New cars are not allowed on the road just like that, not even if they come from the most renowned manufacturers. Solid walls and swinging blocks test the safety of drivers and passengers brutally. Casual walkers and cyclists should also have a fair chance to survive a huge collision. Safety stars push sales up while very few people are willing to buy cars with a poor safety rating. Cars are not an exception, bicycles, toasters and prams also undergo numerous test to evaluate their durability. Test results deservedly determine market success nowadays. Then why do so few companies put their strategies to a really firm test?
Push the boundaries of your own strengths and competences by simulating some truly hard crashes.
Most companies take no chances when they outline their strategy for the future. They explore old and new markets, analyse competitors and calculate the financial implications of their business plans. Expensive strategy consultants throw themselves on all available data and choose from among the options they have first thought up themselves. Directors look at proposals from every angle and shoot at every weakness. To assess the vulnerability of outcomes for different assumptions finance departments carry out numerous ‘what-if’ analyses. Obtained insights lead to large and small strategic adjustments and changes in investment policies. If that is not tough testing!
Obviously, sharp debates and sensitivity analyses do help to strengthen strategies and business plans. Companies are well advised to continue doing it and even intensify it whenever deemed necessary. But regardless how well this is done, as tests of robustness they sooner or later fail. Why? Mainly because they test ‘everyday use’ supplemented with some familiar ups and downs. The ordinary highway with some tough rides off-road or in heavy snow. Slices of bread interspersed with a handful of thick toasts with pineapple. No truly peculiar outliers or exceptional situations. In a similar way financial ‘what-if’ analyses typically only test for relatively minor fluctuations and, if so, only those in key variables we are already familiar with. Business-as-usual alternating with some periods of double-digit market growth and incidentally a major disappointment in procurement costs. What can companies do more?
If we consider the testing of cars, the answer to this question is relatively simple: push the boundaries of your own strengths and competences by simulating some truly hard crashes. A crash test for strategies is, however, considerably more complicated than for cars. Preferably it involves disruptive changes in which not just one variable at a time changes but dozens of variables change simultaneously and significantly. Whereas test conditions for all cars can be same, testing strategy always requires customisation. Not just random incidents but well-chosen events and developments that bring the markets on which a company operates to a sudden and harsh standstill. Is it a new technology that turns up from another market and makes existing products suddenly expensive and superfluous? A totally unknown virus that contaminates drinking water throughout entire continents? Or the fall of a reigning government or royal family in a major country? It is fully irrelevant if we think it is possible or not, as long as it leads to a substantial crash that demands the most of a company. What safety rating does your strategy get
First published as a column in CFO Magazine (in Dutch).