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Planning under uncertainty

Strategic planning initially proceeds from the fact that the future is predictable. But what to do in a situation when it is impossible to predict events and their impact on business?

Uncertainty does not allow planning investments and production volumes, and, as a result, can lead to financial losses for the company. Let's see how to avoid these inconveniences.

Traditionally, there are three types of factors that can affect the development of a company.

The first group is trends that can be determined rather accurately. This is the simplest group of factors. Their influence on business development is obvious. For example, with the trend of tightening environmental policies, companies need to increase their investment in facilities that reduce emissions.

The second group of factors are those that can be assessed after a preliminary study. This category of factors includes, for example, demand forecast, competitors' plans to increase capacity, etc.

The third group includes factors that are not defined and here is the main source of uncertainty. This group includes, for example, such a factor as whether a certain law will be adopted or not. The company's growth strategy may be subject to significant changes and can cause a risk that the company can not manage.

The last group of factors introduces the greatest complexity into the process of strategic planning of the company, but even it can be reduced. Methods for reduction are divided according to the sophistication of such uncertainty.

Level 1. It's simple

In such situations, all factors are amenable to any definition and assessment. Usually there are no such events that could introduce different scenarios for further realization in case of these occurrences. At this level, it is sufficient to use a standard set of methods such as marketing analysis, value chain analysis, commodity chain analysis, factor models, etc.

Level 2. Attention, there are alternatives

The first stage of the complication of the task is alternative prospects described in several isolated scenarios. All of these scenarios will have different triggers for launching.

The solution of such tasks undermines development of several scenarios which are associated with the probability of certain events occurring. This probability is often assessed at the expert level. The result should contain a decision tree with key metrics for each outcome.

Level 3 Spectrum

The future is described in a range of different options that will affect the process but without a particular result. Also, such situations include the extreme points of the range, but do not contain strong scenarios to achieve the median variant. Such tasks are usually typical for companies entering new markets.

In cases like this, it is better to use scenario analysis and identification of key triggers of major events. Of course, it will not be possible to predict any specific situation, but it will be good to determine some framework for future activities. The main recommendation may be to limit the number of scenarios taken into consideration for the likeliest to be implemented.

Level 4. Complete uncertainty

The uncertainty is so multilevel that it simply cannot be described. The main tip is not to go at random, trusting only your intuition.

To solve and determine the strategy in such cases, management can single out a subset of factors that determine the development of the market, as well as select indicators that will help to guide in changing the direction of development. The growth strategy can be modified in the process of obtaining reliable data.

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