Marketing for MOSTModule 11 – Managing Uncertainty

技術経営コンソーシアム

開発担当者 ： Ritsumeikan Asia Pacific University 　教授 : Takamoto, Akihiro更新日 October, 2003

Marketing for MOST: Module 11 – Managing Uncertainty

Contents of Managing Uncertainty

1. Strategy Under Uncertainty.

2. Decision Science.

3. Scenario Planning.

4. Real Options Theory.

5. Pitfalls of Emerging Technologies.

6. Disruptive Technologies.

Marketing for MOST: Module 11 – Managing Uncertainty

Strategy Under Uncertainty

Marketing for MOST: Module 11 – Managing Uncertainty

Strategy Under Uncertainty

• What Makes for a good Strategy in a highly uncertain business environment?

• Under uncertainty, traditional approaches to strategic planning can be downright dangerous.

• It is essential to think about:– The Anatomy of the Future; – The Choice of Strategic Postures and Moves.

Marketing for MOST: Module 11 – Managing Uncertainty

Anatomy of the Future

Marketing for MOST: Module 11 – Managing Uncertainty

Anatomy of the Residual Uncertainty

• A Clear Enough Future

• Alternate Futures

• A Range of Futures

• True Ambiguity

Marketing for MOST: Module 11 – Managing Uncertainty

Anatomy of the Residual Uncertainty

• A Clear Enough Future

• Alternate Futures

• A Range of Futures

• True Ambiguity

A Clear-Enough Future

What Can Be Known?

Analytic Tools

Examples

• A single forecast precise enough for determining strategy

• “Traditional” Strategy Toolkit

• Strategy against low-cost airline entrant.

Source: Harvard Business Review (HBR) on Managing Uncertainty, HBR Press.

Marketing for MOST: Module 11 – Managing Uncertainty

Anatomy of the Residual Uncertainty

• A Clear Enough Future

• Alternate Futures

• A Range of Futures

• True Ambiguity

• A few discrete outcomes that define the future

•Decision analysis•Option valuation models•Game theory

•Long distance telephone carriers’ strategy to enter the deregulated local-service market•Capacity strategies for Chemical Plants

Source: Harvard Business Review (HBR) on Managing Uncertainty, HBR Press.

Alternate Futures

1

2

3

What Can Be Known?

Analytic Tools

Examples

Marketing for MOST: Module 11 – Managing Uncertainty

Anatomy of the Residual Uncertainty

• A Clear Enough Future

• Alternate Futures

• A Range of Futures

• True Ambiguity

Source: Harvard Business Review (HBR) on Managing Uncertainty, HBR Press.

• A Range of possible outcomes, but no natural scenarios

•Latent-demand research•Technology Forecasting•Scenario Planning

•Entering emerging markets, such as India•Developing or acquiring emerging technologies in consumer electronics

A Range of Futures

What Can Be Known?

Analytic Tools

Examples

Marketing for MOST: Module 11 – Managing Uncertainty

Anatomy of the Residual Uncertainty

• A Clear Enough Future

• Alternate Futures

• A Range of Futures

• True Ambiguity

Source: Harvard Business Review (HBR) on Managing Uncertainty, HBR Press.

• No basis to forecast the future

•Analogies and pattern recognition•Non-linear dynamic models

•Entering the market for consumer multimedia applications•Entering the Russian Market in 1982

True Ambiguity

What Can Be Known?

Analytic Tools

Examples

Marketing for MOST: Module 11 – Managing Uncertainty

The Choice of Strategic Postures and Moves

Source: Harvard Business Review (HBR) on Managing Uncertainty, HBR Press.

Shape the future

Play a leadership roleIn establishing how the industry operates, for example:-Setting standards-Creating demand

Adapt to the future

Win through speed, agility,and flexibility in recognizingand capturing opportunitiesin existing markets.

Reserve the Right to Play

Invest sufficiently to stay inthe game but avoid prematurecommitments.

The Three Strategic Postures

Marketing for MOST: Module 11 – Managing Uncertainty

The Choice of Strategic Postures and Moves

Source: Harvard Business Review (HBR) on Managing Uncertainty, HBR Press.

No Regrets Moves

Strategic decisions thatHave positive payoffs inAny scenario

Options

Decisions that yield aSignificant positive payoff in Some outcomes, and a(small) negative effective inOthers.

Big Bets

Focused strategies with positive payoffsIn one or more scenarios but a negativeEffect in others.

What’s in a Portfolio of Actions?

