07 Mar 2023
For organizations to thrive and survive, they need to have control of their future. This has become more important since events like the COVID pandemic and the war in Ukraine, as well as geo-political uncertainty, which has impacted economies globally. In such an uncertain world, it is essential organizations are able to adapt to the unexpected. This is where assumptions can help. In this blog we take a look at why business assumptions are so important.
Why use assumptions?
Assumptions capture the thinking about the future, however predicting the future with any degree of accuracy is very difficult - the further out you want to project, the less accurate the outcomes will be. Most companies can get by with a three-to-five-year strategic plan, but others may have to estimate demand on their products decades ahead. For example, to grow trees for timber might need a 20-to-30-year plan, pharmaceutical products need a decade or more to go through to launch, and a building manufacturing facility could take several years. The business needs some future view to calculate the return on investment, otherwise it’s just potluck.
Documenting and testing is key
The key to predicting the future is documenting and monitoring the thinking that underpins the future view, then to test how good those plans are by measuring and adjusting the assumptions as you go. Without writing them down and agreeing the key drivers behind plans, any opinion on the quality of the plans, is as good as the next and can be the death knell of a company. Think about how General Motors fell from being the biggest car company in the 1970s to bankruptcy in 2009, or how Eastman-Kodak failed to move with the digital revolution. There are many more examples, such as those identified in the HBR article, ‘When Growth Stalls’, which summed it up nicely with the statement: ‘When what you know is no longer so…’ The article concluded that 87% of the key elements that lead to failure were within management’s control, including these ‘red flags’:
• Core assumptions were not written down.
• Market definitions had not been revisited in many years.
• Shifts in key customer groups were infrequently tested.
Failing to take the documentation and monitoring of assumptions seriously, could therefore be fatal. Alignment is also needed on a good working definition of the term ‘assumption’. According to the Oxford Learners’ Dictionary, an assumption is, ‘A belief or feeling that something is true or that something will happen, although there is no proof’. Combining the dictionary definition, with our Oliver Wight definition, ‘The thinking behind the numbers that form our plans for the future’, a more encompassing definition could be, ‘Documenting and agreeing the thinking underlying business plans, where there are no definitive facts available to validate those plans.’
‘Uncertainty’ about the future is the key requirement for needing assumptions. There are however things we can predict with confidence, such as the seasons, sunrise and sunset, the tides, Easter, Christmas Day, and many more. The issue becomes understanding what is important to your specific plans and getting granular enough to align any change in assumptions to the impact on those plans – but not too granular that the number of data points makes it unwieldy.
So, what does a good set of assumptions look like? In our next blog we cover the first five of ten keys to effective assumption management.
For more information on assumptions download the white paper here.