CHAPTER TWO
Planning for Uncertainty
UNCERTAINTY — IN THE ECONOMY, society, politics—has become so great as to render futile, if not counterproductive, the kind of planning most companies still practice: forecasting based on probabilities.
Unique events, such as the Perot phenomenon or the dissolution of the Soviet empire, have no probability. Yet executives have to make decisions that commit to the future current resources of time and money. Worse, they have to make decisions not to commit resources—to forgo the future. The lengths of such commitments are steadily growing: in strategy and technology, marketing, manufacturing, employee development, in the time it takes to bring a new plant on stream or in the years until a commitment to a store location pays for itself. Every such commitment is based on assumptions about the future. To arrive at them, traditional planning asks, “What is most likely to happen?” Planning for uncertainty asks, instead, “What has already happened that will create the future?”
The first place to look is in demographics. Nearly everybody who will be in the labor force of the developed countries in the year 2010 is already alive today. There have been two revolutionary changes in the workforce of developed countries: the explosion of advanced education and the rush of women into careers outside the home. Both are accomplished facts. The shift from blue-collar labor to knowledge and service workers as the centers of population gravity is irrevocable. But so is the aging of both the workforce and population.
Business people need to ask: “What do these accomplished facts mean for our business? What opportunities do they create? What threats? What changes do they demand—in the way the business is organized and run, in our goals, in our products, in our services, in our policies? And what changes do they make possible and likely to be advantageous?”
The next question is: “What changes in industry and market structure, in basic values (e.g., the emphasis on the environment), and in science and technology have already occurred but have yet to have full impact?” It is commonly believed that innovations create changes but very few do. Successful innovations exploit changes that have already happened. They exploit the time lag—in science, often twenty-five or thirty years between the change itself and its perception and acceptance. During that time the exploiter of the change rarely faces much, if any, competition. The other people in the industry still operate on the basis of yesterday’s reality. And once such a change has happened, it usually survives even extreme turbulence.
World War I, the Depression, and World War II had no impact on such trends except to accelerate them. Examples are the shift of freight traffic from railroads to trucks, the shift to the telephone as primary carrier of communications over distance, and the shift to the hospital as the center of sickness care.
Closely related are the next questions: “What are the trends in economic and societal structure? And how do they affect our business?” Since 1900, the unit of labor needed for an additional unit of manufacturing output has been going down steadily at a compound rate of about 1 percent a year. Since the end of World War II, the unit of raw materials needed for an additional unit of manufacturing output has been decreasing at the same rate. Since around 1950, the unit of energy needed for an additional unit of manufacturing output has also been going down steadily at that rate. But from the 1880s, since the telephone and Winslow Taylor’s Principles of Scientifi c Management, the amounts of information and knowledge needed for each additional unit of output have been going up steadily at a compound rate of 1 percent a year—the rate at which businesses have added educated people to their payrolls.
Indeed, the computer may well have been a response to this information explosion rather than its cause. Similar structural trends can be found in most industries and markets. They do not make the “weather” for an industry or a company—they create the “climate.” Over any short-term period their effects are slight. But in the not-so-long run these structural trends are of far greater importance than the short-term fluctuations to which economists, politicians, and executives give all their attention.
Whoever exploits structural trends is almost certain to succeed. It is hard, however, to fight them in the short run and almost hopeless in the long run. When such a structural trend peters out or when it reverses itself (which is fairly rare), those who continue as before face extinction and those who change fast face opportunity.
The most important structural trends are those that many executives have never heard of: in the distribution of consumers’ disposable income. They are particularly important in a time of uncertainty like today’s. At such a time, these trends tend to change—and to change fast.
For the past one hundred years most of the tremendous increase in wealth-producing capacity and personal incomes—a fiftyfold increase in the developed countries—has been spent on greater leisure, on health care, and on education. These three, in other words, were the dominant growth areas of the twentieth century.
Will they continue in that role? For leisure the answer is almost certainly “no.” Health-care spending as a percentage of consumer income is more than likely to be capped in the next decade despite the increase in the number of old people and the advances in medicine. Education should continue its growth—but primarily as education of already well-educated adults, while changing from the most labor-intensive of major industries to one of the most highly capital-intensive ones. What challenges—to a company’s policies, products, markets, goals—do such changes present? What opportunities?
These are macroeconomic trends. But similar structural trends shape the microeconomies of individual industries and markets; they are equally important. For three hundred years, since colonial days, the floor space per family, and with it the percentage of consumers’ income spent on housing, has steadily grown in the United States (in contrast to Europe and Japan). Has this trend now come to an end with the drastic changes in family size and composition?
Since World War II, the share of consumers’ disposable income spent on entertainment electronics—radio, TV, audiocassettes, videocassettes, and so on—has grown steadily, a trend the Japanese understood and exploited. Has it plateaued? The share of consumers’ disposable income spent on telecommunications has been growing for a century. It may be poised to explode.
Economic wisdom has it that older people do not save. Is this still true? The growth of mutual funds would argue the opposite. And what would such a shift in the distribution of disposable income by people over fifty or fifty-five—the fastest-growing segment of the developed countries’ population—mean for financial institutions, their products, services, and marketing? These are not particularly arcane matters. Most executives know the answers or how to get them. It’s just that they rarely ask the questions.
The answers to the question “What has already happened that will make the future?” define the potential of opportunities for a given company or industry. To convert this potential into reality requires matching the opportunities with the company’s strengths and competence. It requires what I first (in my 1964 book Managing for Results) presented as “strength analysis” and what now—thanks mainly to the work of Professors C. K. Prahalad and Gary Hamel—is coming to be known as the analysis of “core competence.”
“What is this company good at? What does it do well? What strengths, in other words, give it a competitive edge? Applied to what?” Strength analysis also shows where there is need to improve or to upgrade existing strengths and where new strengths have to be acquired. It shows both what the company can do and what it should do. Matching a company’s strengths to the changes that have already taken place produces, in effect, a plan of action. It enables a business to turn the unexpected into advantage. Uncertainty ceases to be a threat and becomes an opportunity.
There is, however, one condition: that the business create the resources of knowledge and of people to respond when opportunity knocks. This means developing a separate futures budget.
The 10 percent or 12 percent of annual expenditures needed to create and maintain the resources for the future—in research and technology, in market standing and service, in people and their development—must be put into a constant budget maintained in good years and bad. These are investments, even though accountants and tax collectors consider them operating expenses. They enable a business to make its future—and that, in the last analysis, is what planning for uncertainty means.
1992