Using the innovator’s toolkit to create foresight-based options-driven strategy

Larry Schmitt

Innovation Partner

It is often difficult to imagine a different world.  It is this failure of imagination that so often leads to strategic surprise.  What is needed is to expand the futures that are considered by sparking the imagination.

Rita McGrath – Author of Seeing Around Corners

Highlights

• • Strategy and innovation should be intimately entwined – both are ways a company thinks about and creates its future. Unfortunately, they are often disconnected and poorly integrated.
  • The future should be divided into two ‘zones’, a near-in-time ‘Forecast Zone’ and a farther out ‘Foresight Zone’. The Forecast Zone extrapolates the past, usually linearly, over a relatively short period of 1 to 3 years.
  • The Foresight Zone is for long-term vision, scenarios and strategic transformation – where prediction and analytics are ineffective. It is where disruption happens, and where different methods based on strategic options must be used. But many companies pay scant attention to it.
  • A set of six toolkits, developed over 20 years of innovation research and deployment, can be used to create strategic options for the Foresight Zone The result is a more robust and comprehensive strategy and set of actions that enhances a company’s current strategy process.

In May of 2002 SpaceX was formed with the goal of reducing space transportation costs. Elon Musk said at the time “We want to open up space for humanity, and in order to do that, space must be affordable”. Eighteen (18) years later, a SpaceX rocket successfully carried two astronauts to the International Space Station.

Even in hindsight, given what the world looked like in 2002, it is still surprising that SpaceX was successful. The Space Shuttle was still going strong (its last mission was in 2011). There were no smartphones, no electric vehicles, no Facebook. Amazon had not yet incorporated (that happened in 2005). Solar Photovoltaics cost around $6 a Watt (it’s now less than 8 cents) and Li ion batteries cost more than $1000 a KWh (they are now approaching $100/KWh). Getting on the internet involved a dial-up connection at 56K baud, the human genome project was still a year from completion. But the signs of a disruptive revolution were all around. Even so, the experts at the time, using the most sophisticated tools for analysis and prediction, got the future so wrong.

Musk’s approach for SpaceX is a textbook example of what Derek Abell has called a dual-path strategy. Musk was imagining a plausible, far off future and then taking out strategic options in several actions that could increase the likelihood of that future to happen. There was no 20-year plan. Instead there was a 20-year story that informed and revealed specific and concrete actions to do in the present. It was not a forecast based on analytics, it was a narrative about the future and a ‘Today-for-Tomorrow’ strategy to get to a pay-off in nearly 20 years.

John Kay and Mervyn King make the case in their book Radical Uncertainty that

We live in a world of radical uncertainty in which our understanding of the present is imperfect, our understanding of the future even more limited, and in which no one person or organisation can hold the range of information required to arrive at the ‘best explanation’. Narrative reasoning is the most powerful mechanism available for organising our imperfect knowledge.

In both Abell’s and Kay and King’s writing, as well as many others, uncertainty about the future is the critical variable with which every innovator, strategist and business leader must wrestle with.

The Prediction Horizon and the Foresight Zone

Most people in a company are focused on the near future, sometimes very near, where uncertainty is low. This future can be understood using tools of big data, predictive analysis, and probability distributions. This is the Forecast Zone and it is the future that dominates the strategic thinking of most companies. It is the future that informs the yearly strategic plan and it is the only future that many companies even consider.

But the farther the future that is considered, the greater the uncertainty. And when uncertainty gets high enough, the processes, methods and tools that are used for strategy and innovation in lower-uncertainty environments are no longer effective.

At some point in the future you cross a threshold called the Prediction Horizon and new approaches are necessary. The Prediction Horizon separates the future into the Forecast Zone and the Foresight Zone.

Figure 1 – The Prediction Horizon

The Prediction Horizon is crossed when predictive analytic tools and approaches used for ‘seeing’ the future no longer work, or worse, mislead. The reason for this is increasing uncertainty along many dimensions – technological, social, individual, governmental, etc. – the farther into the future you look. For futures that are farther out, where uncertainty is high and data-driven analytics and predictions no longer work, these tools need to be abandoned and replaced by other ones.

The Forecast and Foresight zones therefore have quite different fundamental characteristics as shown in the table below.

Table 1 – Forecast and Foresight Zone Characteristics

When in the future the Prediction Horizon happens is dependent on many social, technological, industry and even specific company factors. It has fuzzy boundaries and it is hard to tell when you are entering it or about to cross it. But there is no doubt that, because of accelerating volatility, uncertainty, complexity and ambiguity (VUCA) the prediction horizon is sooner than ever. In the 20^th century, 5-10 year predictions were common. Today, in some industries, you are lucky if 3 year predictions hold up.

