Using Strategic Foresight with Open Strategy: The Case for Decentralized Finance

In this article:

·?Strategic Foresight as an element of Strategic Thinking

·?The synergy between Strategic Foresight and the Open Strategy approach

·?Presentation of case based on the evolution of Decentralized Finance business models

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This cis the English version of the paper elaborated by myself, Alexandre Oliveira, and my colleagues at IBGC: Domingos Laudisio , Marco Vitiello and Oliver Moesgen . The original document is available in Portuguese at IBGC Knowledge Portal https://conhecimento.ibgc.org.br/Paginas/Publicacao.aspx?PubId=24660

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1 Introduction

The profound and accelerated changes resulting from the application of disruptive technologies require the understanding and incorporation of innovative approaches to the processes of strategic thinking and strategic planning.

This paper addresses the concept of Strategic Foresight and its synergy with the Open Strategy approach. This strategic combination proves to be highly effective in the era of rapid change driven by technological innovations. As an example of this interaction, we explore a vision for financial products and services based on the profound changes resulting from the Decentralized Finance model.

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Key Concepts

· Strategic Foresight is a methodology to support the exploration of Possible Futures and the rethinking of strategic guidelines in changing scenarios.

·?Open Strategy invites a variety of stakeholders to participate in the formulation and execution of organizational strategies.

·?Business models in DeFi operate financial services without intermediaries, enable direct peer-to-peer transactions, and challenge the global financial landscape.

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We expect to contribute to the debate on the importance of Strategic Foresight and Open Strategy in an ever-evolving business world. Using the concrete case of DeFi, we design scenarios that can help companies decide how to move towards a more advantageous future.

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2 Decentralized Finance

?· Origin and evolution of the concept of DeFi

·?Risks and opportunities of DeFi models

·?Entry strategies: landslide, outside-in, and inside-out

The evolution of the internet unfolds in distinct phases. In the early 1990s, Web 1.0 fostered one-way search in the form of browser searches. In the 2000s, Web 2.0 leveraged great interaction on social networks and consumers gained greater autonomy in relation to access to products and services. Web 3.0, on the other hand, evolving over the last decade, has incorporated transactional attributes, and concepts such as tokenization and open finance that challenge the global financial landscape.

The 1st wave of fintechs emerged in the 1990s with the expansion of access to bank accounts via the internet and homebanking and resulted in more agile and lower-cost financial transactions. The popularization of resources such as artificial intelligence applications, cloud computing, and blockchain data management drove the 2nd wave of fintechs, with innovations that promoted a new reduction in transactional costs, improvements in the experience, and increased user autonomy. This conjuncture was conducive to the integration of processes that transform financial services and products into tokens. Tokens are a digital representation of tangible assets like fiat currency and real estate, or intangibles like cryptocurrencies and patents.

The evolution of tokenization mechanisms has kept pace with fintechs' growing demand for the diversity of digital assets, requiring combinations of attributes such as security, utility, and reproducibility. The recognition of the sophistication, coordination, and scope of these mechanisms favoured the consolidation of the term Decentralized Finance (DeFi) during the 2010s. The period between 2017 and 2020 became known as the era of the Initial Coin Offering (ICO) - a process equivalent to the IPO (Initial Public Offering), but with access to funds directly from the public, without bank intermediaries.

On the other hand, the profusion of technical terms such as smart contracts, stablecoins, and liquidity pool, combined with the difficulty in offering uncomplicated explanations of the terms and functions of DeFi, has inhibited the approach to the average consumer, attracting mainly the younger and those more familiar with technological innovations. A pity, because smart contracts are just programs that automatically execute transactions, whenever certain conditions are met; stablecoins are tokens backed by fiat currency (such as the U.S. dollar or Euro), which reduce the volatility of DeFi solutions; and ?liquidity pool is a minimal set of tokens? from different cryptocurrencies, held in a way that ensures liquidity in a DeFi environment. For many other entries, it is also possible to present a simple and objective definition.

