Management of Uncertainty

Types of Uncertainties
•What makes a good strategy in uncertain
environments
•Some organizations seek to shape futures with high stake
bets
•Kodak $500 m in 1998 for digital photography
•Jio $3b in 2016 in mobile telephony
•Tesla with driverless cars in 2020
•Some hedge their bets with making smaller investments by
forging limited operational or distribution alliances
•Walmart in pursuit of growth opportunities in emerging markets
•M&M in small production in Detroit
•Does this small investment truly reserves the right to play
in these markets or just reserve the right to lose
•Some invest in flexibility that allow organizations to adapt
quickly as markets evolve
•But the cost of establishing such flexibility can be high
•Moreover taking a wait and see strategy – postponing large
investments until the future becomes clear can create a window of
opportunity for competitors
•How to decide what to do?
•Bet big, hedge or wait & see
•Traditional strategy process will not help
•Traditional
•Create a vision, capture the realities through DCF, discuss
alternatives and test how sensitive these forecasts are to
changes in key variables
•This serves well in stable environments
•In uncertain environments at best it is marginally helpful
and at worst downright dangerous
•Uncertainty makes managers take a binary view
• World is certain therefore open to precise or uncertain
therefore completely unpredictable
•Capital budgeting or planning requiring point forecast forces
managers to bury uncertainty under DCF
•This pushes organizations to underestimate uncertainty to make
compelling case for their strategy
•This leads organizational strategies neither to defend them
against threats nor exploit the opportunities that higher level of
uncertainties provide
•If assumption is, world is entirely unpredictable organizations
abandon analytical rigor and base strategies on gut instincts
•These may result in record write-offs
•Risk Averse managers who do not trust gut instincts in
uncertain environments may suffer from decision paralysis
•Avoid making strategic decisions about product, markets,
technologies
•Focus instead on
•Reverse engineering, quality management, cost reduction etc.
though laudable are no replacement of strategy
•It is rare that managers know absolutely nothing of
strategic importance even in most uncertain environments
•It is possible to identify a range of potential outcomes or even a
discreet set of scenarios
• It enables determining which strategy is best, what
process to be used to develop it depending upon the level
of uncertainty organization faces
•Firstly it is possible to identify clear trends, such as
market demographics, defining future demand of
product and services
•Secondly host of factors are currently unknown but
are knowable through right analysis
•Performance attributes of a present technology, elasticity of
demand for certain products, competitors capacity expansion
programme are often unknown but are knowable
•Uncertainty that remains after the best possible
analysis is “residual uncertainty” and may include
performance attribute of a technology still at
development stage
•Such residual uncertainty facing strategic decision
maker falls into one of four kinds
Option of doing depends on what type of
uncertainty awaits the organization
4 types of uncertainties
A known uncertainty- clear enough
future
• Level 1
• Rare situation
• Clear how many customers and what
they will want to buy
• Allowance to be made for:
– Intergenerational differences
– PESTLE changes and other surprises
• Forecast will be sufficiently narrow to
point to a strategic direction
– At L1 residual uncertainty is irrelevant to
making strategic decisions
• Consider an airline trying to develop strategic
response to the entry of a low cost no frill
competitor in its hub airport
– Should it respond with a low cost service of its own
– Should it cede low cost niche segment to new entrant
– Should it compete aggressively on price and service to
drive the entrant out of market
– these decisions are possible by finding out, size of the
different customer segments, likely response of each
segment to a different combination of price ad service,
knowing how much it costs the competitor to serve,
how much capacity competitor has for every route in
question
 – Finally airline needs to anticipate how the entrant will
respond to each of its moves

• In today’s aviation world either this information is

already available or can be obtained by legal means
and new market research – but is inherently
knowable
• Once this information s known residual uncertainty
of L1 grade would be limited
• Incumbent airline would be able to build a strategy
with great confidence
A limited-option future or alternate
futures
• Level 2 uncertainty
• Future can be described as one of
few alternate outcomes or discrete
scenarios
• Analysis can not identify which
outcome will occur, although it
may help establish probabilities
• Some, if not all elements of
strategy shall change if the
outcome were predictable
• US long distance telephone cos faced the dilemma which
strategy to adopt when wanting to enter local call market.
Bill was pending with regulator. Features of the bill were
known what was not known when will it get passed and in
which form, with what conditions
• No amount of analysis can predict it and therefore what
course of action is correct
• Can identify small number of outcomes - some more
favourable than others
– e.g. invest now, invest later, never invest, seek alliance
• Found in in mature industries & oligopoly markets
• Difficult to predict which one will occur and best strategy
depends which one actually occurs
• Decision trees, real options, game theory assist strategy
making
Range of Uncertainties : multi-option
future
• Level 3 uncertainty
• Emerging or growing markets or
industries
• Can draw some conclusions
from past experience...
• ...but not enough to limit
outcomes to a few
• Firm may hedge bets by
pursuing multiple paths
Infinite option future
• Totally novel situation with no
useful points of reference
• Rely upon intuition based on
personal experience and
past reactions to similar
innovations
 Real options
• The right or ability, but not the commitment, to take a
particular strategic action
• Can be valued using option theory to take account of:
– Possibility of fine-tuning project as it goes along
– Option of abandoning it before it has cost too much
– Value of early investment in enabling subsequent options.
• Criticisms:
– May leads to over-investment in uncertain options
– Hard to find right numbers to feed option models
– ‘Real options thinking’ encourages flexibility, but:
• May discourage necessary strategic commitment
• Flexibility may be disruptive for people involved
 Types of strategic alternative
• Match competitors’ products/methods
• Use advantages in one area to offset
weaknesses elsewhere
• Seek new businesses/markets
• ‘Breakthrough’ or ‘outpacing’ strategy
– Change product+value chain+architecture
• Withdraw from business or activity
• Experimental moves
• Minimum investment: ‘reserve right to play’
• Feints and spoiling actions
• Neutralize competition (acquisitions, litigation)
 Doing things in different ways
• Change competitive stance:
– Move resources between businesses
– Reposition product up/down-market
• Change value chain
– Enhance cost-effectiveness, reliability
• Change architecture, e.g.:
– Improve information gathering and communication
– Enhance motivation
Usually need to change all three together to keep
strategy “consistent”