The two zones described in Table 1 clearly indicate the need to have a dual-path strategy – what Derek Abell calls the Today-for-Today and the Today-for-Tomorrow paths.

The zone with low uncertainty, the forecast zone, is well understood with methods and tools (and consultants) available. It is the zone in which the current ecosystem looks much like it does today. Even in very dynamic, super competitive, and turbulent ecosystems, immediate futures are arguably ‘predictable’. Companies know how, and feel comfortable, operating in this zone. It is the zone in which a Today-for-Today strategy applies and sustaining innovation dominates. It is the zone of Horizon 1 and many Horizon 2 innovation initiatives, ones that are closer to the core. It is the zone of the yearly strategic plan and most business unit and functional strategies. It is the zone that should occupy the majority of a company’s attention. And rightfully so. If a company does not do well in the forecast zone, it will cease to exist.

When you cross the prediction horizon threshold, you enter the Foresight Zone where insights cannot be linearly extrapolated from history or derived from deep analytics. The Foresight Zone is farther out and not well understood. This is the zone that is driven by high uncertainty and non-linear ‘inflection points’ that change the underlying rules of the game. As a result, companies often ignore the Foresight Zone or, if they do not ignore it, they struggle with it.

The Foresight Zone is where a Today-for-Tomorrow strategy and strategic innovations need to be employed. It is the zone of Horizon 3 innovation initiatives and narrative-based strategies. It is the zone that both strategists and innovators must operate in if they are to come up with the most significant and game-changing initiatives for the company. It is also the zone that the highest levels of the corporation should be focused on.

The way to address the Foresight Zone, and create a Today-for-Tomorrow strategy, is to create strategic options. A strategic option describes an alternative strategy, a different way for the enterprise to go forward, given that a set of future conditions come to pass. A company ‘buys’ a strategic option with a present, on-going, low-cost, investment of time, resources, and money, in  activities and artifacts that will allow a company to make a future big investment in a new business, or abandon it, at the right time.

A company should have several strategic options in play at any one time. The key for strategic options is to have the processes, methods and tools to identify a meaningful strategic outcome, to set up the actions and artifacts that are on a path to that outcome and to establish the metrics and mechanisms to determine when is the right time to strike (i.e. exercise) or to abandon the strategic option. To accomplish this, a company needs to have a system to develop new strategic options and then to deploy them.

Why the Foresight Zone is Important

There is no question that the Foresight Zone exists. There are questions, however, about what to do about it. The questions that come up most often are.

1. Do we need to pay attention to the Foresight Zone? Why?
2. If we do need to pay attention to it, how?

The answers to these questions are a) yes, ignore it at your peril and b) use the processes, methods, and tools that have been developed for strategic innovation.

There is a pernicious attitude in many boardrooms and C-suites today that since the future cannot be predicted, it is useless to try. The only possible approach is to be responsive and react quickly. They hear ‘long-term strategy’ and think, ‘Why bother? Our company struggles to cope with 1 to 3-year time horizons. What good is thinking 5, 10 or 15 years out? It couldn’t possibly affect what we’re doing today.’

Nothing could be farther from the truth. Companies like Shell have, for four plus decades, created long-term, future scenarios to guide their current strategy. One of their more recent scenario efforts, called “Sky”, looks 50 years out to a world that is carbon neutral and solar energy sources are dominant. As they say in their description of their scenario process

“Shell Scenarios ask “what if?” questions, encouraging leaders to consider events that may only be remote possibilities and stretch their thinking. They are plausible and challenging descriptions of the future landscape. “

It is not only Shell that is doing this. A multi-billion-dollar, international medical equipment company and a leading US health insurance provider both recently undertook initiatives to gain insight into what the future of healthcare could plausibly look like 10 to 15 years from now. They are using these insights today to create options for their future.

These are 10, 15, 20-year strategic visions of plausible futures that inform actions that can be taken today. This should take up only a small portion of a company’s total time and attention in the present, but it is time and attention that’s well spent. The time and attention spent today is buying an option to exercise in the future. It lets the company reserve the right, not the obligation, to invest in a plausible future for themselves.

The question is not whether to investigate the future or not. Companies anticipate the future as a matter of course when they create strategies, invest in R&D, and innovate new offerings. But executives are often skeptical about looking too far into the future. Often they feel that more then 3-5 years is too far out, too speculative, etc. They feel that they can put off thinking about things that are over-the-horizon and will be able to react to whatever happens.

