Published in 2001, the book 20/20 Foresight by Hugh Courtney provided a model for strategic decision making in uncertain times. In a recent interview published by McKinsey & Company, Courtney discussed the relevance of 20/20 Foresight in the wake of what is arguably the most serious financial crisis since the Great Depression.

The complexity of the financial markets has grown in proportions that are unfathomable. Credit default swaps, collateralized debt obligations, mark to market, toxic assets and cramdowns. Terms now discussed almost daily on financial talk shows were not even on the radar just a few short years ago. But is this pointing to new levels of risk and uncertainty? Not according to Courtney, who believes that risk and uncertainty has and will always be there. What largely changes in times of crisis is our perception of the risks that exist in the world.

Without a consistent focus on addressing marketplace risk, however, most organizations fail in their strategic planning process. In 20/20 Foresight, Courtney categorized uncertainty in four levels. Level one provides a clear, single view of the future. In level two there is a limited set of possible future outcomes. Level three has a range of possible outcomes and in level four it’s full scale uncertainty (limitless possible future outcomes). It’s easy to see how greater complexity in the marketplace (as evidenced by a higher degree of possible future outcomes) increases complexity in the strategy planning process. It’s simply harder to plan when the future is more uncertain.

According to Courtney the current financial crisis has brought about greater clarity because it forced companies to recognize that there are more level three and four scenarios than they originally thought. Part of this stems from the fact that human nature creates a bias of overconfidence when it comes to our ability to forecast the future. It’s just easier to deal with things if we’re convinced we’re headed in the right direction.

So now that we know there is a more uncertainty than we thought, what do we do about it? Courtney has some good advice for those leading the strategic planning efforts of companies. First, start with scenario-planning techniques. While these have been around for decades it is still a niche tool in the planning process. Scenario planning helps you define the level of future uncertainty you’re dealing with. Once scenarios are outlined, draw analogies to similar situations and combine this with traditional analytic tools to quantify the probability of outcomes from each scenario. Which of the scenarios is most likely to happen? Answer that and you can plan more confidently.

All of this, according to Courtney, represents the critical need to rethink the planning process. Companies that treat strategic planning as a once-a-year paper-pushing exercise will have to change. Decisions will need to be made quickly and companies will have to be prepared to make this in real time. It’s all part of the general movement toward strategic flexibility – a process driven by more frequent planning discussions focused on shorter timeframes – all working toward a longer-term, scenario-based view of the future.

Without a doubt, the financial services industry will change as a result of the current crisis. Striking a balance between the benefits of scope and scale with the need for regulatory structure is just one example. While there’s no such thing as certainty, a sound strategic planning process can help you separate the unknown from the unknowable and bring clarity to the decisions you make.

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Information for this article taken from: A fresh look at strategy under uncertainty: An interview, The McKinsey Quarterly, December 2008.