Blueprint to Navigate a Complex World

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Do you know what I am talking about?

You're right. It's the equivalence of different measures in a year.

But what is time, and why is it so important in strategic planning?

Let me make my case, without being too esoteric, nor too physical.

We have learned and experienced that in a complex system, planning is limited.

It's like driving in the fog, as one of my professors (Guido Strunk) told us. The meaning is, we can plan ahead, but only for a limited period. After that, it's too foggy, and detailed plans make not much sense.

We must drive on "sight."

This is interesting and gives us a lot of insights into planning. Yet, it doesn't help us much in our practices as Managers and CEOs.

Let's start with the core idea of strategic management:

Its goal is to exploit future potential for success.

Contrarily, operational management ensures the exploitation of current potential for success.

This is why we talk in operations about timeframes of 1 Year or less.

Strategic management has to do with decision and the period of time you have to deal with such decisions.

So, what is the right timeframe to plan for? What is the strategic time horizon?

Is it 2 Years, 3 Years, 5 Years? Or even longer?

The answer is easy.

It depends.

Depends on what, you may ask?

Fredmund Malik says:

Time constants are the period of time to which the company must irreversibly commit itself to its decisions because the nature of the business does not allow otherwise.

This is profound.

Imagine you're a semiconductor company. Your current plants are at full capacity, and you need to decide whether to only exploit current success potential or tap into new one.

Tapping into new potential means building a new plant. You have to make many decisions: Which continent? Which country? Which size? ... You know that, based on the current situation, you need roughly 10 years for amortization.

Bingo, there's your minimum strategic planning cycle for this kind of decision.

10 years seems a lot, and it is. Remember, complexity science has taught us that it's hard to impossible to plan this far into the future.

There are things you could and should try to anticipate. This is called risk management.

As a semiconductor company, you might be interested in logistic capabilities the country in focus offers. Or the level of education since you need subject matter experts.

Another important aspect is geopolitical stability, as well as climate change issues. With the right knowledge and expertise, you can assess these factors to a certain extent.

But this analysis has limits. Therefore, it is of utmost importance to create scenarios and derive indicators from those scenarios.

This should help you check, on a regular basis, if your plan works out as you have outlined.

Then there are factors harder to incorporate. You may not have assessed geopolitical tension correctly. Or they changed due to circumstances you couldn't foresee.

What about future potential success? Think of substitution of your product. Or an event that could change the rules of the game in your industry (e.g., AI).

How would you anticipate those over the long run? Remember, your strategic horizon in our example is 10 years.

You can't. This is the whole point of complex systems.

What an unsatisfactory answer. Maybe there is a solution for this?

I don't have one solution for you. I have two.

The first one: Resilience.

When we build companies in a resilient way, they have a much better chance to deal with uncertainty. They have financial and operational resilience. They know how much to invest and have incorporated buffers where needed (and not everywhere).

The second one: Strategic Management.

A company can only survive and grasp hard and weak signals early if they know where to focus.

Here is my blueprint (from Fredmund Malik):

1. Manage your Liquidity. No matter how good your product is, how robust your operations, or how fancy your risk management. There is only one factor that keeps companies in the game. This factor is their ability to pay their bills.

2. Manage your Profit. If a company can still pay its bills, it will survive even if it's not profitable (incurs losses). But not for long. Profitability and profit margin are very important resilience indicators. You need to safeguard them.

3. Exploit current success potential. This is the first metric which couldn't be measured as well as the previous two. But nonetheless, it's an important one. What is your market position, your market share? The top 5 companies (depending on the niche) have a competitive edge due to various reasons. Monitor if it's increasing or decreasing.

4. Explore future success potential By far the hardest part, but also the most crucial if we have to navigate uncertainty for a longer period. How could my product be substituted, what technology or geopolitical development could hurt our company's wellbeing.

The champions league is, if you can link those steps to your Resilience Program. Incorporate it in your day-to-day operations. Suddenly, a completely new world opens up. A world where we have a good chance to thrive and survive.

Sincerly,

Marco

P.S. If you want to learn this and other Frameworks, DM me "Strategy"