For all the focus in risk on compliance and operational detail, the reality is that most firms fail or underperform because of poor strategy and poor execution of strategy. The perennial gale of creative destruction (in Schumpeter’s famous phrase) blows not at the level of accounting reconciliations but at the strategic level – at the level of decisions made in board rooms and executive suites. Getting the accounting right is vital to getting the job done, but it has to be right job to begin with!
Key to conceiving, developing and implementing the right strategy is understanding what you know, what you do not know and what you cannot know – the ‘known unknowns’ and ‘unknown unknowns’ (of Rumsfeld fame) and ‘unknowables’; being aware of the limits of your knowledge and if and how you can fill the gaps. This involves distinguishing risk from uncertainty from complexity – it requires ‘unpacking’ risk.
Many, if not most, firms approach the future as if they know what it will be. The key is to maintain attentiveness to external conditions and flexibility to adapt to them as they change. Designing this in advance means recognising what assumptions are built in to the firm’s and to its managers’ views of the future. It also involves a willingness to admit previous assumptions were flawed – and that is where most firms struggle.
We work with firms to decouple their thinking about and acting upon strategy from a single view of the future to separate assumptions from knowns. In this process, firms emerge as more nimble and more adaptable to their environments – better able to flex against that destructive, perennial gale.