But the fact is that this is where disruption comes from, and, if one looks, the signs of it happening are visible and can be acted on now. It requires attention from executives and the company precisely because it cannot be predicted, only imagined. It enhances, not replaces, existing strategy and innovation initiatives by broadening the universe of what could be plausible so that the company can see the future happening now that is not evenly distributed and is often hidden.

The beauty of separating the future into two distinct zones, albeit with a very fuzzy boundary, is that it allows the future to be thought about in two very distinct ways. No longer do you need to ask, ‘how far in the future is far enough?’. Is 1-3 years long enough? Is 10 years too long? Instead you just need a dual path approach to strategy and innovation using two sets of methods and tools. The first set relies on being able to predict with reasonable accuracy. To use data and analytics to assess probabilities and to accurately depict and model the current ecosystem and how it will change in the next few years.

The second set of processes, methods and tools relies on a different approach that acknowledges that non-linear change will happen, disruption is inevitable and the ecosystem you are now living in will look very different than it does today. Innovators have long dealt with the Foresight Zone. Indeed, one of the purposes of strategic innovation is to create the non-linear, disruptive changes that will create the future. Consequently, strategists can look to innovation for the language and tools necessary to be effective in the Foresight Zone.

The Strategy-Innovation Connection

Whatever one may think of Elon Musk, when starting SpaceX, he did think about both long-term and present day strategic and innovation actions. Both are needed.

But, as William Gibson so famously observed, ‘The future is already here, it’s just not evenly distributed’. In 2002, almost all the technologies used to successfully deliver two astronauts to the International Space Station in 2020 existed only in very nascent forms – in laboratories and in the minds of researchers and inventors. In 2002, the touch screen displays that dominate the SpaceX Dragon Crew capsule existed only in very primitive (and expensive) forms. The sensors and flight automation intelligence were just beginning to come into being in a few researcher’s labs. The design of the Falcon 9 first stage with its Merlin engines is beyond anything that was then possible. Landing the first stage upright on a platform in the middle of the ocean so it could be reused? Experts would have laughed (and they did).

SpaceX was battling two entrenched competitors. One was Boeing who was competing for NASA’s commercial crew program with its Starliner program. The other was United Launch Alliance (ULA), a joint venture between Lockheed Martin Space and Boeing Defense, Space & Security, formed in December 2006, that was competing for the space launch business. Both Boeing and Lockheed Martin (the partner with Boeing in ULA) had worked with the government for decades and were entrenched in the space system. SpaceX was a newcomer.

But, as evidenced in the quote above, Musk not only had a long-term vision, he had a strategic imperative to reduce the cost of space flight that informed the actions the company took from 2002 until the present. As Rita McGrath articulated, he expanded the futures being considered by imagining a different world.

Elon Musk, and many of the SpaceX executives he has hired are people who can combine the perspectives of both a strategist and an innovator. They can imagine a future and then work to make it happen. They understand that the future imagined in 2002 will not be the same as the future imagined in 2011 or in 2020. They can understand that the future is uncertain, it makes you as you make it. They also understand that without imagining this 20-year future, and the strategies and innovations that need to make it happen, they would end up like the United Launch Alliance, struggling to adapt and keep up.

The Strategic Option

As mentioned above, a strategic option describes an alternative strategy, a different way for the enterprise to go forward, given that a set of future conditions comes to pass. A company ‘buys’ a strategic option with a present, on-going, low-cost, investment of time, resources, and money, that will allow the company to make a future big investment in a new business, or abandon it, at the right time.

In its basic form, a strategic option is for a new business – either a core transformation or a business outside the core as shown in the following figure.

Figure 2 – A Strategic Option is for a New Business

A key part of a strategic option is a description of a plausible future within the Foresight Zone. This future is used to set the stage for new strategic propositions for a new business that would be successful if that future came to pass. This new business would either be a transformation of the existing core business or an entirely new business outside the current core.

The future scenarios upon which strategic options are based describe things like ecosystem changes, and new roles within the ecosystem (see Options-based Strategy for more detail). They are created when developing strategic options (see below).

The new businesses that strategic options describe are based on future ecosystems and domains imagined during a structured and rigorous foresight process. One of these imagined futures can be the source of several potential strategic options.

In addition, the strategic option can, and should, contain tangible concepts for new opportunities, either new platforms or new specific solutions that would be both possible and wanted in the imagined future.

