Strategy Under Uncertainty Flashcards
Residual Uncertainty
Uncertainty that remains after the best possible analysis has been done
4 Levels of uncertainty
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
Level 1: A Clear Enough Future
Precise enough for strategic development
Forecast narrow enough for a single strategic direction
Residual uncertainty irrelevant to making strategic decisions
Level 2: Alternate Futures
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
Level 3: A Range of Futures
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
Level 4: True Ambiguity
Virtually impossible to predict
Range of potential outcomes cannot be identified
Rare but do occur
Level 1: A Clear Enough Future Examples
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
Level 2: Alternate Futures Examples
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
Level 3: A Range of Futures Examples
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)
Level 4: True Ambiguity Examples
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
Strategic Analysis for Level 1 – A clear enough future
Standard strategy tool kit
Market research, competitor’s cost and capacity, value chain analysis, porter’s 5 forces, etc.
Strategic Analysis for Level 2 — Alternate Futures
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
Strategic Analysis for Level 3 – Range of futures
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
Strategic Analysis for Level 4 – True Ambiguity
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
Strategic Postures
Postures define intent of strategy relative to current and future state of an industry
Strategic Postures – Shapers
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
Strategic Postures – Adapters
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
Strategic Postures – Reserving right to play
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
Portfolio of Actions
Action required to fulfil intent
Portfolio of Actions – Big bets
Large commitments – Major investments / acquisition
Usually in shaping strategies
Eg. Kodak investing $500 million per year, changing how consumer use, store, and view photography
Portfolio of Actions – Options
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
Portfolio of Actions – No regrets move
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
Strategy for Level 1 uncertainty – A clear enough future
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
Strategy for Level 2 uncertainty – Alternate Futures
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
Strategy for Level 3 uncertainty – Range of futures
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
Strategy for Level 4 uncertainty – True ambiguity
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
New Approach of Uncertainty
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
