Strategy Under Uncertainty

Question 1

Residual Uncertainty

Answer 1

Uncertainty that remains after the best possible analysis has been done

Question 2

4 Levels of uncertainty

Answer 2

Identify clear trends to define potential demand in future products / services

(Shows the increase in uncertainty)
Level 1: A clear enough future
Level 2: Alternate Futures
Level 3: A range of Futures
Level 4: True Ambiguity

Question 3

Level 1: A Clear Enough Future

Answer 3

Precise enough for strategic development
Forecast narrow enough for a single strategic direction
Residual uncertainty irrelevant to making strategic decisions

Question 4

Level 2: Alternate Futures

Answer 4

Few alternate outcomes / discrete scenarios
Some elements of strategy would change
Possible outcomes are discrete and clear, difficult to predict
Strategy depends on which one occurs

Question 5

Level 3: A Range of Futures

Answer 5

Range of potential futures defined by key variables
The actual outcome may occur anywhere on the continuum
No natural scenarios
Market cannot determine level of latent demand

Question 6

Level 4: True Ambiguity

Answer 6

Virtually impossible to predict
Range of potential outcomes cannot be identified
Rare but do occur

Question 7

Level 1: A Clear Enough Future Examples

Answer 7

Major Airline strategy against low-cost airline entrant
Need to do market research to find out competitor’s objectives, capacity, different combinations of pricing & services

Question 8

Level 2: Alternate Futures Examples

Answer 8

Long distance telephone carrier’s strategy to enter deregulated local-service market (uncertainty lies in result of regulation)

Pulp and paper – used to be highly regulated

Capacity strategies for chemical plants – Decisions to build a plant often contingent on competitor’s decisions

Question 9

Level 3: A Range of Futures Examples

Answer 9

Entering emerging markets (Eg. Gilette going into Indian Market)
European company deciding to enter Indian market:
Best possible market research shows market penetration rate (10% to 30%) broad range of estimates, hard to determine strategy

Developing / Acquiring emerging technologies in consumer electronics
(Broad range of potential costs, but overall profitability of investments depends on those attributes)

Question 10

Level 4: True Ambiguity Examples

Answer 10

Entering market for consumer multimedia applications
Uncertainties lies between relationships between hardware and content providers -> unpredictable & no plausible range of scenarios -> Become level 3 once industry begins to take shape

Entering Russian market in 1992 (Post-communist) -> Can’t outline potential laws and regulations governing property rights and transactions + additional uncertainty of political instability -> Greater political & regulatory stability makes level 4 to 3

Question 11

Strategic Analysis for Level 1 – A clear enough future

Answer 11

Standard strategy tool kit

Market research, competitor’s cost and capacity, value chain analysis, porter’s 5 forces, etc.

Question 12

Strategic Analysis for Level 2 — Alternate Futures

Answer 12

Develop set of discrete scenarios, probability of each scenario, use classic decision analysis framework
Determine winners and losers in each scenario & what will happen if the company sticks to the status quo

Identify likely paths industry will take to reach those alternative future outcomes

• Major steps / Evolutionary fashion?
• Market signals & trigger variables should be monitored

Question 13

Strategic Analysis for Level 3 – Range of futures

Answer 13

Identify set of scenarios that describe alternative future outcomes & focus on trigger events that signal moving towards certain scenarios
When developing possible scenarios:
- Limited number
- Don’t make redundant scenarios
(scenarios should offer distinct picture of industry)
- Make probable future outcomes
(not necessarily all the possible outcomes)
Allow managers to see how robust their strategy is, likely winners and losers, risk of following status quo

Question 14

Strategic Analysis for Level 4 – True Ambiguity

Answer 14

Catalog what you know and what is possible to know

• Gain perspective
• Identify subset of variables (Determine how market will evolve over time)
• Identify favourable and unfavourable indicators (Track market’s evolution, adapt to strategy over time)
• Identify patterns – See similarity between other level 4 markets
• Identify information they have to believe about future to justify investment they are considering – early market indicators and analogies to help see if beliefs are realistic