A more detailed description of the strategic option will be given in a subsequent article. For now, think of a strategic option as a narrative, a story, about a new business that exists in a plausible future world that is beyond the prediction horizon. Developing these strategic options is similar, in many respects, to how innovators create new opportunity concepts.

Developing Strategic Options

Because both long-term strategists and strategic innovators need to operate in the Foresight Zone, with all its inherent uncertainty and ambiguity, it makes sense that they should be able to use similar processes, methods and tools. The innovation profession has been developing, deploying, and testing these processes, methods and tools, and their ‘muscles’ have been developed, for over twenty years.

The strategy profession, not so much. Aside from the yearly strategic planning process and the ubiquitous senior leadership ‘strategy weekend’, most companies do not have a structured long-term strategy process and, even if they do, it is not tightly integrated with their innovation efforts. Strategists often find that their efforts, while appreciated, often do not have the impact or influence on their company’s future that they should. There is sporadic use of scenarios and corporate strategists are often frustrated to get their companies to think at all about the long term.

This is starting to change. Strategists are learning from innovators and vice-versa. After all, a company’s strategic innovation portfolio, R&D initiatives and new product development efforts are the purest expression of what the company believes its future will be. It is these efforts that are creating a company’s future not just 1, 3 and 5 years out, but 10 years and beyond. They are the company’s long-term strategy.

The Innovation and Strategy Toolkits

An understanding of  strategic innovation has emerged over the past 2 decades that has resulted in a set of fundamental innovation toolkits that are used, in whole or in part, by every innovation practitioner. These toolkits have many different names and are categorized in many ways. One such depiction of the set of innovation – strategy toolkits is shown in Figure 3.

Figure 3 – The Toolkits of Strategy and Innovation

This structure organizes the processes, methods and tools used in innovation into functional categories that represent what is required to generate new concepts and take them from idea to reality.

1. Learn Toolkit functions to build a broad and deep corpus of tacit and explicit knowledge from multiple sources to gain understanding and insight. The techniques of searching, probing, gathering, and extracting information serve to ‘learn of’ new things and ‘learn about’ specific things in new areas. The tools in the toolkit help people seek out and deal with structured and unstructured, uncertain, and ambiguous information. They allow the human (and perhaps AI) component of the sub-system to become immersed in a specific focus area so that understanding, insight and new emerge. Moreover, the tools record document, extract and share the information and knowledge that is created.
2. Synthesize Toolkit functions to make sense of large amounts of unstructured, incomplete, and ambiguous information and integrate diverse perspectives to model complex systems. The techniques of pattern finding, categorizing, classifying, and describing entities and actions are used to build models and to foster additional queries for corpus building. The tools in the toolkit promote complex and holistic systems thinking in which the various components of an interconnected system interact in non-obvious ways. Models can be formal or informal but always serve to illuminate not only what is going on now, but what could go on in the future.
3. Imagine Toolkit functions to expand the imagination through the creation of plausible future stories (scenarios and vignettes) based on observable (though sometimes weak) trends happening now to develop future foresight. The focus is on the Foresight Zone where things will look quite different than the present. The tools and techniques of trend identification and projection, scenario and vignette creation and entity extraction and backcasting are used to create multiple, future stories and use these stories to create actionable insights and ideas for thing to do today.
4. Invention Toolkit functions to create new concepts and investigate their potential with ever increasing rigor to design new and novel artifacts. Nascent concepts are created (discovery-of) with a bottoms-up, outside-in, creative process, which expands the range of potential options. As concepts advance through the design and decision-making process, more knowledge and analytics are applied (discovery-about). The tools and techniques of ideation/creativity, design thinking, qualitative and quantitative analysis are used to generate and develop multiple concepts at once.
5. Decide Toolkit functions to promote good decision-making under uncertainty. Multiple concepts (opportunities, future states, strategic options) are assessed with respect to each other, to the company, and to the world to create portfolios of options. The techniques used are designed to provide decision-making insights even with incomplete, ambiguous, uncertain information. The tools in the toolkit promote input from a broad and diverse community that has different perspectives and opinions and gives teams the tools to decide where to focus attention and how to advance concepts to the next stage.
6. Socialize Toolkit functions to communicate the essence of concepts being developed in a way that lets people understand and connect with what could be possible by telling a compelling story. The techniques used encourage multiple perspectives that illuminate various aspects of a concept and cause people to ‘experience’ what the world would be like if the concept was real. The emphasis is on narrative rather than analytics and the tools in the toolkit encourage creators to communicate their visceral understanding through stories and visualizations that let listeners connect both rationally and emotionally.

