High-pressure executive decision-making requires clarity, but in most cases, this is not found or is not even possible. Why is this the case? Because strategic choices are made in environments filled with ambiguity, where data is incomplete, market trends are volatile, and outcomes really are up in the air. The successful leader doesn’t see a clear path or clear options. What they do is live in the world of probabilities and possibilities, using tools like a probability calculator to dissect the uncertainty they’re faced with. And then they make the call, against a backdrop of the inherent riskiness of uncertainty.
Take the case of Olivia, for example. She is the CEO of a global logistics company. In early 2020, her executive team was faced with a vital choice: whether to invest in a new artificial intelligence-powered platform for supply chain management. To put it mildly, the potential upsides were enormous. On the other side of the coin, though, the possible downsides were staggeringly risky. And in the background, the nascent global pandemic was already starting to shake the economy.
No tool might better capture the marriage of data and math than the probability calculator. It allows leaders to quantify uncertainty. When it comes to making decisions, uncertainty is the one constant we can all count on. Whether we’re talking about calculating the odds of a new product launch succeeding or estimating the chances of a competitor blowing into town, these are what you might call classic business problems steeped in uncertainty.
To convert that uncertainty into something we can more easily grasp, leaders will define their key variables. In the case of our merger example, those might be currency stability, regulatory approval, and cultural fit. Then they’ll build out various scenarios. Remember: a scenario is not a forecast. It’s not saying what will happen. Rather, it’s telling a story about how the future might unfold given certain conditions.
Once the scenarios are built, the next order of business is assigning each a probability. This is where the ol’ calculator comes in handy. The way it works is pretty simple. You feed it some variables, juices them up a bit with some good old statistical know-how, and then you plop down some scenarios, make ‘em pretty, and make ‘em convincing. The result? Instant risk assessment, baby!
Only 35%? The company might think again and look for ways to boost its prospects. Another compelling use of calculators and what-if scenarios is in option valuation. Very often, when we make strategic decisions, we are making choices about real options, choices that create future opportunities. For example, investing in a new strategic initiative can be likened to buying an option to expand. A calculator helps us get a handle on the value of these options by forecasting different future states and the probabilities attached to each.
But we seldom hear about the most underappreciated advantage of thinking in terms of probabilities. It is simply this: If you want your team to be aligned and not to have a lot of dumb conflicts, get them to agree on some key assumptions and to think in terms of the probabilities of different events happening.
Once you have done that, and once the team has also done some decent what-if thinking, you can then have key leaders make use of all this to inform the decision-making process.
Investments in new drugs come with a great deal of uncertainty, and the odds of any one compound making it through clinical trials to eventual market acceptance are well-documented as being low. For this reason, a number of drug companies have turned to probability-based models to better ascertain which projects are worth pursuing and which are not. Even if using these models does not lead to an increase in successful drugs, at the very least it ought to make the capital allocation decisions of the firms involved more economically efficient.
Why should startups and smaller firms take note? Well, the margins for error in these organizations are much thinner, and the amounts of capital involved in going-to-market decisions are much less flexible. Using models to calculate different probabilities associated with different funding decisions or operational pivots under conditions of high uncertainty can bring much-needed clarity to these situations.
Leaders who use tools like probability calculators to impose order on the chaos we call life are better positioned to grab hold of opportunities and avoid blundering missteps that could cost them (and us) dearly. We live in a world where disruption seems to have become the new normal. When we’re talking about strategic clarity, there’s no such thing as a crystal ball. What we do have, and what we can use to our advantage in building a world that we want to live in, a future that’s ours to remake, are choices. Choices that can be made with confidence, using the things we’ve been talking about for the last couple of days: guesswork, dialogue, tools.
