Market Unpredictability and the Limits of Strategic Planning
Research on firm survival challenges strategies that depend on precise forecasts of competitors and markets. The excerpt argues for plans that can adapt as events unfold and distinguishes emergent strategy from deliberate planning.
THE IDEA
Context
In 2004, the economists Paul Ormerod and Bridgett Rosewell published a paper entitled, “How much can firms know?” It was about the evolution and extinction of firms. (2) The paper drew on research that showed that there are two stylized facts about firms’ extinctions: 1) the probability of extinction is highest in a firm’s early life and 2) there is an empirical relationship between the size and extinction of a firm that exhibits a power law. (3)
The paper drew on extensive research. One study looked at the analysis of a database of six million firms by state and industry in the United States between the 1980s and 1990. Another database had firms of eight OECD countries over the 1977-79 period, which showed a power law with an exponent of -2.
The excerpt interprets this research as evidence that executives have limited knowledge of competitors and markets. It questions planning that relies on precise predictions in a complex environment. That argument does not establish that all analysis or planning is useless. De Geus explores the limits of prediction in The Living Company. (4)
The practical question is how a strategic plan can remain useful when market responses are uncertain. The excerpt also cites Christensen and Raynor’s The Innovator’s Solution for the argument that much strategy emerges through experience rather than following a deliberate plan. (5)
When to use it
A startup founder deciding whether to invest heavily in a detailed business plan or to adopt a more adaptive, learning-oriented approach.
A corporate strategist evaluating the effectiveness of annual strategic planning processes and considering complexity-adaptive methods.
An economist modeling industry dynamics using power law distributions to understand extinction risks across different firm sizes.
A consultant advising a firm on how to respond to competitive moves when the market environment is highly unpredictable.
FROM THEORY TO EVERYDAY LIFE
In practice
Analysis of Six Million US Firms
A study analyzed six million firms across US states and industries from the 1980s to 1990, revealing that extinction rates follow a power law. This supports the idea that market dynamics are complex and unpredictable.
OECD Firm Extinction Power Law
The excerpt reports that data from eight OECD countries (1977-1979) showed a power law with an exponent of -2. It does not provide enough detail about the variables or model to infer a particular firm’s extinction risk from that exponent alone.
A MOMENT TO REFLECT
Put it to work.
Given that markets are complex and unpredictable, how should you approach strategic decisions in your own business or career?
What are the implications of the power law of firm extinction for startup survival and growth?
Which parts of your strategy depend on forecasts, and which would remain useful if those forecasts proved wrong?
Often confused with
References
- How much can firms know? — Paul Ormerod and Bridgett Rosewell (2004)
- The Living Company — Arie de Geus (1997)
- The Innovator's Solution — Clayton Christensen and Michael Raynor (2003)
CONTINUE THE CONVERSATION
Source texts
- Cynefin - Weaving Sense-Making into the Fabric of Our World ED02 (Dave Snowden Sonja Blignaut Zhen Goh)