Arkaro Insights

Beyond the Tyranny of the Mid-Case: Rethinking How We Design Strategy with Pete Compo

• Mark Blackwell • Episode 29

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What happens when we fundamentally misunderstand one of strategy's most powerful tools? In this thought-provoking conversation with returning guest Pete Compo, we tackle the frequently misunderstood concept of scenarios and their crucial role in strategic thinking.

When uncertainty looms large, many organizations default to familiar approaches—creating low, medium, and high forecasts before averaging them into a comfortable middle ground. Pete calls this "the tyranny of the mid-case" and explains why it's fundamentally flawed. True scenario thinking isn't about prediction at all, but rather acknowledging the multiple futures that might unfold and considering how they would impact your strategic choices.

One of the most compelling insights from our discussion challenges the common practice of creating different strategies for different scenarios. As Pete eloquently puts it, "Your strategy is at the mercy of all external conditions and events." You don't get to choose which future materializes, so effective strategy must consciously consider various possibilities without attempting to implement multiple approaches simultaneously.

This conversation takes unexpected turns, from questioning when strategy is actually necessary (hint: almost always) to exploring whether organizations must build robustness across all potential futures. Using examples ranging from investment portfolio design to making tea for royalty, Pete illustrates how strategic considerations change dramatically based on your aspirations and the consequences of failure.

By the end, we explore practical guidance for avoiding common scenario pitfalls: never average scenarios, don't ignore upside potential, never use scenarios as forecasts, and remember that scenarios aren't arbitrarily long-term—their timeframe should match your strategic horizon. This episode will transform how you think about preparing your organization for an uncertain future, providing both philosophical insights and practical approaches to more effective strategic planning.

Want to learn more about implementing scenarios in your strategy process? Let us know in the comments, and we'll explore these topics in future episodes.

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Mark Blackwell:

Hey, good afternoon everyone. Welcome to the Arkaro Insights. We've got a favorite guest of ours, Pete Compo, who's been on the show a couple of times already. Welcome, Pete, how are you doing?

Pete Compo:

I'm doing well. Thanks for having me on again.

Mark Blackwell:

I hope you're feeling well because I think we've got one of the more challenging topics in the world of strategy to cover today. We want to see if we get there, but try and get everyone on board with a sense of understanding of scenarios I hope we'll explore have been one of the more misunderstood terms in the whole strategy world and as that's, if to say, the language used in strategy is itself extremely complicated and confused and misunderstood. Let's take our time and see where we end up on the journey. What do you think about that, pete? Sounds good. So an odd question maybe to kick off for two people who fascinated and love the world of strategy is when does it make sense not to use strategy to go and think about change and innovation in your organization?

Pete Compo:

It makes sense not to have a strategy when you're certain that you know how to achieve your aspirations. If you have no uncertainty about how to do whatever it is you're trying to do, then just go do it. If you have no questions, if your organization is clear, if you can lay it out in a cascade of goals and a cascade of plans, then just go do it. I just ask how many times do people have aspirations that there is no uncertainty and where it's absolutely clear exactly what to do, and where it's absolutely clear?

Mark Blackwell:

exactly what to do. So many people would say that they're in a VUCA world right, but they're now. But they've been doing traditional strategy. They've been doing plans and goals. Are you saying that they've got to think about strategy differently?

Pete Compo:

Well, again, I'll say two things. Number one it's always been a VUCA world. Tell me that the past has been stable and simple and linear and predictable, and you'll be dismissing all of history. The second is linear strategy methods never worked for any kind of situation, for any kind of situation. Cascades, chevron processes, flowdowns from the CEO on down all of these linear, sequential processes do not work. They didn't work in the past, they don't work in the current.

Pete Compo:

The reason why people did well in the past was because they had great intuition about how to do strategy and how to think Entrepreneurs do it without a methodology per se. I think that what we're realizing today is that there's a better way to do strategy, and it's been building. People have been slowly getting rid of the old world of thinking about strategy as lists of good things to do and, you know, even lists of just choices and lists of initiatives. We're moving in a better direction, and scenarios is part of moving in that better direction, because we recognize that there are things that influence what we do choice of strategy that we can't control and that are parts of the external world that we're going to live in.

Mark Blackwell:

So I think you almost got there. But, as I was saying right at the beginning, language is half the problem, because people have the wrong idea. How would you define a scenario?