The global financial market faced a crisis of confidence caused by the onset of the COVID-19 pandemic and Total Value Locked (TVL), which represents the total currency value (typically U.S. dollars) of digital assets available in DeFi operations, suffered a sharp drop in less than 24 hours on a day that became known as Black Thursday. After overcoming this moment, several companies providing decentralized financial services were born. The set of innovations from this period marked DeFi Summer (late 2020), when many users around the world joined a wide variety of crypto-asset-based services transacted on Lending, Exchange, and Derivatives Platforms. However, the greater interoperability of these solutions has exposed the DeFi ecosystem to systemic and market risks typical of Traditional Finance (TradFi) – an example of this is whales (institutional investors with substantial amounts of tokens, which influence behaviour in certain transactional environments).

Business models in DeFi also present technical risks, such as vulnerabilities in smart contracts, cyber risks, and regulatory risks since the legislation does not order what does not exist and acts responsively in relation to technological advances. However, the search for an ethical and wholesome DeFi environment makes developers, regulators, and users collaborate in the installation of new protective initiatives.

In its early years, the DeFi model developed with little overlap with the existing market, pushing the boundaries of the industry by introducing innovative products and services. This movement, known as landslide, sets a different standard than incumbents because it is supported by the secure, transparent, and automated nature of transactions carried out without traditional banking intermediaries. At this stage, the so-called outside-in movement attracts a diverse audience composed of users who are dissatisfied or neglected by the incumbents of the financial system. This is the case of a rural producer who faces difficulties in obtaining loans or conducting basic financial transactions due to the lack of banking infrastructure in his region. DeFi promises to offer access to financial services such as peer-to-peer loans, without relying on traditional banking.

On the other hand, with the advance of DeFi, financial services companies that are digitally native have begun to directly challenge incumbents and go after their customer base, in an audacious strategy known as inside-out. These new entrants bet on differentiation through innovation as a lever to offer low price, agility, transparency, and data security. This type of positioning requires a solid value proposition, based on deep knowledge of the market and the needs and desires of users, as well as excellence in the ability to deliver what is being promised.

The adoption of these movements - landslide, outside-in and inside-out - requires a robust and sophisticated strategic thinking exercise, which explores Possible Futures and rethinks strategic guidelines based on scenarios vastly different from business as usual. In this context, the practice of Corporate Foresight presents itself as a resource capable of concatenating multiple trends and formulating viable futures for which the company can prepare now.

3 Strategic Foresight

·?Oversight vs. Oversight Foresight

·?Foresight Application Horizons

·?Strategic Foresight Steps

·?Possible Futures vs. Probable Futures

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Strategic thinking is not an isolated act, but an ongoing process that demands a deep understanding of the context, the definition of strategic guidelines, the elaboration of a robust plan and detailed actions, the effective communication of the strategy and, not least, the constant implementation, execution, and monitoring. Another approach to addressing strategic thinking is through the composition of oversight and foresight. While the practice of oversight focuses on the present, identifies immediate risks and opportunities, and provides information for well-informed decisions, foresighting seeks to accelerate the understanding of the future and guide the development of strategic guidelines.

However, the diligent eye for foresight must consider the three horizons of application. The first horizon, with a range of between 2 and 5 years, is traditionally called forecast and is strongly anchored in historical data and the many trends already identified. At the other extreme, exploring scenarios that can span several decades, are the horizons treated by the so-called "analogies" approaches. Finally, in an intermediate position, Corporate Foresight, also called Strategic Foresight, extends from 3 to 25 years – or more, in particular situations.

This paper deals with Strategic Foresight, a methodology that starts from the identification of weak and still fragmented signals, and advances to the ideation of guidelines supported by constructs. A construct is a description that simplifies and organizes complex information, helps to understand, and interpret the world in a structured way. They are influenced by cultural, social, and historical factors, and they play a key role in setting patterns of behaviour and decision-making. Constructs are not fixed, as they evolve over time with new experiences and knowledge. Strategic Foresight does not aspire to accurate predictions; but it concatenates the latent rhythm of the evolution of the captured signals and projects the path of formation of the transdisciplinary mechanisms that give rise to different scenarios, including Possible and Probable Futures. While Possible Futures consider more variables and uncertainties, Probable Futures result from the most realistic or feasible transdisciplinary paths. The construction of Probable Futures contemplates the evolution of fragmented signals, the chain of their interactions, the possibility of disruptive events or inflections that alter the course of events.

