, our decisions are always based in incomplete information – it’s just the best information we have on hand at the time. As a result, we must learn to manage the risks associated with a decision-making process that is imperfect.
We can think of decision-making in terms of four steps:
– Assess honestly: It’s important to know where you are. A clear-eyed, thorough assessment of your current position is necessary before you can set goals and manage risks. It’s equally important to know what you don’t know. Understand the limits of your own knowledge, and question the assumptions of others.
– Define rules of the game: It’s essential that you determine how much risk you are willing to accept in order to achieve your goals. What do you have to gain if you achieve your goal; and what might you have to give up, what might it cost you to achieve this goal? Transparency is essential. You and your team must fully understand the risks and discuss them openly. Note that diversification does not work in times of extreme risk because everything is correlated. Understand that the management of risk requires checks and balances. It never ends.
– Make an informed decision: Always consider all the alternatives and always leave yourself an exit strategy. Ensure that risk is managed at every step in the process. Investigate the reputation of everyone with whom you do business. And be willing to reconsider your decisions as your goals change.
– Re-Evaluate: Monitor outcomes continuously and learn from your mistakes so you can make better decisions in the future. The Japanese philosophy of Kaizen, or continual improvement, is based on just this approach: making small, incremental changes that lead to the fulfillment of one’s goals.
The inevitable events that experts predict – pandemics, earthquakes, droughts, sea rise, and other disasters – take a long time to happen, but when they do, they happen fast. The use of risk management is good practice and preparation for handling the inevitable when it does happen. This approach will give you a good sense of what might occur – sooner or later – so you can make better decisions along the way.