Evergreen Strategies & Leadership: Building a Foundation for Organisational Capabilities

In today’s rapidly changing business environment, uncertainty is a constant. Whether expanding into new markets, launching innovative products, or responding to technological disruption, business leaders must develop strategies that can navigate this uncertainty effectively. Understanding the four levels of uncertainty can help organisations tailor their approach to strategic decision-making based on the degree of unpredictability they face.

1. Level 1: Clear Predictability

At this level, the future is relatively certain, and business conditions are stable. The key factors influencing decisions are well-understood, and historical data provides clear guidance. Commonly seen in mature industries, these environments allow companies to plan with a high degree of confidence.

• Strategy Approach: Traditional strategic tools like market research, competitor analysis, and financial forecasting work well in Level 1 scenarios. The focus is on efficiency, incremental improvements, and maximizing current market opportunities.
• Example: The consumer goods industry, where companies have established products, stable demand, and predictable supply chains.

2. Level 2: Scenario Planning

As uncertainty rises, the future becomes less predictable, and multiple potential outcomes emerge. While the key drivers of uncertainty can be identified, it’s impossible to predict exactly which outcome will unfold.

• Strategy Approach: Scenario planning becomes critical. Companies need to develop several plausible scenarios, each based on different assumptions about the future. Strategic decisions are made based on probabilities and preparing for various contingencies.
• Example: A company considering expansion into a new market where variables like regulation, competition, or consumer behavior could lead to different outcomes.

3. Level 3: Broad Range of Possibilities

At this level, the range of possible futures widens significantly. The uncertainty is so broad that while you can identify extreme outcomes, predicting the exact path forward becomes difficult. This situation often arises when new technologies are emerging, or when businesses are confronting disruptions that are hard to anticipate.

• Strategy Approach: Focus on creating flexible strategies that can adapt as new information becomes available. Decision-making centers around identifying key drivers and signals that will help predict which direction the business environment is heading. Developing a set of contingency plans is essential.
• Example: A tech company deciding whether to invest in a disruptive innovation, where market acceptance and technological performance are uncertain.

4. Level 4: True Ambiguity

True ambiguity is the most extreme level of uncertainty. At this stage, there are so many unknowns that predicting the future is nearly impossible. Key variables, like customer preferences or technological developments, are entirely uncertain, and the interactions between them are unpredictable.

• Strategy Approach: In environments of true ambiguity, strategy is not about prediction, but about adaptation. The focus shifts to learning, monitoring signals, and adjusting quickly as new information emerges. Organizations need to remain agile, continuously reassessing their strategy based on real-time market feedback.
• Example: Entering the early days of a completely new market, such as AI or blockchain, where the industry structure and key drivers are still evolving.

Tailoring Strategic Analysis to the Four Levels of Uncertainty

Level 1, 2 & 3:

History suggests that at least half of all strategy problems fall into levels 2 or 3, while most of the rest are level 1 problems. But executives who think about uncertainty in a binary way tend to treat all strategy problems as if they fell into either level 1 or level 4. And when those executives base their strategies on rigorous analysis, they are most likely to apply the same set of analytic tools regardless of the level of residual uncertainty they face. For example, they might attempt to use standard, quantitative market-research techniques to forecast demand for data traffic over wireless communications networks as far out as ten years from now.

But, in fact, a different kind of analysis should be done to identify and evaluate strategy options at each level of uncertainty. All strategy making begins with some form of situation analysis—that is, a picture of what the world will look like today and what is likely to happen in the future.

To help generate level 1’s usefully precise prediction of the future, managers can use the standard strategy tool kit—market research, analyses of competitors’ costs and capacity, value chain analysis, Michael Porter’s five-forces framework, and so on. A discounted-cash-flow model that incorporates those predictions can then be used to determine the value of various alternative strategies. It is not surprising that most managers feel extremely comfortable in level 1 situations—these are the tools and frameworks are, still to this day, commonly taught in every leading business schools.

Level 4: True Ambiguity

At level 4, multiple dimensions of uncertainty interact to create an environment that is impossible to predict. Unlike in level 3 situations, the range of potential outcomes cannot be identified, let alone scenarios within that range. It might not even be possible to identify, much less predict, all the relevant variables that will define the future.

