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Vuca Management
Vuca Management
1.0 Introduction
VUCA is an acronym for Volatility, Uncertainty, Complexity and Ambiguity. Management is always
concerned with future for its decision making purpose. But ever thing management tries to
visualize filled with these four risk factors, if left unmanaged the art of management becomes
nothing less than the art of gambling. The term VUCA world implies a situation of business decision
making where management of these four factors becomes vital than need.
1.1 VUCA
VUCA is an acronym first used in 1987 to describe or to reflect on the volatility, uncertainty,
complexity and ambiguity of general conditions and situations drawing on the leadership theories
of Warren Bennis and Burt Nanus
Volatility : It basically tells about the velocity with which change happens. Software industry is
considered to be more volatile than automobile industry. Derivative market is more volatile than
stock market. When change is expected to happen and one is referring to its speed, then he is said
to be dealing with volatility. Understanding and measuring of the volatility is of paramount
importance in business decision making.
Uncertainty : Lack of perfect information about state of nature. For example we know there will be
demand, we also have information that it’s likely to be more but we don‘t know how much it’s going
to be. Management course of action depends on state of nature, so attempting to predict a state of
nature means dealing with uncertainty. Success of decision depends on how nearly we predicted
the state of nature and course of action matched to it.
Complexity : Multiplicity of several factors involved at a time. In attempting to develop a
mathematical model, analysts try to help managers by providing them with an input out model.
Managers need not be mathematicians for this purpose. Once a business model is developed and
found accurate in application, managers provide required input and base their decision making
skills on output from the model. But the problem is multiplicity of factors.
For example an Uncertain Demand forecasting model has to consider many factors like price of the
product, price of substitute, complementary products, tastes and habits of consumers, product life
cycle stage, new inventions around the world, Government enactments on essential goods, taxes
etc. Exclusion of any of these factors effects accuracy of the model and inclusion of everything
makes the model complex in development stage and also in application stage as well.
Ambiguity : Lack of clarity on the meaning or conceptual understanding. In VUCA world ambiguity
refers to a situation of zero information. In such situation decision makers to be flexible enough to
react in a suitable manner to such ambiguous events occur. Col. Eric G.K ail defines ambiguity in the
VUCA model as the inability to accurately conceptualize threats and opportunities before they
become lethal. Thus the causes and the who, what, where, how, and why behind the things that are
happening (that) are unclear and hard to ascertain
2.1 Digitalization
Digitalization can be defined as a system developed by business to match the informational needs
through the aid of information technology. Management information system, Executive information
system and Decision support system are all the outcomes of digitalization of business process.
Under VUCA environmental conditions, business decision making need to be very much
spontaneous that a slow decision based on manual information sources is of no use. As see in VUCA
world, velocity of change is very fast and a delayed decision in response is equal to a denied
decision.
Management Information System (MIS): A management information system (MIS) is a computer
system consisting of hardware and software that serves as the backbone of an organization's
operations. An MIS gathers data from multiple online systems, analyzes the information, and
reports data to aid in management decision-making. While management information systems can
be used by any and every level of management, the decision of which systems to implement
generally falls upon the chief information officers (CIO) and chief technology officers (CTO). These
officers are generally responsible for the overall technology strategy of an organization including
evaluating how new technology can help their organization. They act as decision makers in the
implementation process of new MIS.
Executive Information Systems (EIS): A executive information system (EIS), also known as an
executive support system (ESS), is a type of management support system that facilitates and
supports senior executive information and decision-making needs. It provides easy access to
internal and external information relevant to organizational goals. It is commonly considered a
specialized form of decision support system (DSS).EIS emphasizes graphical displays and easy-to-
use user interfaces. They offer strong reporting and drill-down capabilities. In general, EIS are
enterprise-wide DSS that help top-level executives analyze, compare, and highlight trends in
important variables so that they can monitor performance and identify opportunities and problems.
EIS and data warehousing technologies are converging in the marketplace.
Decision Support System (DSS):A decision support system(DSS) is an information system that
supports business or organizational decision-making activities. DSSs serve the management,
operations and planning levels of an organization (usually mid and higher management) and help
people make decisions about problems that may be rapidly changing and not easily specified in
advance—i.e. unstructured and semi-structured decision problems. Decision support systems can
be either fully computerized or human-powered, or a combination of both.
