My friend and fellow strategic thinker Bill Welter asked me a great question: “Why do so many leadership teams get surprised by adverse events or fail to be prepared if previous uncertainties come to light?” Bill is the author of some great strategy books and has a terrific newsletter on how to advance your preparation for the future.

The question has become urgent as Trump’s rapid-fire moves have generated considerable uncertainty. For example, supply chain experts must deal with on-again, off-again tariffs and biotech companies with cutbacks in research funding … or maybe not. And even without these latest moves, the world seems increasingly less predictable due to geopolitical issues and natural disasters.

A required attribute for today’s leaders is the ability to deal successfully with uncertainty. What does that mean exactly? Let me present a matrix that will advance this discussion.

This 2×2 matrix compares leadership awareness of an issue (known vs. unknown) relative to events outside the company. Leaders can be confident about some of these outside events (e.g., using data on demographic trends). Others remain uncertain or unknowable to the world (will there be sufficient scalable solutions to remove carbon from the atmosphere?).

 

	External Events
Leadership Team Awareness	Certain	Uncertain or Unknowable
Known	Safe Zone	Preparatory Zone
Unknown	Zone of Ignorance	Zone of Surprises And Black Swan Events

What are leaders’ responsibilities and vulnerabilities in each quadrant?

Safe Zone: Leadership teams spend most of their time discussing certainties, such as events or actions that occur, have occurred or will occur. The leaders try to optimize their decisions around these known factors. That could be a quality issue, a new market opening, a competitor gaining ground, or succession planning with an aging CEO. Some of these issues represent risks that might keep leaders up at night. But the tool kit to deal with them is handy and well-worn. Companies fail here through ineffective strategy, poor decisions, or failed execution.

Preparatory Zone: This is the zone leadership teams address during strategic planning or after a prior uncertainty resolves itself (e.g., our supplier did become a competitor). Teams identify risks and opportunities based on known events and trends and substantive uncertainties—about competitors, customers, technology, etc. From this exercise, leadership teams pick a path forward and identify which uncertainties to monitor closely.

Companies fail here by not being fully prepared for “uncertainties.” They therefore do not address them fast enough as the picture becomes more apparent.  Kodak comes to mind: its leadership kept focusing on film at a time when digital photography was expanding at even faster rates than expected. Blockbuster did the same thing: it held onto a retail store business model in an emerging streaming era. Neither company made a decent bet on an alternative future that was uncertain but a realistic possibility.

Ignorance Zone: There is no excuse for being in this zone where leaders are unaware of known events or trends. You get here through laziness or inattention. Cadillac fell into this zone when it failed to realize its customer base was growing old and would not sustain the brand’s financial growth. Companies fail here by not anticipating known trends that will significantly impact the business. 

Surprises and Black Swan Zone: Surprises come to leadership teams that fail to identify uncertainties with significant potential effects on their business. As for “black swans,” Nassim Taleb, a mathematician and former Wall Street trader, coined the term for rare events with significant consequences that are difficult to anticipate, much less predict. Though, in hindsight, the event appears inevitable or at least knowable.

These are things that leaders cannot imagine will happen because they have not happened before. An example is the 2008 recession following the imploding of the subprime bond market. Companies fail because they lack the agility to respond rapidly to unexpected external shocks or because they lack plans to deal with uncertainties.

Improving leadership foresight

To improve foresight, reduce the size of the unknown row — that is, increase your leadership’s knowledge about events and trends, both known and uncertain. Doing this requires two things:

First, better identify, understand, and manage uncertainties and potential black swan events. Here are some tools I use for that purpose:

• Start strategic planning after the budget is complete so that managers’ minds are less focused on operational performance.
• Conduct scenario-based planning based on uncertainties.
• Identify the assumptions and facts that underlie your business models and challenge their future veracity.
• Host competitive war games.

Second, evaluate the underlying mindsets of leaders. Failure to identify a broad swath of relevant uncertainties stems from many things. One is confirmation bias, in which we search for information that confirms our biases versus searching for the truth. (Nowhere is that more present than in our political world. If our party says it’s good, it’s good for the economy. It may not be.) Another is assuming the past is prologue—that is, what has already happened predicts what will happen in the future. Finally, being too narrow in our thinking can keep us from imagining events different than we anticipate or things that could happen.

What else can companies do to improve foresight?

First, make sure you have independent directors on your board, especially some outside your industry. They are vital value-adds because they can bring new perspectives and deter groupthink. Here’s a great read on that topic.

Second, change the criteria for attributes you want to see in your leaders: Are they curious? Do they read narrowly or broadly? Are they comfortable with uncertainty? Do they listen/read beyond one political party? Do they have people who challenge their thinking on their staff? In their life? Are they agile in their thinking and behavior? Hire leaders with those attributes and encourage existing leaders to develop these skills.

In other words, are you and your leaders narrowly set in your thinking? Or are you broad thinkers with a balcony view of the three-level chessboard of business?