A system that employs these toolkits is driven by an Iterative Deepening engine that invokes the use of the right tool from the right toolkit at the right time in a non-linear, iterative manner.

In an innovation context, applying these toolkits is standard use. Indeed, they have been used for large-scale, strategic innovation initiatives for decades. For innovation initiatives, the concepts being considered are new opportunities, the outcome is a set of opportunities that are incubated and then accelerated into new businesses and offerings. But how can these toolkits be applied to strategy?

Deploying Strategic Options

In a Today-for-Tomorrow strategy that is informed by the Foresight Zone, the first task is to develop strategic options. Once they are developed, the task becomes to deploy one or more by undertaking activities that will prepare the company to strike at the right time.

• Signposts to observe: Triggers and waypoints to see how the future is playing out
• Domains to explore: learn about an area that is outside the normal scope of interest
• Experiments to learn from: structured effort to see how something works
• Relationships to work with: unusual partners for new capabilities and tests of possibilities
• Models to test outcomes: simulate ecosystems to understand dynamics
• Rules to advocate for: influence externalities to create favorable future environments

Many companies already do versions of these today, but not in a rigorous, organized, or structured way that is part of a system of strategy and innovation. The deployment of strategic options will be covered in the next article in this series on Dual-path Strategy.

Conclusion

“Before the wheel was invented (by the Sumerians, ancient Iraqis, around 3500 BC) no one could talk about the probability of the invention of the wheel, and afterwards there was no uncertainty to discuss … To identify a probability of inventing the wheel is to invent the wheel … creativity is inseparable from uncertainty.” – John Kay and Mervyn King

The future is what strategy and innovation prepares for. There is the future for which the past and present is extensively analyzed and used to predict what will probably happen. It is the world of risk but low uncertainty. It is the world of Today-for-Today strategy and sustaining innovation. It is the environment that companies are generally comfortable with and good at. It is necessary, but not sufficient, for companies to be good in this Forecast Zone.

Then there is the future for which the past and present are not predictive. It is the future of the plausible in which foresight and narrative play the dominant role and probabilities and prediction are secondary. But this is the future that will disrupt you and which you must understand to thrive.

By focusing on the Today-for-Tomorrow path, spending at least a little time and attention in the Foresight Zone, you do not need to, nor should you, abandon current strategy and innovation initiatives focused on the Today-for-Today strategy and the Forecast Zone.  What is needed is a new set of processes, methods and tools, ones based on 20+ years of innovation research, to enhance the long-term, Today-for-Tomorrow component of the strategy. This is the component that is lacking in many companies. Doing so will result in:

• An enrichment strategic thinking
• A broadening of imagination about what is possible
• More tightly coupled innovation and strategy initiatives
• The creation of new options by making low-cost investments
• A more agile, open, and exciting organization

The Foresight Zone is always uncertain and the dangers of not taking it into account can be devastating. An example of this occurred In 2015 when General Electric purchased Alstom’s Power and Grid Business, for $13B. Alstom’s Power and Grid business was a struggling competitor to GE’s own Power business and GE seized on an opportunity to acquire them in order to dominate the market (Siemens and Mitsubishi are the two other big players).  The deal closed one month before the start of the meeting in Paris that would result in the Paris climate accord. It was a multi-billion dollar mistake born out of a CEO’s desire to make a big deal and a sole reliance on a Today-for-Today strategy with no foresight into how the world of energy generation was being radically transformed. It is a transformation that others did foresee, with the right mindset, tools and a dual-path strategy, could have been foreseen by GE as well.

As Michael Raynor points out in his book The Strategy Paradox,  the future is uncertain but success requires commitment to a strategy well in advance of certainty. Since the Foresight Zone is defined by high uncertainty, it seems that companies have no choice but to commit to a strategy that may or may not work in the future. But this up-front commitment ignores the possibility of developing then deploying strategic options to deal with future uncertainty. Companies have their current strategy. They can predict, relatively accurately, what will happen in the near future, the Forecast Zone, and develop their strategic plans accordingly.

What companies do not do well today is probe the possibilities, both good and bad, that can emerge in the Foresight Zone. But doing so can reap tremendous rewards. It can prepare you for an uncertain future. It can reveal new business possibilities that were previously unimagined. It can inoculate you against disruption or, alternatively, make you the disruptor. Such are the possibilities of becoming comfortable in the future uncertainties of the Foresight Zone.