2.1.1 Advantages
Digitalization of business processes provides wide spectrum of value to the business. Dreaming to
manage the business organization in VUCA conditions will remain as a far cry, unless digitalization
is practiced at desired levels.
1. Quick decisions : Information needs of the management are meet in no time (real time)
using computerized data processing and digitalized report generating. This will in turn
through the aid of specialized applications (accounting software’s or computer aided audit) can
further process the inputs in a manner more useful for quick decision of managers.
2. Process wise management : Current management practice of managing on functional wise is
age old and in dealing with volatility conditions management need to have full control over
processes than on functions ( Human resource marketing and finance). A collection of
activities is called a process and a collection of process is called business. So today the style of
management needs to be Business process management rather than traditional functional.
2.1.2 Disadvantages
While there are many advantages and business values associated with digitalization of business
process, there certain disadvantages which are sometimes too dangerous that they make business
vulnerable to further conduct business.
1. Cyber security threats: Recent Ransom virus is an example that hit many developed
countries and many banks and government services were shutdown to recover from it.
Processing of data in computerized environment is dependent on proper functioning of all sub
systems and application programs. As such errors or threats at any stage can falter business
activities.
2. Cost of acquisition: For use of information technology the organization need to of
considerable size. Otherwise there will be diseconomies of scale and average cost to be borne
by businesses will be very high.
3. Compatibility problems: Information systems developed by organization will suite to current
technology conditions and any change in current technology needs re-development of system
which cost a lot to business entities. Example changes in windows versions
2.2 Globalization: Growth prospects of an economy and business units working in it will be limited
in a closed or isolated system. Supply cannot be matched with demand in the absence of
international opportunities made available to entities. Pricing mechanism tends to be imperfect
Social Inclusion at business level implies providing opportunity for those who didn‘t get
opportunity to improve their status due to earlier discriminations in terms of religion, caste,
physical disability and gender inequality.
Providing opportunity to participate in decision making aspects to lower level employees who
are otherwise not allowed to share ideas in the development of enterprise.
Organizations which are socially responsible are likely to gain society support even during
the VUCA conditions.
Due to additional cost or sacrifices in the process of social inclusion, it seems we are
increasing the business risk, but when compared with likely costs or consequences that an
entity had to face if social exclusion is continued, such costs are negligible.
Sustainable development of the enterprise is not complete without social inclusion.
1.2 Applications
Estimates of cash flows are based on assumptions about the economy, competitors,
consumer tastes and preferences, construction costs, and taxes, among a host of other possible
assumptions. One of the first things managers must consider about these estimates is how
sensitive they are to these assumptions. For example, if we only sell 2 million units instead of 3
million units in the first year, is the project still profitable?
Or, if Government increases the tax rates, will the project still be attractive?
We can analyze the sensitivity of cash flows to change in the assumptions by re-estimating
the cash flows for different scenarios. Sensitivity analysis, also called scenario analysis, is a
method of looking at the possible outcomes, given a change in one of the factors in the analysis.
Sometimes we refer to this as ―what if analysis-what if this changes,-what if that changes, and
so on.
Conclusion
Sensitivity analysis is one of the tools that help decision makers with more than a solution to a
problem. It provides an appropriate insight into the problems associated with the model under
reference. Finally the decision maker gets a decent idea about how sensitive is the optimum
solution chosen by him to any changes in the input values of one or more parameters.
We use the risk free rate as the rate of discounting because our immediate task is to ascertain the
riskiness of the investment because of which we need to isolate the time value of money. In case we
include a premium for risk in the discount rate e.g. in cases where cost of capital is used as the
discounting factor, we resort to imbibed double counting with respect to our analysis. This happens
because the premium of risk imbibed in the discount helps address the risk by itself in the
discounting process. A subsequent analysis of risk over such a risk adjusted result would be a
second time adjustment and hence would be inappropriate. Standard Deviation – The following
formula may be used to compute this important measure ofdispersion.
In the example above the standard deviation of possible net cash flows in periods 1,2 and 3 is `
1,140. Using a risk free rate of 6% the standard deviation shall work out to be ` 1,761. Also if we
employ the same risk free rate in the equation for the mean of the probability distribution of NPV,
the latter would work out as ` 1,635. Assuming a normal probability distribution, it shall be possible
to compute the probability of an investment proposal providing more or less than a specific
amount. The concept of risk till now has been applied for NPV computation. The same concept
holds true for IRR also. We have examined the case of serially independent cash flows‘ over time.
