Strategic Decision Making Dr Michael Gunderson Structuring Decisions

Strategic Decision Making Dr. Michael Gunderson Structuring Decisions: Innovating Through Turbulence

Identifying Uncertainties and Their Strategic Implications § The Domain of Uncertainty § Sensitivity Analysis as a tool for organizing decisions under uncertainty – Defining Problems – Identifying Uncertainties – Preparing Strategies Structuring Decisions: Innovating Through Turbulence

Strategic Uncertainty § In the next 3 minutes write down 2 key strategic uncertainties that you face in your business today. Structuring Decisions: Innovating Through Turbulence

Tactical vs. Strategic Uncertainty § Tactical – Obvious, easily measured, manageable – Pricing, productivity, liability § Strategic – Not obvious, hard to measure, difficult to manage – Market environment, technological innovation, political environment Structuring Decisions: Innovating Through Turbulence

The Domain of Uncertainty § § § Business/Operation uncertainty Financial uncertainty Market uncertainty Technological uncertainty Business relationship uncertainty Policy/regulatory uncertainty Structuring Decisions: Innovating Through Turbulence

How Do We Think About Strategic Uncertainty? Structuring Decisions: Innovating Through Turbulence

Often we focus on the downside Structuring Decisions: Innovating Through Turbulence

Pursue Upside and Manage Downside Structuring Decisions: Innovating Through Turbulence

Uncertainty § Historical focus on exposure and operations § What about the opportunity – the potential? § How do you manage strategic uncertainty – Capture the potential and Mitigate the exposure – Absorb/retain – capture profit – Transfer – insurance/futures – Reduce – flexibility, low leverage – Avoid – don’t do! Structuring Decisions: Innovating Through Turbulence

Potential and Exposure for Strategic Uncertainty Categories of Strategic Uncertainty Examples of Potentials Exposures Business/ Operational Superior cost control/operational efficiency, Superior workforce, Creating synergies through scope Business interruption, Loss of key employees Rising interest rates, Loss of lender, Highly leveraged Financial Strong financial position, Access to equity funds/investors, Attractive financing terms (amounts and terms), Financial reserves (pursue unanticipated opportunities, weather financial shocks, etc. ) Detre J. et al. “Scorecarding and Heat Mapping: Tools and Concepts for Assessing Strategic Uncertainty”. Structuring Decisions: Innovating Through Turbulence

Potential and Exposure for Strategic Uncertainty Categories of Strategic Uncertainty Market Conditions Technology Examples of Potentials Exposures Strong brand, Strong complementary products and bundling potential, First mover advantages, Create high switching costs (create loyalty) Pricing pressure/discounting by competitors, Loss of market share, Consolidation of customer industry, Hypercompetition Speed of innovation and commercialization, Niches not attractive to others, Enhanced learning capacity Limited acceptance of biotechnology, Slow to commercialize new products, Competitor has preferred standards/platform Detre J. et al. “Scorecarding and Heat Mapping: Tools and Concepts for Assessing Strategic Uncertainty”. Structuring Decisions: Innovating Through Turbulence

Potential and Exposure for Strategic Uncertainty Categories of Strategic Uncertainty Business Relationships Policy & Regulation Examples of Potentials Exposures Strong market position of distributors, Strong relationship with processors, Enhanced learning, Access to future opportunities Dependence on distributors, Not a preferred supplier to processor, Not a key account to suppliers Increasing market from more open trade, Patent protection, Speed of approval Changes in intellectual property law, Changes in farm income support, Local limits on technology adoption Detre J. et al. “Scorecarding and Heat Mapping: Tools and Concepts for Assessing Strategic Uncertainty”. Structuring Decisions: Innovating Through Turbulence

Strategic Uncertainty Assessment Scorecard for Potential Likelihood Categories of Strategic Uncertainty Low High Business/Operational 1 2 3 4 5 Financial 1 2 3 4 5 Market Conditions 1 2 3 4 5 Technology 1 2 3 4 5 Business Relationships 1 2 3 4 5 Policy & Regulation 1 2 3 4 5 Detre, Briggeman, Boehlje and Gray. “Scorecarding and Heat Mapping: Tools and Concepts for Assessing Strategic Uncertainty”. Structuring Decisions: Innovating Through Turbulence

Strategic Uncertainty Assessment Scorecard for Exposure Categories of Strategic Uncertainty Exposure Low Likelihood High Low High Business/Operational 1 2 3 4 5 Financial 1 2 3 4 5 Market Conditions 1 2 3 4 5 Technology 1 2 3 4 5 Business Relationships 1 2 3 4 5 Policy & Regulation Detre, Briggeman, Boehlje and Gray. “Scorecarding and Heat Mapping: Tools and Concepts for Assessing Strategic Uncertainty”. Structuring Decisions: Innovating Through Turbulence

Interpretation of the Uncertainty Scorecard § Numerical evaluation of uncertainty § Managing exposure while capturing potential § Multiple views of uncertainty – individual assessments § Building Consensus § Visualizing/Mapping the uncertainty Structuring Decisions: Innovating Through Turbulence

Why Scorecard? § § Align strategy with uncertain future Surface unexpected events or “surprises” Develop consensus on key uncertainties Focus on highest priority exposures and potential Structuring Decisions: Innovating Through Turbulence

Potential and Exposure Graphs Structuring Decisions: Innovating Through Turbulence

Putting the Two Together Structuring Decisions: Innovating Through Turbulence

Construct Scenarios § 3 different ways: – Intuitively: find some major themes and story lines to organize the elements – Heuristically: select the two most important uncertainties and place them in a matrix – Statistically: combine the outcomes of all the key uncertainties into internally consistent strings to provide feasible boundaries – Name the scenario – State the assumptions clearly Structuring Decisions: Innovating Through Turbulence

Construct Scenarios § Three tests of internal consistency: – Are the trends compatible within the chosen time frame? – Do the scenarios combine outcomes of uncertainties that indeed go together? – Are the major stakeholders placed in positions they do not like and can change? Structuring Decisions: Innovating Through Turbulence

Sensitivity Analysis § Which variables drive results? § Are results more sensitive to key decisions? § Can we manage the risk using this insight?

Identify Strategies § Identify best strategies for each scenario § Try to identify core elements (decisions that hold across a number of “likely” scenarios) § Identify contingent elements that could allow rapid response to “revealed” future Structuring Decisions: Innovating Through Turbulence