Pete Compo:

A scenario is an external condition or event that you have very little ability to change, but that can impact your results, that can impact your, your company. You know let's use standard ones If your company is sensitive to interest rates, if your world is much different at 6.5% than it is at 2.5%, that could be a scenario for you, a change in interest rates, a meaningful change in interest rates. You can't control interest rates. Even the biggest companies in the world, I don't believe, can change interest rates. Even the Fed and the government can try to control them a little bit, but they don't choose them, or else we would just choose 2%, the Fed would choose 2% and the president would just choose 2%. Yes, we can do things like trade, growth and economic activity for a tamp down on interest rates, but it's not a control. So it's a great example of a scenario if it would impact dramatically your outcome and if you could choose strategies that are influenced by the choice of scenario of interest rates.

Mark Blackwell:

So can we now maybe think about mental models of how we think, about what scenarios exist and perhaps as a way of doing that? Often you've heard in my business career okay, mark, let's think about our plan. We've got a good best case scenario, a worst case scenario and a middle case scenario. Can you tell me why is that such a poor way of thinking about scenarios?

Pete Compo:

I think for two reasons. One is that it has very little specific content. Yeah, I suppose in the interest rate examples you could have a 2% for your low, 4% for your mid and 6% for your high. I don't know that the 4% one really matters all that much. What you really want to look at is the more extremes and you want to put a story behind them more than just numbers. You want to talk about inflation, you want to talk about the administration and what their view is. You want to talk about content that goes behind those numbers.

Pete Compo:

The other really damaging part to low mid high is that encourages averaging. It says boy, we did a 10% case and we did a 90% case, and look what happens when we average them. It comes out to the 50% case. So we'll go with that. We'll go with most likely thinking, which is the worst possible case to do most likely thinking. I call it the tyranny of the mid case. So I think there's two reasons for getting away from low mid high it doesn't help you think about content and it leads you to possibly getting into the tyranny of the mid-case.

Mark Blackwell:

And maybe another way of avoiding the tyranny of the mid-case is being more multidimensional, because you're just basically thinking of your future, where interest rates dominate everything. You might have a scenario where the competition is strong or the competition is weak. You might have wars going on, you might have political disruption. All of these things are fundamentally independent of interest rates, and so you could imagine several different types of worlds that might exist in the future.

Pete Compo:

Well, I think what you're leading to is that there's no such thing as just one scenario of the external world that you're going to be implementing your strategy or, as we say, walking down the road, and they can be independent to some extent. Let's think of an example of a company that's both you know. That would be both dependent on interest rates but also, for example, regulatory. Like what if a drug manufacturer both has an interest rate factor and whether or not their drug will be approved? Now you might argue that they can influence that, but maybe sometimes not. Maybe it's public opinion whether a drug is accepted or not. Another example would be regulatory around example I give in the book drones. What if you don't know whether drones for delivery is going to be accepted or not by the government and you don't know that you really have much influence on that? That might be completely independent of interest rate scenario, and there's nothing that says you can't have more than one scenario to consider in your strategy work.

Mark Blackwell:

So how would you go about practically trying to reduce an infinite number of potential scenario down to a manageable few? How would you?

Pete Compo:

Well, this is a very important point, and probably one of the great pitfalls in scenario work is that anybody can list a ton of futures. Anybody can create future worlds and future events and say, hell, I've got 10, 15, 20 scenarios of the future. The problem is that they're not useful until they're connected to a strategy process, until they're connected to your choice of strategy, your strategy alternatives, and so this is one reason why strategy can't be done sequentially, in a cascade or in a Chevron sequence. It's a puzzle.

Pete Compo:

When you're creating your scenarios, you're also thinking at the same time. Would these influence our choice of action? What if you're a company that interest rate wouldn't change anything you do? Well then, interest rate wouldn't be a scenario that you need to even think about. You'd put it on a parking lot somewhere and say, yeah, we know this could be true, but right now, our choice of strategy doesn't care if interest rates are going to go up or down. Yeah, it might influence our outcome, but it doesn't influence our choice of strategy. So creating scenarios is easy. Integrating them into the strategy process and judging which scenarios are needed is much trickier, and they have to be done in parallel. You have to be thinking about your scenarios, while you're thinking about alternatives and bottlenecks and the rest of your framework.