In case we compute the standard deviation from the data given in Table 1 assuming perfect
correlation, we shall arrive at ` 3,047 which is significantly higher than the ` 1,761 computed with
assumptions of serial independence. 2. Cash flows are moderately correlated over time: In cases
where cash flows are moderately correlated over time, the standard deviation is computed as
follows:
Where NPVt is the net present value for series t of net cash flows covering all periods, NPV is the
mean net present value of the proposal and Pt is the probability of occurrence of that specific series.
1. Risk Adjusted Discount Rate Method: The use of risk adjusted discount rate is based on the
concept that investors demands higher returns from the risky projects. The required return of
return on any investment should include compensation for delaying consumption equal to risk free
rate of return, plus compensation for any kind of risk taken
on. The case, risk associated with any investment project is
higher than risk involved in a similar kind of project, discount
rate is adjusted upward in order to compensate this
additional risk borne. After determining the appropriate
required rate of return (Discount rate) for a project with a
given level of risk cash flows are discounted at this rate in
usual manner. Adjusting discount rate to reflect project risk- If
risk of project is greater than, equal to, less than risk of
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existing investments of firm, discount rate used is higher than, equal to or less than average cost of
capital as the, case may be. Risk Adjusted Discount Rate for Project 'k' is given by dk is
positive/negative depending on how the risk of the project under consideration compares with
existing risk of firms. Adjustment for different risk of project 'k' depends on management‘s
perception of project risk and management‘s attitude towards risk (risk - return preference). If the
project's risk adjusted discount rate (rk) is specified, the project is accepted if NPV is positive.
2. Certainty Equivalent Approach (CE Approach): This approach allows the decision maker to
incorporate his or her utility function into the analysis. In this approach a set of risk less cash flow
is generated in place of the original cash flows. It is based on game theory. Suppose on tossing out a
coin, if it comes head you will get ` 10,000 and if it comes out to be tail, you will win nothing. Thus
you have 50% chances of winning and expected value is ` 5,000. In such case if you are indifferent at
receiving ` 3,000 for a certain amount and not playing then ` 3,000 will be certainty equivalent and
0.3 (i.e 3,000/10,000) will be certainty equivalent coefficient. Students may remember a popular
game show on TV called ―Deal or No Deal. The entire game is based on the Certainty Equivalent
Approach. The participant is asked by the banker‘ (hidden to the viewers and participants)
periodically whether he/she would accept a certain amount (say ` 225,000) in exchange for the sum
of uncertain amounts left in more than one closed box (say the expected value of the same could be
` 275,000). Depending upon the risk appetite of the player‘, the player would call NO DEAL‘ for the
offer and continue to play the game or accept the offer and call it a DEAL. The takeaway here is that
someone else may not have as much of fear of risk as you do and as a result, you will have a
different certainty equivalent.
Steps in the Certainty Equivalent (CE) approach
Step 1: Remove risk by substituting equivalent certain cash flows from risky cash flows. This can be
done by multiplying each risky cash flow by the appropriate α t value (CE coefficient)
Step 2: Discounted value of cash flow is obtained by applying risk less rate of interest. Since you
have already accounted for risk in the numerator using CE coefficient, using the cost of capital to
discount cash flows will tantamount to double counting of risk.
Step 3: After that normal capital budgeting method is applied except in case of IRR method, where
IRR is compared with risk free rate of interest rather than the firm‘s required rate of return.
(i) Forwards: A forward contract is a customized contract between two entities, where settlement
takes place on a specific date in the future at today‘s pre-agreed price. A forward contract specifies
the price at which an asset can be purchased or sold at some future date. Although a forward
contract is classified as a derivative in many markets it is difficult to distinguish between the
underlying and the forward contract. Large trading volumes in OTC forwards can in fact make them
more significant than spot markets.
(ii) Futures: A futures contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Futures contracts are special types of forward contracts
in the sense that the former are standardized exchange-traded contracts
Features of Future Market:
Terms and conditions are standardized.
Tradingtakesplaceonaformalexchangewhereintheexchangeprovidesaplacetoengagein
these transactions and sets a mechanism for the parties to trade these contracts.
There is no default risk because the exchange acts as counterparty, guaranteeing
delivery and payment by use of a clearinghouse.
