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Planning Your Company's Future: Do Numbers Tell the Whole Story?

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A pair of recently-published documents from McKinsey & Company and Roland Berger Strategy Consultants suggest that business leaders should spurn strictly quantitative models in favor of alternative predictive tools.

In the January edition of McKinsey Quarterly, the authors of "Have you tested your strategy lately?" offer ten ways that businesspeople can do just that—test their strategies against the firm's famously high standards. From the obvious (No. 1: "Will your strategy beat the market?") to the uncomfortable (No. 8: "Is your strategy tainted by bias?"), these tests run the gamut of business strategy's most oft-broken rules.

The sixth test, "Does your strategy embrace uncertainty?" wonders if business leaders too often base their strategies on specific probabilities, typically calculated by sophisticated predictive models. While not indicting quantitative models specifically (more on that in a moment), McKinsey consultants place their faith in a method that predicts diverse outcomes based on variables that are, crucially, out of a company's control.

Their proprietary method calculates "four levels of uncertainty", ranging from "a reasonably clear view of the future" (level one) to "total ambiguity" (level four). The McKinsey approach is the antithesis of what, the authors suggest, is all too common in modern business settings: companies either assume that they're at level one or level four, and fail to consider the uncertain variables that could alter their projections significantly. It's when companies base their strategies on these blind assumptions that disaster can happen. Companies that consider all the possible outcomes—or, the four levels of uncertainty—stand the best chance of coming through an unforeseen crisis unscathed.

Davos 2011 - See Complete Coverage
Davos 2011 - See Complete Coverage

Now, about those quantitative models.

In an interview given at the World Economic Forumat Davos, Roland Berger CEO Dr. Martin C. Wittig condemned the use of "complex, quantitative modeling," a popular consulting tool which he says "failed" the world by failing to predict the recent economic crisis. "Traditional forecast models have failed," the CEO says, "since they are too volatile, too imprecise or sometimes just plain wrong."

Wittig's alternative solution bears remarkable similarity to McKinsey's "four levels of uncertainty." Instead of just crunching numbers, Wittig suggests, a better plan is to view the future in terms of potential "scenarios". Dubbing them "drafts of the future," he asserts that it's imperative for companies to identify and plan for multiple scenarios that could develop in the fast-changing world of international business.

So what's the takeaway here? Ditch the numbers and hope for the best in an uncertain future? Surely not. Number-crunching plays a huge role in predictive modeling of any kind—that’s what analysts are for!

What businesses really shouldn't do, though, is stake their futures on any one model or likely outcome. If anything, number-crunching analysts should do more—instead of picking one glorious model and sticking to it, McKinsey consultants might advise, pick four. Pick ten. Pick a hundred.

The real takeaway is that businesses can't be too careful when it comes to building a strategy around an unknowable future. Identifying and planning for uncertainty is a "surprisingly rare activity at many companies," the folks at McKinsey say.

Sam Reynolds is the consulting editor at Vault.com. A former journalist, he covers the latest news and trends affecting the consulting industry, as well as providing insight and thoughtful discussion on the Consult THIS blog.

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