April 07, 2014

Unknown Unknowns, Scenarios and Strategic Judgment

Peter Kennedy
Partner

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.”   - Donald Rumsfeld

 

Errol Morris’s much-anticipated documentary on Donald Rumsfeld, The Unknown Known, is in the theatres – well, independent theatres, anyhow.  It was preceded a couple of weeks ago by Morris’s four-part series on the former secretary of defense in the The New York TimesIt’s worth reading, oddly, perhaps, because of the issues it raises related to knowledge, uncertainty and strategy.

Future uncertainty is at the heart of strategic challenges in the marketplace.  Will people buy my product? What is the most effective distribution channel?  Is my supply chain competitive and dependable?  Will we face regulatory hurdles?  How is my franchise or market position disruptable?  And so on.  

Rumsfeld liked to talk about the continuum of known and unknowable events – things we know, things we know we don’t know, and things we don’t know we don’t know -- or, as he famously put it, “unknown unknowns.”  

In contemporary business planning and strategy, by far the greatest attention and value is placed upon known knowns.  This is understandable.  Known knowns tend to be data-rich and therefore lend themselves to quantitative analysis and measurement.  But even if you really do know what you think you know (about competition, price sensitivity, supply chain risks, etc.), over time that certitude will be upended by external changes outside of your control.  So, at some point, planners and decision-makers find themselves migrating from the comfort of the known into the uncertainty of the unknown, with few familiar bearings or contingency plans at their disposal. The consequences of this lack of strategic preparedness are always undesirable, and sometimes they are disastrous.

This is not a cheap shot at quantitative analysis.  It’s essential for relatively short-term forecasting and business planning.  And thanks to powerful computational tools, it’s increasingly effective and reliable – in those domains.

But at some point, the predictive value of quantitative tools break down, no matter how data-rich or algorithmically brilliant they may be.  It seems that the complexity of the business world continues to outpace the evolution of analytical tools at our disposal. 

In the Rumsfeld series, Morris catches up with the cosmologist Martin Rees (to whom the Rumsfeldian saying “absence of evidence is not evidence of absence” is wrongly attributed).  Rees distinguishes between risk and longer-term uncertainty.  “Risk is something you can assign a probability,” he says.  “But as to what’s going to happen in 10 or 20 years, then you really can’t assign realistic probabilities.”

In fact, FSG has witnessed a notable shortening in the planning horizon over which numerical models can reliably predict what is going to happen.  Increasingly we’re hearing from executives who want to explore three- to five-year market scenarios because they do not have confidence that their business planning tools have all the answers – too many unknowns!

So, there is more than a touch of irony here, that with all the big data and powerful computational tool there continue to be both need for and interest in decision tools, like scenario planning, that are inherently judgmental in nature, and that rely on human beings to wrestle with the meaning and implications of seemingly unrelated conditions – unknown unknowns – converging in unprecedented and unexpected ways. 

Thoughts?