Question for the CEO: How Could You Pursue Short-Term Gains in a Cyclical Industry?

Doug Oberhelman, Chairman and CEO of Caterpillar, last week announced he would step down as CEO because of questions about the company’s future after four years of revenue decline. A Wall Street Journal article on October 17, 2016 noted that at a mining trade show in September Oberhelman said, “Everybody was surprised by the size of the downturn [in the commodities markets] and the length of it. I firmly believe we couldn’t have forecast that at the time.” No, Caterpillar shouldn’t have been surprised. How could any company dependent on a cyclical commodity industry be surprised by plausible cyclical developments?

When Caterpillar made a slew of major investments from 2010 to 2013 at the height of the commodities boom, I have to surmise they went after potential short-term gains and ignored the risks of a commodities slump. It’s also foolhardy for a company to make strategic investments in a very dynamic, constantly changing marketplace that don’t enable the company to adjust when very plausible changes begin to occur?

There are two strategy imperatives for companies competing in dynamic, complex markets: First, in evaluating the major strategic opportunities to pursue, explicitly evaluate the range of possible long-term developments the company could face. Second, in crafting a strategy, incorporate the ability to adjust the strategy as events and developments unfold—after you have a lot more information about important external decision factors. In other words: 1) you can’t predict the future, so don’t commit to a strategy that only succeeds under one set of assumptions, and 2) commit to a strategy that enables the company to act quickly in response to big changes when they begin to occur.

Another Wall Street Journal article last week on October 18, 2016 was about Ford Motor Co.’s new dual-track strategy to be an auto manufacturer and a transportation-services provider. On the surface, this dual-track strategy appears to satisfy the second imperative above. It would give Ford the ability to move or accelerate in different directions, depending on how events in the future unfold. What will be the markets for electric and self-driving vehicles and what business models will serve the new transportation landscape best? In effect Ford is saying, we don’t know what strategy will be the winning strategy, so we’re going to invest in a number of initiatives and develop the capability to move quickly to realize whatever big opportunities emerge. Continuing the One Ford strategy implemented by the CEO Mark Field’s predecessor would be too risky given the range of marketplace developments that could occur.

Implementing Ford’s dual-track adaptive strategy won’t be easy. It depends on building a decision making process that will enable the company to adjust its strategy—quickly if necessary—in response to unfolding events. The strategy needs to be dynamic, and this will require a shared—not just top down—decision making process, a new information gathering and assessment system, and a fast organization-pivoting capability.

The biggest obstacle in many companies to developing an effective strategy for an uncertain environment is senior executives’ unwillingness to use planning-under-uncertainty techniques like scenario planning for major decisions. That unwillingness mostly stems from a lack of knowledge and experience with the techniques, and the fact few multinationals are known to rely on them in making major decisions. That’s a shame because decision-focused, scenario-planning methods are mature, practical, and effective in creating strategy that everyone can get behind. They require some effort to learn, but that’s a small price if the result is the ability to make good strategic decisions in the face of uncertainty.

If the senior executives of an organization don’t use scenario planning or something like it, then the board of directors should insist on independently applying a stress test—like the too-big-to-fail financial institutions must undergo each year—to see how well the strategy and proposed investments of the organization would do in the face of major change.

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