Question 15

Strategic Postures

Answer 15

Postures define intent of strategy relative to current and future state of an industry

Question 16

Strategic Postures – Shapers

Answer 16

Aim to drive their industries toward new structure of their own devising

Create opportunities in market
Either shake up level 1 industries / try to control higher level industries

Eg. Kodak investment in digital photography technology maintaining their lead in industry

Question 17

Strategic Postures – Adapters

Answer 17

Take current industry structure and its future evolution as given
Speed, agility to capture opportunities in market

Little uncertainty – choose strategic positioning
High uncertainty – recognise & respond quick to market developments
Rely more on pricing and effective execution rather than product innovation

Eg. Service resellers buy & sell latest products & services by major telecoms

Question 18

Strategic Postures – Reserving right to play

Answer 18

Incremental investments made today to put the company in a privileged position and then formulating a strategy when the environment is less uncertain
(stay in the game and avoid premature commitments)

Only applicable in levels 2 to 4

Eg. Pharmaceutical company acquire / ally with small biotech firms

Question 19

Portfolio of Actions

Answer 19

Action required to fulfil intent

Question 20

Portfolio of Actions – Big bets

Answer 20

Large commitments – Major investments / acquisition
Usually in shaping strategies

Eg. Kodak investing $500 million per year, changing how consumer use, store, and view photography

Question 21

Portfolio of Actions – Options

Answer 21

Secure big payoffs in the best-case scenario and minimise losses in the worst-case scenario
Modest initial investments that allow companies to ramp up / scale back investment later as market evolves

Eg. Pilot trials, limited joint ventures, licensing alternative technology

Used by reserving right to play and shapers

Question 22

Portfolio of Actions – No regrets move

Answer 22

Pay off no matter what happens

Reduce cost, gathering competitive intelligence, building skills
In high uncertainty environments:
Invest in capacity, enter certain markets

Essential element of any strategy

Question 23

Strategy for Level 1 uncertainty – A clear enough future

Answer 23

Mostly Adapters – Strategies involve making positioning choices
- Learn how to create value through innovation in products/services / through improvements in their business systems
(w/o change industry)
Usually series of no regret moves

Can also be shapers but risky and rare
- Increase residual uncertainty for themselves & competitors
- Involves Big Bets
Eg. FedEx introduce overnight shipping

Question 24

Strategy for Level 2 uncertainty – Alternate Futures

Answer 24

Shapers – try to lower uncertainty – increase probability of favoured industry scenario occurring

• Can fail – need strategic flexibility, supplement shaping bets with options
• Monitor key trigger variables, don’t let strategy run on autopilot

Adapt or reserve the right to play
Eg. Electricity companies (natural gas / oil) – make plants that easily switch between different fuels

Question 25

Strategy for Level 3 uncertainty – Range of futures

Answer 25

Shapers – Try move market in general direction
Eg. Mondex International – establish what it hopes will be universal electronic-cash standards

Adapters – Aims to keep options open
Eg. Regional banks need to make choices in real time

Reserving right to play – common at level 3
Restructure big bets into options
Eg. Telecommunications company – invest in broadband

Question 26

Strategy for Level 4 uncertainty – True ambiguity

Answer 26

Shapers – Offer higher returns & lower risk,
provide vision of industry structure and
Coordinate strategies of other players & drive market to more stable and favourable outcome (no need best strategy & big bets)

Reserving the right to play – Common but risky
Incremental investment – low cost option & rigorously evaluated

Adapters – Make investments in organisational capabilities
Will move to bigger bets when move to level 3 and 2

Question 27

New Approach of Uncertainty

Answer 27

Can accurately predict future when business is stable
Don’t work in highly uncertain environments
New way to think about strategy

Avoid dangerous binary view of uncertainty
Provide guide to which tools to help make decisions depending on level of uncertainty
More complete and sophisticated understanding of uncertainty faced