To project the outcomes of the myriad "unknowns" that emerge over time, Strategic Foresight uses techniques and methodologies that can be categorized into six steps: (i) the objectives of the ?framing include the scope and objectives? of the Strategic Foresight exercise, identifying key issues and areas of strategic interest, and establishing the boundaries of the Foresight exercise; (ii) during scanning, the organization deepens its understanding of the context in which it operates, gathering from diverse sources information that is extensively analysed to identify weak and fragmented signals, trends, and emerging changes that may impact the future of the organization; (iii) the futuring (or prospecting) stage analyses how these factors can develop, their potential concatenations and how they can affect the company, in an attempt to anticipate parts of scenarios; (iv) during scenario building, scenarios are formulated based on coherent and plausible narratives of how the signs and trends identified in the previous stages can unfold and interact, culminating in systematically formulated constructs; (v) in? the envisioning stage,? organizations create a more detailed and inspiring vision of the desired future, involving the definition of ambitious goals and objectives; (vi) finally, during strategizing (or probing) the company identifies specific initiatives, allocates resources and implements measures that guide towards the desired future, transforming vision into action, and translating strategic thinking into tangible results.

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4 Futures for DeFi

·?Incumbents' Reaction to Possible Futures

·?Conservative Reactions and Aggressive Reactions

·?Coexistence between DeFi and TradFi (Traditional Finance)

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As a result of the Strategic Foresight exercise that, since the first transformational waves, has placed DeFi at the center of financial business models, some banks, investment funds, means of payment, and incumbent insurance companies are already positioning themselves in the decentralized services market, heating up the competition for new generations of consumers. A Possible Future indicates that this competition will accelerate the development of more secure and efficient solutions, and that the adoption of traditional firms will bring more liquidity to the DeFi environment.

In this context, an agile culture is essential for the company to embrace the new and adapt to change. In addition, open communication and collaboration are central to encouraging partnerships to create innovative solutions. In addition, continuous learning qualifies employees on the latest trends and provides better-informed decisions. These organizational attributes mitigate the risks in navigating the transition to an increasingly decentralized and innovative financial market.

Competition from digital-natives operating lower-cost, scalable models can result in incumbents losing competitiveness, shrinking market share, declining revenues, and pressure to increase service fees. As a reaction to Possible Futures with DeFi as the protagonist of financial services, traditional financial institutions are expanding their portfolio of strategic guidelines. The acceptance that there will be profound changes in market patterns already encourages incumbents to structure collaborative projects with pioneering DeFi startups or undertake the launch of spin-offs, in a clear effort to anticipate what they consider Probable Futures. Among the most conservative approaches, the segmentation strategy stands out, which involves focusing on niches, offering specialized services to audiences with particular needs. Another conservative strategy is the reduction of the size of the company, which restricts the scope or scale of operations, focusing on the most profitable or safe niches in the face of competition, and may incur in the sale of parts of the business or in the geographic retraction, better directing resources to more effectively face competitive threats.

On the other hand, some incumbents will adopt bolder strategies, such as launching new businesses by leveraging their existing capabilities. Another aggressive strategy is the acquisition of already established DeFi companies, leveraging the experience of the acquired businesses and gaining quick access to the technologies, expertise, and customer bases. In addition, portfolio diversification is an option to adapt to new priorities, and to move away from the offer of products and services that are more threatened, seeking new sources of revenue by repositioning themselves in the market.

In a Probable Future, DeFi and TradFi coexist and evolve integrated, demanding from organizations a culture of innovation, agility, and flexibility, capable of embracing change as a perennial element.