Mark Blackwell:

So it's a balance of trying to get the few that are manageable and those that impact what it is that you're trying to achieve. Another misconception we want to explore maybe is okay, I will just see how the world works out and if I see some early warning signals, I'll have one strategy for this scenario and I'll have another strategy for that scenario, because I'll be able to get some early warning triggers, points or something, and then we can build our strategy based on some early warning indicator. Is that a good idea?

Pete Compo:

Well, you've got two points in there, and you've made it a little more sophisticated with your last point about warning, but let's take them separately. Okay, let's start with where you started, and you won't believe this, but you can read it in. You know, consulting companies, literature and so forth the idea of create your scenarios and now create a strategy for each scenario. Well, this completely misses the point of scenarios. And we say it this way your strategy is at the mercy of all external conditions and events. You don't get to pick which external conditions and events are going to occur for your particular strategy. The analogy is in making bets and gambling, like in a dice game. It's like being able to make the bet, determining your strategy on betting, after the dice have been rolled. It's absurd. Your strategy is at the mercy of all the conditions of the future world that you do not influence. They don't all matter, but the strategy is at the mercy of all futures.

Pete Compo:

But then you added in a good secondary point, though there's nothing that says that you can't start with one strategy, and, let's remember, you can only follow one strategy at a time. That's, in part, why strategy is at the mercy of all futures. You can't have two strategies at one time. You can't be walking down two paths at one time. You can choose to send some people to one path and send people to another path, but that's a completely different strategy.

Pete Compo:

What if, though, as part of your framework and your dashboard, you have indicators? You have indicators of whether a particular future is likely to come true or is coming true. So, say, on interest rates, you're keeping an eye on government action, you're keeping an eye on companies' inventory levels and so forth, and you have a bit of a model that says I think that these behaviors are leading, possibly, to higher interest rates. There's nothing that says, at that point, you can't change your strategy to the one that was more successful in the higher interest rate scenario, but that's much different than saying I'm going to have one strategy for each scenario, because that implies you're implementing multiple strategies at one time. You can always change your strategy, but you can't implement two at the same time.

Mark Blackwell:

Go ahead ongoing strategy thinking as opposed to old-fashioned lame-o thinking of five-year plans and annual budgets. Would that be correct?

Pete Compo:

I mean absolutely the idea that strategy should be put on a timeline. I think people are getting past this right. The silly yearly strategy update which we know most of the times is a budgeting exercise, a profit objective exercise, or the five-year strategy plan, and then you're going to stick with it. I have no objection to doing a five-year view, but the possibility is that after six weeks it's wrong or that you see that something's different than you thought. Strategy has to be changed when there's creative tension to do so, when there's enough of a difference in what you diagnosed or what the world around you seems to be, and in your internal world as well, that you have to make a change. And that could be six weeks from the time you created. It could be six years, and that's why the dashboard has to have indicators, leading indicators about whether all of the diagnosis you made is still true, and one of the key parts of your diagnosis is scenarios, of course.

Pete Compo:

Another key one that really gets to the heart of your question, mark, is you built your strategy around? What's in the way, the bottleneck to achieving your aspiration? What if you solve that bottleneck in six weeks or six months? You're going to wait around for a year to decide how to upgrade and move on to the next aspiration, the next improvement. No, you solved it. Need a new strategy, time to move on to a better place.

Mark Blackwell:

Interesting, at the mercy of all future outcomes and those scenarios that you really want to focus on that are going to impact you. Isn't the logical implication of that that you fundamentally need to be more resilient in the way that you operate your business? Doesn't that mean that you have to have more buffers, more slack, more reserve, which goes against so much of management practice, which we think about six sigma of eliminate defects, lean, eliminate waste and be optimizing what you're doing? Isn't there a sort of a bigger question about thinking about your strategy when you realize that we live in a vehicle world?

Pete Compo:

Okay, well, there's a lot to unpack here too. Yeah, I would say. Number one there's no. There is nothing in strategy theory that says you must create a strategy alternative or choose one and implement and execute on a strategy alternative that makes you robust in all futures. I think we said this before right. There's nothing that says that.

