Faris Yakob looks to the fundamentals of strategy and how they might help us navigate uncertainty by thinking in terms of risk.
Strategy is an approach to business that turns uncertainty into risk, which is different from uncertainty itself. Strategy is predicated on the belief that informed decisions are better, because they improve the chances of achieving objectives in competitive situations of uncertainty.
Risk is about known unknowns; the odds of any face coming up when you roll a die are measurable. Risk needs to be managed, but not eliminated – because risk is also where competitive performance is created.
When companies make investments, it’s because they are willing to take on risk in order to create profit over time (and because they have the reasonable expectation that it will create a return.) Investors match the odds to the return to calculate if an investment is worthwhile and within their range of tolerance.
Uncertainty is different. It is both unknown unknowns that can’t be measured and our confidence about the stability of the immediate future. If the future is too uncertain, or businesses feel it is, they can’t make reasonable estimations about the likelihood or rate of return. Businesses use discounted cash flow analysis to estimate the future value of investments, a rolling up of all attributable future cash flows discounted over time to compare to the present cost of capital.
Due to inflation, money today is always worth more than money tomorrow. The more uncertain the future, the more that future cash flow has to be discounted. Advertising spend is an investment.
Global disruptions are relatively rare, but reliably happen. An impending pandemic was both predictable and predicted, making it at best a grey, rather than black, swan.
Regardless, the commercial and cultural context brand communication operates in has changed dramatically, which requires changes in behaviour. We are operating in a time of flux, which can lead to panic and paralysis. However, strategy provides the tools to analyze uncertainty in useful ways. We never truly know what is going to happen but the levels of confidence in the market fluctuate on sentiment and sensationalism.
We begin to manage uncertainty by establishing boundaries around and within it. Just as people can only use bounded rationality, using what they know and who they are to make decisions, so companies create boundaries to manage the unknown.
Despite endless protestations of market uncertainty, because the economy works across different time scales, we now have a lot less uncertainty about a lot of things.
Leading indicators are unequivocal. The lockdown will continue for weeks or months. Anything that is best enjoyed out of home will be decimated in the short to medium term. Conversely, anything that can be delivered, physically or digitally, will see significant increases: new behaviors that may last.
Unemployment has already risen to historic levels in the USA and surveys indicate a significant portion of advertising spend has been halted or postponed. These will inevitably lead to second and third order effects. There will be a recession, the only questions being the shape of the recovery, the post-pandemic dynamics of the market, and who is still standing. The two most important boundaries are duration and intensity - how long will this last [and how long can the company survive] and how bad will it get?
The canonical advice from the advertising industry during recessions may sound self-serving but has obvious logic to it. Brands that keep active in media will gain cheaper share of voice and maintain salience so rebound to profitability faster and often increase market share. That said, this is also a function of the fact that the biggest brands have the strongest balance sheets -- and easiest access to credit. They are simply more likely to survive and be in a position to take advantage of challenging trading conditions.
However, companies will have to make difficult strategic decisions, considering whether it’s more important to pay their rent [Office retailer Staples, the fourth biggest e-commerce retailer in the USA, just announced they wouldn’t be paying rent on their stores in April, despite remaining open] or employees, moving funds out of longer-term investments, like brand, and into crucial liquidity.
Some allocated media will be locked in, some will have flexibility. Strong brands can push, sensitively, some will have to consider how to use their committed media, creative needs to be reconsidered and produced under difficult constraints. Many will pull as much discretionary spend as possible for the next quarter or two.
The longer the lockdown continues, the longer and larger the knock-on effects to the economy. Economic activity can’t completely recover until there is a vaccine, which could be eighteen months away. So our boundaries of time are this week, this quarter and through next year, and the scale of the impact is historic.
The outlook is very negative, but we do have some clarity. We know that all of our competitors and customers are adapting to the same conditions. Effective brand behavior requires loops of activity, operating in the immediate term as more information filters in, whilst managing the next quarter’s existing and re-allocations, and managing cash flow to give the company as much breathing room as possible. It’s a delicate balancing act, of limiting factors and limited resources, but that’s what strategy has always been for.
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