Level 4 situations are quite rare, and they tend to migrate towards one of the other levels over time. Nevertheless, they do exist. Consider a telecommunications company deciding where and how to compete in the emerging consumer-multimedia market. It is confronting multiple uncertainties concerning technology, demand, and relationships between hardware and content providers, all of which may interact in ways so unpredictable that potentially no plausible range of scenarios can be identified.

Needed: A More Comprehensive Strategy Tool Kit

To perform the kinds of analyses appropriate to elevated levels of uncertainty, many companies will need to expand their strategy tool kits.

Level 2 situations are a bit more complex. First, managers must develop a set of discrete scenarios based on their understanding of how the key residual uncertainties might play out—for example, whether deregulation occurs or not, a competitor builds a new plant or not. Each scenario may require a different valuation model—general industry structure and conduct will often be fundamentally different depending on which scenario occurs, so alternative valuations cannot be handled by performing sensitivity analyses around a single baseline model. Getting information that helps establish the relative probabilities of the alternative outcomes should be a high priority.

After establishing an appropriate valuation model for each outcome and determining how probable each is likely to be, a classic decision-analysis framework can be used to evaluate the risks and returns inherent in alternative strategies. This process will identify the winners and losers in alternative scenarios, and more importantly, it will help quantify what’s at stake for companies that follow status quo strategies. Such an analysis is often the key to making the case for strategic change.

In level 2 situations, it is important not only to identify the different probable future outcomes but also to think through the likely paths the industry might take to reach those alternative futures. Will change occur in major steps at some point in time, following, for example, a regulatory ruling or a competitor’s decision to enter the market? Or will change occur in a more evolutionary fashion, as often happens after a resolution of competing technology standards? This is vital information because it determines which market signals or trigger variables should be monitored closely. As events unfold and the relative probabilities of alternative scenarios change, it is likely that one’s strategy will also need to be adapted to these changes.

At one level, the analysis in level 3 is remarkably similar to that in level 2. A set of scenarios needs to be identified that describes alternative future outcomes, and analysis should focus on the trigger events signaling that the market is moving towards one or another scenario. Developing a meaningful set of scenarios, however, is less straightforward in level 3. Scenarios that describe the extreme points in the range of outcomes are often relatively easy to develop, but these rarely provide much concrete guidance for current strategic decisions. Since there are no other natural discrete scenarios in level 3, deciding which outcomes should be fully developed into alternative scenarios is a real art. But there are a few general rules. First, develop only a limited number of alternative scenarios—the complexity of juggling more than four or five tends to hinder decision making. Second, avoid developing redundant scenarios that have no unique implications for strategic decision making; make sure each scenario offers a distinct picture of the industry’s structure, conduct, and performance. Third, develop a set of scenarios that collectively account for the probable range of future outcomes and not necessarily the entire possible range.

Because it is impossible in level 3 to define a complete list of scenarios and related probabilities, it is impossible to calculate the expected value of different strategies. However, establishing the range of scenarios should allow managers to determine how robust their strategy is, identify winners and losers, and determine the risk of following status quo strategies.

Situation analysis at level 4 is even more qualitative. Still, it is critical to avoid the urge to throw one’s hands up and act purely on gut instinct. Instead, managers need to catalogue systematically what they know and what is possible to know. Even if it is impossible to develop a meaningful set of probable, or even possible, outcomes in level 4 situations, managers can gain valuable strategic perspective. Usually, they can identify at least a subset of the variables that will determine how the market will evolve over time—for example, customer penetration rates or technology performance attributes. And they can identify favourable and unfavourable indicators of these variables that will let them track the market’s evolution over time and adapt their strategy as latest information becomes available.

Managers can also identify patterns indicating ways the market may evolve by studying how analogous markets developed in other level 4 situations, determining the key attributes of the winners and losers in those situations and identifying the strategies they employed. Finally, although it will be impossible to quantify the risks and returns of different strategies, managers should be able to identify what information they would have to believe about the future to justify the investments they are considering. Early market indicators and analogies from similar markets will help sort out whether such beliefs are realistic or not.

Uncertainty demands a more flexible approach to situation analysis. The old one-size-fits-all approach is simply inadequate. Over time, companies in most industries will face strategy problems that have varying levels of residual uncertainty, and it is vitally important that the strategic analysis be tailored to the level of uncertainty.