Pete Compo:

For example, like what, if you're a hedge fund manager or you work for one of the big brokerage houses and you're you know you're giving, you're creating an investment scheme for an ETF or a mutual fund, you believe that 80% chance interest rates are going to stay high for the next five years, you put a probability of 80% on it, right or wrong. You model it, you think about it, you get experts, you really have conviction that you have an 80% probability and I don't even like using the word 80% because it implies precision. You have a high belief, a high probability belief that interest rates are going to stay high for the next five years, and you design your investment portfolio such that it takes advantage of those high interest rates. And in the case that you're right 80% case that you're right you look great. It is a perfectly valid strategy to say I'm going to go with that what I believe to be a high probability of success, and I'm going to accept the fact that if the 20 percent chance, or the low probability, that interest rates come down and I'm going to look like crap and I'm going to get fired, I accept it because the upside of the high probability case is so great that I'm willing to accept the down case. That is a perfectly good strategy. That is a completely valid strategy.

Pete Compo:

The question is are you consciously making that choice? Are you consciously saying look, it's possibility that interest rates could be 2%, not 6.5%, and do you realize that if it goes to 2% we're going to get fired? Is that a conscious decision? That's a lot different than saying you know you don't have to think about robustness to all interest rate conditions.

Pete Compo:

If you see where I'm going, I think that there are plenty of cases where robustness by hedging, by spreading bets, by having alternative pathways available and optionality built into the strategy. I'm positive that there are too many cases where people are not considering that there may be futures that they're not prepared for, but I'm not saying that that has to be. I'm saying it should be a conscious choice, remembering that every hedge, every optionality, every spreading bets comes with a cost and that cost has to be weighed versus the robustness that it gives you. So there's really two answers there. I don't think that there's a demand that you must be robust to all futures, of these multiple futures, and that you make a conscious choice and a reasoned choice, whether you're willing to pay to be robust to the multiple futures.

Mark Blackwell:

I think so. So the simple example that I've used in the past is do I need a strategy to make a cup of tea? I don't need a strategy to make a cup of tea because I can live with the fact of the unlikeliness of the kettle exploding on me when I switch it on. It's certainly a possibility, but you know what I've thought about it and discounted it, that that event is going to happen. There is a risk that the manufacturer might not put tea in the bags, but it's so small, so I might as well assume that the world is quite linear, predictable, when I go to make my cup of tea.

Pete Compo:

I love this okay, because what you're bringing in is it depends on the aspiration. Remember the example we just talked about. You're an ETF designer and you're willing to accept that in 20% of the case you're going to get fired in return for a great payday. In the 80% case, let's do it in tea If you're just making it for yourself or somebody you know, and it doesn't matter if you screw it up. But what if you're making tea for the queen?

Mark Blackwell:

Wouldn't I take a bit more care?

Pete Compo:

What if your position as official tea maker for the queen, or whatever that position is, and the pot explodes or you ended up using tea that wasn't on the approved list because it looked like tea but it wasn't really the same tea, and the queen or the king says we need a new tea maker here? You know, are you willing to accept that result for the price of ensuring that the teapot isn't going to explode? And ensuring that you've got the right tea Depends on your aspiration. And now we're circling back to. There is no universal answer to the question how many scenarios do you need? And whether you need them or not, it all depends on your aspiration and what choices you have available to you.

Pete Compo:

You know, if you're the tea maker for the queen and there's only one tea available to you and it's three minutes to tea time, you don't have a choice of a strategy, because it's either. Well, maybe you have a strategy question. Do you say hey, mom, I don't know if I got the right tea or not. Do you want me to make it? You know like do you say something or not?

Mark Blackwell:

But if I've just won the contract to be the king's teammate for next year, then I'm going to have a different strategy on how to produce the team.

Pete Compo:

If you've got a year to decide how you're going to do it, then you have other strategy optionality available to you. But what are we really going after here? Scenarios is not some isolated thing that you do as an afterthought to test your strategies or as a you know. Let's make a list of scenarios. It's an integrated part of the puzzle. Depends on your aspiration, depends on what your optionality is in your strategies Absolutely.

Mark Blackwell:

You know, the view's got to be worth the climb after all, because, as you point out, everything is integrated beyond that. I think fundamentally, if you're running a large enterprise and you're thinking about the strategy, at some point scenarios have got to be considered and often, historically, they haven't been. So I hope our dear listeners have got some insights into this. So the next thing, they're going through the strategy process on when and how much effort to put into them and why it makes sense to do that.