The clearing house protects itself from default by requiring its counterparties to settle
gains and losses or mark to market their positions on a daily basis (NSCCL).
Futures are highly standardized, have deep liquidity in their markets and trade on an
exchange.
Profits and losses on futures contracts are settled on a periodic basis (Marking to Market).
An investor can offset his or her future position by engaging in an opposite transaction
before the stated maturity of the contract.
(iii) Options: Options are of two types - calls and puts. Calls give the buyer the right but not the
obligation to buy a given quantity of the underlying asset, at a given price on or before a given
future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the
underlying asset at a given price on or before a given date.
Terminologies used in options
a. Option holder: The buyer of the option who gets the right
b. Option writer: The seller of the option who carries the obligation
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c. Premium: The consideration paid by the buyer for the right
d. Exercise price: The price at which the option holder has the right to buy or sell. It is also called
as the strike price.
e. Call option: The option that gives the holder a right to buy
f. Put option: The option that gives the holder a right to sell
g. Tenure: The period for which the option is issued
h. Expiration date: The date on which the option is to be settled
i. American option: These are options that can be exercised at any point till the expiration date
j. European option: These are options that can be exercised only on the expiration date
k. Covered option: An option that an option writer sells when he has the underlying shares
with him.
l. Naked option: An option that an option writer sells when he does not have the underlying
shares with him.
M. In the money: An option is in the money if the option holder is making a profit if the option
was exercised immediately.
N. Out of money: An option is in the money if the option holder is making a loss if the option was
exercised immediately.
O. At the money: An option is in the money if the option holder evens out if the option was
exercised immediately.
Warrants: Options generally have lives of upto one year, the majority of options traded on options
exchanges having a maximum maturity of nine months. Longer-dated options are called warrants
and are generally traded over-the-counter.
LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options
having a maturity of upto three years.
Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is
usually a moving average or a basket of assets. Equity index options are a form of basket options.
(iv)Swaps: A swap is one of the most simple and successful forms of OTC-traded derivatives. It is a
cash-settled contract between two parties to exchange (or "swap") cash flow streams. As long as
the present value of the streams is equal, swaps can entail almost any type of future cash flow. They
are most often used to change the character of an asset or liability without actually having to
liquidate that asset or liability.
A Swap is an agreement to exchange a sequence of cash flows over a period of time in the
future in same or different currencies. Mainly used for hedging various interest rate exposures, they
are very popular and highly liquid instruments. Some of the very popular swap types are Interest
Rate Swaps and Currency Swaps.
• Interest rate swaps: These entail swapping only the interest related cash flows between the
parties in the same currency.
Similarly an interest rate floor is a derivative contract in which the buyer receives payments at
the end of each period in which the interest rate is below the agreed strike price.
• Currency swaps: These entail swapping both principal and interest between the parties, with
the cash flows in one direction being in a different currency than those in the opposite direction.
• Swaptions: A swaption, also known as a swap option, refers to an option to enter into an
interest rate swap or some other type of swap. In exchange for an options premium, the buyer
gains the right but not the obligation to enter into a specified swap agreement with the issuer on a
specified future date.
While the target company always gains, the acquirer gains when synergy accrues from combined
operations, and loses under the other two theories. The total value becomes positive under
synergy, becomes zero under the second, and becomes negative under the third
2.1 Need for JV’s: Both forms of partnership can be used to transfer technology, assets and
knowledge between complementary companies. Strategic alliances are usually undertaken to
allow each company to pursue a new market, product or strategy that they can't manage on
their own. Joint ventures are often used to shield the parent companies from the risk of a new
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venture failing; if the new product flops, the joint venture can go bankrupt without harming the
parent company except to the extent of its investment. Some countries require that all
companies that do business within their borders be at least partly owned by citizens of that
country. In this case, a foreign company can start a joint venture with a domestic company to
comply with the law.
2.2 Advantages of forming a Joint Venture
1) Provide companies with the opportunity to gain new capacity andexpertise
2) Allow companies to enter related businesses or new geographic markets or gain
new technological knowledge
3) Access to greater resources, including specialised staff and Technology
4) Sharing of risks with a venture partner
5) Joint ventures can be flexible. For example, a joint venture can have a limited life span and
only cover part of what you do, thus limiting both your commitment and the business'
exposure.