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Strategic Posture and Moves

Before we can talk about the dynamics of formulating strategy at each level of uncertainty, we need to introduce a basic vocabulary for talking about strategy. First, there are three strategic postures a company can choose to take vis-à-vis uncertainty: shaping, adapting, or reserving the right to play. Second, there are three types of moves in the portfolio of actions that can be used to implement that strategy: big bets, options, and evergreen strategies.

Strategic Posture

Any good strategy requires a choice about strategic posture. Fundamentally, posture defines the intent of a strategy relative to the current and future state of an industry. Shapers aim to drive their industries towards a new structure of their own devising. Their strategies are about creating new opportunities in a market—either by shaking up stable level 1 industries or by trying to control the direction of the market in industries with higher levels of uncertainty. Kodak, for example, through its investment in digital photography, is pursuing a shaping strategy to maintain its leadership position, as an innovative technology supersedes the one currently generating most of its earnings. Although its product technology is new, Kodak’s strategy is still based on a traditional model in which the company provides digital cameras and film while photo-processing stores provide many of the photo-printing and storage functions for the consumer. Hewlett-Packard also seeks to be a shaper in this market, but it is pursuing a radically different model in which high-quality, low-cost photo printers shift photo processing from stores to the home.

In contrast, adapters take the current industry structure and its future evolution as givens, and they react to the opportunities the market offers. In environments with little uncertainty, adapters choose a strategic positioning—that is, where and how to compete—in the current industry. At higher levels of uncertainty, their strategies are predicated on the ability to recognise and respond quickly to market developments. In the highly volatile telecommunications-service industry, for example, service resellers are adapters. They buy and resell the latest products and services offered by the major telecom providers, relying on pricing and effective execution rather than on product innovation as their source of competitive advantage.

The third strategic posture, reserving the right to play, is a special form of adapting. This posture is relevant only in levels 2 through 4; it involves making incremental investments today that put a company in a privileged position, through either superior information, cost structures, or relationships between customers and suppliers. That allows the company to wait until the environment becomes less uncertain before formulating a strategy. Many pharmaceutical companies are reserving the right to play in the market for gene therapy applications by acquiring or allying with small biotech firms that have relevant expertise. Providing privileged access to the latest industry developments, these are low-cost investments compared with building a proprietary, internal gene-therapy R&D programmed.

A Portfolio of Actions

A posture is not a complete strategy. It clarifies strategic intent but not the actions required to fulfil that intent. Three types of moves are especially relevant to implementing strategy under conditions of uncertainty: big bets, options, and evergreen strategies.?

Big Bets: Large commitments, such as major capital investments or acquisitions, that will result in large payoffs in some scenarios and large losses in others. Not surprisingly, shaping strategies usually involve big bets, whereas adapting and reserving the right to play do not.

Options: Designed to secure the big payoffs of the best-case scenarios while minimising losses in the worst-case scenarios. This asymmetric payoff structure makes them resemble financial options. Most options involve making modest initial investments that will allow companies to ramp up or scale back the investment later as the market evolves. Classic examples include conducting pilot trials before the full-scale introduction of a new product, entering limited joint ventures for distribution to minimise the risk of breaking into new markets, and licensing an alternative technology in case it proves to be superior to a current technology. Those reserving the right to play rely heavily on options, but shapers use them as well, either to shape an emerging but uncertain market as an early mover or to hedge their big bets.

Evergreen Strategies: Moves that will pay off no matter what happens. Managers often focus on obvious evergreen strategies like initiatives aimed at reducing costs, gathering competitive intelligence, or building skills. However, even in highly uncertain environments, strategic decisions like investing in capacity and entering certain markets can be evergreen strategies. Whether or not they put a name to them, most managers understand intuitively that evergreen strategies are an essential element of any strategy.

The choice of a strategic posture and an accompanying portfolio of actions sounds straightforward. But in practice, these decisions are highly dependent on the level of uncertainty facing a given business. Thus, the four-level framework can help clarify the practical implications implicit in any choice of strategic posture and actions. The discussion that follows will demonstrate the different strategic challenges that each level of uncertainty poses and how the portfolio of actions may be applied.

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Catherine Knott specialises in Human Resources and Organisational Transformation & Change Management. She is deeply committed to supporting businesses through both major and minor transformations. The views expressed in this article are drawn from my personal experiences and reflections and may not represent the perspectives of others in my field or organisation.

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