Inherent in the process of strategic planning is assumptions about levels of business certainty. One way to approach strategic planning is to take what is known about a firm and market conditions and design an approach for maximizing shareholder value based on that knowledge. In this approach, certainty is often viewed as positive and uncertainty as a downside risk. While this may seem logical, in reality consciously incorporating uncertainty into a business plan can be a powerful way to improve enterprise strategic results, make firms more resilient and build firm value.

Two Models of Strategic Planning

Strategic planning generally involves three steps:

• analyzing current and expected future market conditions;
• setting strategic goals based on firm resources (either those that it has or those that it can obtain) and those future market conditions; and
• determining how firm resources should be expended to obtain defined goals.

Each of these steps are based on levels of certainty regarding a firm, how markets will develop and, perhaps most importantly, what the economic consequences will be of taking certain steps in those markets. These assumptions can be broadly grouped into two types of strategic planning models: deterministic strategic planning models and random strategic planning models.

Deterministic Models of Strategic Planning. In a deterministic model of strategic planning, it is assumed that certain things are known about a firm and markets with a high degree of certainty and if a firm acts in a certain way it will produce highly predictable results. For example, a firm that produces pepperoni pizzas and is confident that demand for pepperoni pizzas will continue to grow may design a strategic plan based on the single goal of increasing the number of pepperoni pizzas it sells.

In this type of model, uncertainty is generally viewed negatively and a firm using a deterministic strategic planning approach will typically try to reduce uncertainty as much as possible so that its strategic objective can be achieved. These steps, for example, could involve the pizza restaurant ensuring that it has sufficient employees to produce the targeted number of pizzas and trying to control pizza production costs.

Random Models of Strategic Planning. A deterministic model of strategic planning can be contrasted with a random model of strategic planning. In a random model of strategic planning, it is assumed that there are very low levels of certainty about a firm, how markets will evolve and what the impact of a particular strategic plan will be in those markets. This type of planning perspective can be found in markets that are undergoing or are likely to undergo large or rapid changes due to disruptive forces such as technology or major events (such as wars or pandemics) that fundamentally alter levels of demand or supply and other market dynamics.

In this type of model, uncertainly is generally viewed as positive because it can create conditions that a firm may be able to benefit from, such as creating new opportunities or putting competitors at a sudden disadvantage. Firms with this perspective will often not try to implement a pre-defined strategic approach but rather will try to position themselves to react better than competitors as the direction of changing market conditions becomes clearer.

Both of these models represent two ends of a hypothetical planning approach spectrum. In reality, most deterministic strategic planning makes some allowance for uncertainty and most random models of strategic planning assume that some deterministic forces will be at work at least over time.

Strategic Planning Model	Confidence Regarding Market Conditions	Confidence Regarding Strategy Impact	View of Uncertainty
Deterministic	High	High	Negative
Random	Low	Low	Positive

The Upside of Randomness

While it is true that most strategic planning contains elements of deterministic and random planning approaches, the reality is that most strategic planning tends to be heavily skewed towards deterministic approaches and randomness is actively avoided. There are a number of psychological, organizational and operational reasons for this bias, including different types of habits and the often prevailing planning perspective that the future will essentially be very closely related to the present.

The Diminishing Returns of Certainty. Yet there is reason to ask whether strategic planning would, on the whole, benefit from firms actively seeking to place themselves in situations where the outcome has higher rather than lesser degrees of uncertainty. Exercise programs provide a good example of how this can be useful. If I were to design an exercise program that involved doing 20 push ups a day (i.e. I was 100% certain about what I would be required to do) I might very quickly start gaming the exercise system and increasingly find ways that the push ups could be accomplished with lesser and lesser effort. This of course would significantly reduce the positive impact of the exercise regimen.

On the other hand, if a personal trainer made me follow a random new exercise program each day (i.e., I had no certainty about what exercises I would be required to do) my body would have to learn to adapt to an environment where entirely new physical demands would be thrown at it. Independent of the ability to perform a specific type of exercise, this would create physical and mental agility and resilience that would have very positive health consequences.

A Trip to the Wrong Side of the Book Store. The benefits of randomness can also be seen in the acquisition of knowledge. Let’s say that I am an economist. If I go book shopping, there is a good chance that I will go the economics section of the book store and pick out a book that reflects my specific interests in economics. While this sounds perfectly logical from a deterministic perspective, there is a good likelihood that, rather than help me to see the world in a different way or beneficially question some of my views on economics, any book that I purchase will simply serve to confirm the world view that I already have. If my view is wrong, the book from a knowledge acquisition perspective will be doing me more harm than good.

On the other hand, let’s say that rather than go to the economics section of the book store or even pick out a specific book department, I rather write down on separate pieces of paper all of the sections in the book store, put them into a hat and pick one out. By reducing my deterministic selection bias, the chances are that I would go to a section of the book store that I would normally never go to and pick up a book that really challenged the way I see the world. From a learning or professional perspective, the net result of this could be far better than buying a book I was already pre-disposed to read and agree with.

Business Planning

The benefits of randomness also apply to strategic planning. If a firm decides to take the risk of entering into a completely new market that lies outside of its comfort zone, there of course is a chance that the outcome may be far better or far worse than expected, an avoidable consequence of randomness, but by placing itself in this situation it will likely be forced to learn to improvise in some way which in and of itself is a very useful organizational learning process. The firm will be able to test its resources and perhaps discover things that it can do better than it thought it could and discover other areas where it is not as strong as expected. This knowledge has significant economic value that, independent of short term business planning results, can be applied to strategic planning in the future. Further, increasing exposure to uncertainty can create a business model hedge in the event that the firm’s original assumptions about the market and how it would evolve turn out to be wrong.

Incorporating randomness into a strategic plan does not mean that firms should avoid structure and certainty at all times as that would make it very difficult if not impossible for most firms to function. However, creating some exposure to higher degrees of uncertainty in a strategic vision, such as a real estate firm that historically only developed offices making the decision to use some portion of its resources to try to develop a new type of real estate project or even entering an entirely new business vertical, can have many unexpected strategic and economic benefits.

Conclusion

While most strategic business planning contains deterministic as well as random business planning elements, they tend to be heavily skewed to deterministic approaches. Particularly for firms that follow highly deterministic strategic planning approaches, increasing exposure to uncertainty as part of the strategic planning process can be very useful in helping firms discover new opportunities, learn more about their strengths and weaknesses and better position themselves for market shifts.