Pete Compo:

Well, mark, I think this you know. If we can continue on that, you know what is the real objective of the use of scenarios. Real objective of the use of scenarios it's not to predict the future, because, we're admitting, scenarios, by definition, are not quote predictable. They're things you don't influence and that are highly uncertain. So what is the objective of scenarios? I argue it has three main objectives. It's to destabilize an organization's belief in a known future and in some ways that means you don't even have to come up with the right scenarios. You just have to say you know.

Pete Compo:

The fact is, we don't know what the world's going to look like exactly. And are we thinking about that? Are we considering it? Are we considering where you're going around the question of robustness to different futures Maybe you don't even have to know exactly what they are to improve your thinking on whether or not there should be some hedges, on whether or not there should be some hedges, on whether or not there should be some optionality.

Pete Compo:

A second value of scenarios is to influence some preparation of possible contingencies, and that's where you were going a few minutes ago. Should we build in indicator systems about whether the future is coming out the way we thought it would? And do we have some contingencies to manage that, like in our case with the interest rates? So the woman who created this great ETF for high interest rates for a five-year payback after a year and a half the writing's on the wall. Interest rates are looking like they might come down. The Fed is pushing hard and you know I don't know mortgage people aren't buying houses. Mortgage rates are coming down. Name it, whatever dynamic it is that would drive interest rates down.

Pete Compo:

Could that woman have had, you know, a plan, a contingency to switch to another strategy, to manage that change the nature of the ETF or even go get another job before it's too late? I don't know. But that early warning system and thought about contingency can be enhanced by thinking about scenarios. And this does not mean having to have a detailed plan of everything you're going to do to cover a case that shows up unexpectedly, unexpectedly. No, it's just an encouragement to think about how you might change your strategy because of a change of environment. The third one and it's kind of embedded in the others is to influence strategy, alternative design, to reflect the possibility of different futures, even if you know that there's not a known future. You want to influence your strategy design technically, which is another value of scenarios. But none of these values, none of these objectives around scenarios are to predict the future.

Mark Blackwell:

They're just to make your organization in the strongest position for whatever might come, based upon what you believe to be true.

Pete Compo:

If you're willing to pay and judging whether it pays to do that, do it Correct.

Mark Blackwell:

Great Right, yep, I got it. That's fabulous, pete. Thank you very much. I think that's been a really good conversation. Have we missed anything? Do you think?

Pete Compo:

We could add a whole series on technique around pitfalls for how to design scenarios, what not to do, what to do. I could just list a few quickly. Don't ever average scenarios. Don't use normal distributions. Don't ignore upside potential. How many people do scenarios? They're all doom and gloom possibilities. Well, sometimes a strategy is great because you're taking advantage of some possibility of things being 10 times better than you thought. Don't let only negative thinking get in there. One we talked about already don't think one strategy, one scenario. Another one is do never use scenarios as forecasts. We've kind of talked about that a little bit. So there's a whole series and then there's a whole discussion around how do you actually incorporate scenarios into your strategy matrix, into your strategy design process technically, which takes some work, it's not trivial.

Mark Blackwell:

I'd love to do that, Pete, one day, but I think we're going to need a little bit of visual assistance to try to describe to our dear listeners how that works in practice, and maybe we could do that.

Pete Compo:

Absolutely, I'm going to add one more before we go Okay, do it, and this is a very important one and we, we could do that. Absolutely, I'm going to add one more before we go Okay, do it, and this is a very important one, and we touched on this as well. Scenarios does not mean long-term, some arbitrary long-term view of this future. Your aspiration determines the horizon for your scenario and with our silly example of the official court-appointed tea maker for the king or queen, if your aspiration is to make an acceptable cup of tea for the king or queen in a day or an hour, your scenarios have to be based on one hour or one day. If it's a year from now or a five-year aspiration to become the official tea maker for the queen or king, then your scenarios would be five-year scenarios. Scenarios are not some arbitrary long-term view.

Mark Blackwell:

Strategies are. Thank you for that, pete. Really good. I hope our listeners enjoyed it. I'm sure they do. Please drop a note in the comments. If there's anything that you didn't understand, we'd be happy to get back to you, and if you want to cover any of those topics that Pete suggested, we'll look at that in the future as well. Thank you, pete, really enjoyed it. Well done.

Pete Compo:

Thank you, Mark

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