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Strategy in Scary Times

Now that the war against terrorism has shattered any hope of a quick economic turnaround and upended the strategic planning at companies of all sizes, an understandable response might be paralysis. However, that option would likely prove fatal, says Hugh Courtney, consultant with the global strategy practice at McKinsey & Co. in Washington, D.C., and author of 20/20 Foresight: Crafting Strategy in an Uncertain World.

Courtney advises against seeing uncertainty as an either/or condition: Just because you can't forecast some outcomes, doesn't mean you can't adequately predict anything. Courtney slices uncertainty into four levels, with Level 4 being those questions whose answers are unknowable, where there is a limitless range of future outcomes. In an interview with BusinessWeek Online reporter Theresa Forsman, Courtney discussed strategies for coping with the cloud of uncertainty in which many businesses are now operating. Edited excerpts from their conversation follow:

Q: You wrote this book before September 11, which redefined the term "uncertain world" for many businesses and, of course, individuals. Does your advice hold up under that level of uncertainty?

A: What happened reinforces quite a bit of the advice in the book. No doubt September 11 will have consequences that none of us can foresee at this time. That makes it particularly challenging to make a strategic decision. There is a real danger that we will fall into thinking of uncertainty as either on or off. If we treat uncertainty as "on" after September 11 -- as if everything is Level 4 and there's no way to understand what's going on -- then people will delay any strategic commitments whatsoever, becoming paralyzed.

Q: Isn't that realistic?

A: Some of the geopolitical and macroeconomic uncertainties we face are truly Level 4. How we are going to combat terrorism over the next week, let alone over the next 18 to 24 months, I just can't know. A lot of the factors that matter most, though -- position in market, technical-performance features, regulatory structures, the value proposition of the product or service -- hasn't changed much for many businesses. I'm really worried about people looking at the uncertainty and having it be overwhelming.

Hugh Courtney

I have an industrial client, a chemical company, whose business is cyclical -- if you manufacture plastics and people stop buying cars, that matters. The company has foreign operations, so security issues are more challenging than they ever have been. But its main uncertainties right now are around competitive conduct -- and they always have been. Who else is building a plant now? What will the supply-demand balance look like two, three, four years out? That's something they can get a handle on through good competitive intelligence and treat it like Level 2 uncertainty [which is analogous to a multiple-choice exam, describing those questions for which there is a limited number of possible answers, one of which is correct].

The initial reaction in all this was very personal, very visceral: My God! The world has changed, how can we ever think about building another chemical plant in Southeast Asia? They need to be very systematic in trying to figure out how much is permanent change, how much is transitory.

Q: In the book, you say Level 4 situations tend to degrade over time to lower levels of uncertainty. In this economy, who can afford to wait until uncertainty dissipates?

A: There's time to wait on big strategic commitments. If a chemical company really is concerned about whether there will be demand for that new plant's output down the line and it is pretty sure its competitors are cash poor, and therefore won't preempt them, then waiting out the decision whether to build the plant is O.K. What they can't afford to do is wait it out and at the same time do nothing with their current business model. No one in this economy who is sensitive to a downturn can just run business a usual. A lot of companies are just bleeding cash right now, and you can't do that.

Q: You recommend embracing uncertainty -- "explore it, slice it, dice it, get to know it." Do you see many companies doing that right now?

A: I see more paralysis at this time. I think that is natural and perhaps even healthy -- I hate to say that. I'm a consultant who travels quite a bit, so a natural reaction for me, as a person, is to hunker down and try to manage my professional obligations in a way that I feel safer and more comfortable. In the aftermath of September 11, it's natural for business decision-makers to think that way and fall into a paralysis mode -- maybe even a grief mode. As we get used to the new environment, I think what you'll see is people being much more systematic about figuring out what has changed and what hasn't, what opportunities lie in the current downturn to embrace uncertainty. It would take a real contrarian to do that today, only a few weeks after the attacks. But over the next few months, I hope we see more of it.

Q: Your book says the level of uncertainty is issue- and company-specific, not industry specific. Would that still be true today in, say, the airline industry?

A: What has and hasn't changed is incredibly sector-specific. For airlines, this is a fundamentally new world. Their whole regulatory framework is in flux, and the impact on demand is likely to be sustained. I don't know that there are good historical precedents to gauge how long and how deep it will be.

Q: What if I were an airline asking for your advice?

A: Because of cash-flow problems, airlines need to focus on strategies that are about resilience, cutting back to the bone to reduce fixed costs as much as possible. It's a terrible shame to think that what we have to do in the long run to save airlines is to curtail service in the short run, but I wouldn't be telling the airline executives anything they are not thinking about today.

Q: Your book talks about the opportunities that arise in times of high uncertainty. Is that still true?

A: When people ask me today to talk about September 11, I always come back to this: Avoid the binary view, that uncertainty is either on or off. Dig down deep to figure out what you know and what you don't know. History is not always the best guide for strategic decision-making. Today, relying on history that says recessions always turn around within X number of months is just imprudent. But there is no reason to believe our economy and world economy won't recover, and history does provide some lessons in how the biggest winners in the next upturn behaved during the [previous downturns]. have a cash buffer, it's a good time to take bold, competitive strategy actions. Focus on what you can shape. Any strategy contingent on how the war on terrorism plays out is really dumb -- you can't control it.

A prerequisite for playing the next game is being there, so it's prudent and smart to focus on survival. If you were healthy before September 11 and have a reasonable cash cushion, you can position yourself for the long run. Getting rid of your best people is not the best way to cut costs. Cutting research and development and missing out on the next generation of microprocessor or drug is not the best thing to do. If you have the cash, be pretty forward-looking for opportunities to position yourself competitively.

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