6) In the era of divestiture and consolidation, JV’s offer a creative way for companies to exit
from non-core businesses.
7) Companies can gradually separate a business from the rest of the organisation, and
eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a sale
by one partner to the other.
2.3 Disadvantages of Joint Ventures
It takes time and effort to build the right relationship and partnering with another business can
be challenging. Problems are likely to arise if:
1) The objectives of the venture are not 100 per cent clear and communicated to everyone
involved.
2) There is an imbalance in levels of expertise, investment or assets brought into the venture
by the different partners.
3) Different cultures and management styles result in poor integration and co-operation.
4) The partners don't provide enough leadership and support in the early stages.
5) Success in a joint venture depends on thorough research and analysis of the objectives.
C. Divestmenttechniques
Sell-off: A sell-off is the rapid and sustained selling of securities at high volumes that causes a
sharp drop in the value of the traded securities. Sell-offs most commonly occur with liquid
assets such as stocks, bonds, currencies and commodities. A corporate/company may take
decision to concentrate on core business activities by selling out the non-core business
activities.
Demerger (spin-off): A demerger is a form of corporate restructuring in which the entity's
business operations are segregated into one or more components. It is the converse of a
mergeror acquisition. A corporate body splits into two or more corporate bodies with
separation of management and accountability.
Management buyout: A management buyout (MBO) is a transaction where a company’s
management team purchases the assets and operations of the business they manage.
If the existing owners are unable to run the company successfully for which the very
existence of the company is at stake, management buyout takes place.
Liquidation: Liquidation is the process of bringing a business to an end and distributing its
assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it
cannot pay its obligations when they come due. With accumulated losses equal to or
exceeding the networth, a company may go into liquidation.
Leveraged buyout: A leveraged buyout (LBO) is the acquisition of another company using a
significant amount of borrowed money to meet the cost of acquisition. The assets of the
company being acquired are often used as collateral for the loans, along with the assets of the
acquiring company.
D. Other techniques
Going private: A company can avoid the predators from bidding the company. Going private
is a transaction or a series of transactions that convert a publicly traded company into a
private entity. Once a company goes private, its shareholders are no longer able to trade
their stocks in the open market
Share repurchase: A share repurchase is a program by which a company buys back its own
shares from the marketplace, usually because management thinks the shares are
undervalued, and thereby reducing the number of outstanding shares. A company can
buy-back its shares by utilizing its reserves
Buy-in: The management team who have got special skills will search out and purchase
business, to their interested area, which has considerable potential but that has not been run
to its full advantage due to lack of managerial and technical skills, fails to establish the
market for the company’s products.
Reverse-merger: A smaller company acquires the larger company. A reverse takeover or
reverse merger takeover (reverse IPO) is the acquisition of a public company by a private
company so that the private company can bypass the lengthy and complex process of going
public. The transaction typically requires reorganization of capitalization of the acquiring
company.
Unemployment rate
Female labor force participation rate Median household income
Relative poverty
Percentage of population with a post-secondary degree or certificate Average commute time
Violent crimes per capita Health-adjusted life expectancy
3.0 Promotion
In marketing, promotion is advertising a product or brand, generating sales, and creating brand
loyalty. It is one of the four basic elements of the market mix, which includes the four P's: price,
product, promotion, and place.
Promotion is also defined as one of five pieces in the promotional mix or promotional plan. These
are personal selling, advertising, sales promotion, direct marketing, and publicity. A promotional
mix specifies how much attention to pay to each of the five factors, and how much money to budget.
Promotion covers the methods of communication that a marketer uses to provide information
about its product. Information can be both verbal andvisual.
3.3 Following are transformational strategies practiced by enterprises and more can be
added to the list with advancements in technology.
1. Social Media
Social media websites such as Facebook and Google+ offer companies a way to promote products
and services in a more relaxed environment. This is direct marketing at its best. Social networks
connect with a world of potential customers that can view your company from a different
perspective. Rather than seeing your company as "trying to sell" something, the social network can
see a company that is in touch with people on a more personal level. This can help lessen the divide
between the company and the buyer, which in turn presents a more appealing and familiar image of
the company.
2. Mail Order Marketing
Customers who come into your business are not to be overlooked. These customers have already
decided to purchase your product. What can be helpful is getting personal information from these
customers. Offer a free product or service in exchange for the information. These are customers
who are already familiar with your company and represent the target audience you want to market