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5 Synergy with the Open Strategy

·?What is Open Strategy

·?Benefits of Open Strategy to the DeFi model

·? Synergy between Open Strategy and Strategic Foresight

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The Open Strategy approach reinvigorates traditional strategic thinking by inviting a broader spectrum of stakeholders – including customers, suppliers, employees, regulators, and others – to participate in the formulation and execution of organizational strategies. It breaks with the paradigm of Strategic Thinking behind closed doors by a restricted group of leaders. This inclusive, transparent, and collaborative vision aligns especially well with the dynamic environment of DeFi. By integrating multiple points of view, Open Strategy can quickly assimilate technical, market, competitive, and regulatory implications, providing deep insights.????

The collaborative and inclusive nature of Open Strategy promotes the integration of diverse perspectives and facilitates the recognition of useful signals for Strategic Foresight. By involving multiple stakeholders, Open Strategy creates a fertile environment for noticing emerging trends and changes that might otherwise go unnoticed in more closed models.

In addition, the challenge of interpreting foresight signals and developing future scenarios based on fragmented information can be facilitated by the contribution of multiple perspectives. By enhancing the Strategic Foresight capability, the organization more effectively prepares for the impending changes in the DeFi landscape, positioning itself to address challenges and opportunities revealed by an expanded vision, encompassing both likely and Possible Futures.

The Open Strategy strengthens corporate abductive reasoning (a method that leads to deducing plausible conclusions from scarce and fragmented information). The unknown can reveal surprising opportunities. The sharper our vision of Possible Futures, the better we can rehearse our organizational responses and the more resilient we will be in responding to the unexpected.

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6 Final Thoughts

The dynamic nature of Strategic Foresight demands constant vigilance. For example, we recognize that adopting a specific set of technology solutions can strengthen and accelerate the maturation of essential components of the DeFi ecosystem, such as risk assessment, fraud detection, and regulatory compliance. More specifically, the combination of DeFi with AI can bring countless possibilities and perspectives. However, it is important to point out that the potentially most transformative solutions, in a context where such disruptive technologies as Web 3, DeFi and AI intersect, are still in the process of being developed. The complexity and uncertainties about the future development and adoption of these technologies are challenges that need to be addressed.

The phenomenon observed with ChatGPT illustrates how, in an ever-evolving technological landscape, a simple tweak to the user interface can trigger an explosion in user scale in a matter of weeks. We could also consider solutions such as Robotic Process Automation (RPA), the development of Tokenomics (Token Economy) and the spread of Decentralized Autonomous Organizations (DAO), among others.

In the context of corporate governance and Strategic Thinking, organizations must adopt practices that prepare them to face a world in constant evolution, balancing between adaptation and innovation. The exploration of scenarios with a horizon of up to 10 years or more, plays a crucial role in Strategic Thinking, especially when combined with Open Strategy approaches, which facilitate co-creation among stakeholders.

This is evident when we compare the trajectory and current stage of development of DeFi models, a specific case in this role, with the strategies implemented by some incumbents who identified the first signs of change in the 1990s. These companies saw opportunities and strengthened their organizational resilience. By exploring long-term scenarios, they devised Possible Futures based on the disruptive potential of DeFi. In anticipation of Probable Futures, they considered how technological developments and changes in consumer and business behaviour could revolutionize financial services, offering a completely new experience for future generations of customers.

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Takeawyays

1.?The rapid evolution of disruptive digital technologies requires innovative approaches in strategic thinking and strategic planning.

2.?Strategic foresight plays a key role in understanding and preparing for future uncertain scenarios.

3.?DeFi is set in the context of Web 3, and its expansion and adoption still face technical, regulatory, and market risks.

4.?The combination of Strategic Foresight and Open Strategy helps organizations adapt and thrive in an ever-evolving world.

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?This article was developed in collaboration between the Strategy Commission and the Board of the Future Commission of the IBGC (Brazilian Institute of Corporate Governance). The working group was formed by members Alexandre Oliveira, Domingos Laudisio, Marco Vitiello and Olivier Moesgen. The authors would like to thank the contributions received from the Strategy Commission and the Board of the Future Commission of the IBGC, in the persons of colleagues Alberto Pedrosa , Joao Lencioni , Jorge Carneiro and Maria Cristina (Kika) Ricciardi .