These building blocks are distinguished by three payoff profiles – that is, the amount of investment required up front and the conditions under which the investment will yield a positive return.

Marketing for MOST: Module 11 – Managing Uncertainty

The Choice of Strategic Postures and Moves

Source: Harvard Business Review (HBR) on Managing Uncertainty, HBR Press.

Big Bets(Concentration)

Options(Balancing)

No Regrets(Scattering)

Resource Allocation by Three Actions

A A BA BC D

Marketing for MOST: Module 11 – Managing Uncertainty

The Choice of Strategic Postures and Moves

Compatibility of Postures and Moves

Big Bets

Options

No Regrets

Shape Adapt Reserve

? O

X

O

Oo O

OX

X

Marketing for MOST: Module 11 – Managing Uncertainty

The Choice of Strategic Postures and Moves

• Options:

– Strategic Options

– Financial Options

Marketing for MOST: Module 11 – Managing Uncertainty

Different Methods of Uncertainty Analysis

Many corporations have a collection of tools to better understand the effect of uncertainty on decision making, and successful consulting firms have been built to bring these tools to their clients. They use different methods like:

• Decision Analysis.

• Scenario Planning.

• Simulation Analysis.

• Real Options.

Marketing for MOST: Module 11 – Managing Uncertainty

Decision Science

Marketing for MOST: Module 11 – Managing Uncertainty

Decision Making under Uncertainty

– REFERENCE:• DECISION MAKING UNDER UNCERTAINTY

– Models and Choices– By Charles A Holloway (Stanford University),– Published by PRENTICE-HALL (1979).

– VIEW PDF

Marketing for MOST: Module 11 – Managing Uncertainty

Decision Making under Uncertainty

• Decision Diagrams– Diagram Conventions:

– Decision Node

– Event Node

Decision 1

Or 2

Or 3

Or …

Or …

Heads

Tails

1

2

3

4

5Binary Multiple

Uncertain EventsDecisions

Marketing for MOST: Module 11 – Managing Uncertainty

Decision Making under Uncertainty

• Diagrams for Continuous Models

Marketing for MOST: Module 11 – Managing Uncertainty

Decision Making under Uncertainty

• Application of Continuous Models for Product Development Decision

• (example)

Marketing for MOST: Module 11 – Managing Uncertainty

• A Decision Diagram for Oil Exploration (sample)

• The probability distribution for contribution for drill at site 1 is:• P(Contribution = -$100,000) = 0.7• P(Contribution = 150,000) = 0.2• P(Contribution = $500,000) = 0.1

Decision Making under Uncertainty

Marketing for MOST: Module 11 – Managing Uncertainty

Decision Making under Uncertainty

• Are YOU Risk Averse?– Preferences and Calculation of Certainty Equivalents

Certainty EquivalentDefinition: The certainty equivalent for an uncertain eventis that certain value, in terms of the evaluation units, which a decision maker is just willing to accept in lieu of the gamble represented by the uncertain event.

Win (P) $100,000)

Lose (1-P) $0

Marketing for MOST: Module 11 – Managing Uncertainty

Decision Making under Uncertainty

• Assessing Preference Curves:

1. Establish the payoffs for a reference gamble for the decision problem.2. Specify a value for p, the probability of winning the reference gamble,

and determine the certainty equivalent for the gamble. 3. Record p and the certainty equivalent on a plot with p on the vertical axis

and the certainty equivalent on the horizontal axis.4. Repeat steps 2 and 3 by changing p until the plot p versus certainty equivalent

is well defined 5. Draw a curve through the plotted points.

Marketing for MOST: Module 11 – Managing Uncertainty

Decision Making under Uncertainty

• Preference Curve Example:

Reference Gamble

Ref: Addendum xxxSource: Charles A Holloway

Marketing for MOST: Module 11 – Managing Uncertainty

Decision Making under Uncertainty

• Your Preference Curve:

– Your curve tells you whether you are:• Risk Averse• Risk Neutral• Or Risk Seeking

Marketing for MOST: Module 11 – Managing Uncertainty

Decision Making under Uncertainty

– Assignment• Define your reference gamble (how much of a

payoff) and draw your own preference curve.• Repeat the process, but this time with a higher

payoff.• And discuss the results.

Marketing for MOST: Module 11 – Managing Uncertainty

Scenario Planning

Marketing for MOST: Module 11 – Managing Uncertainty

Scenario Planning

“ Yes, in eighty days!” exclaimed Stuart. “But that doesn't take into account bad weather, contrary winds, shipwrecks, railway accidents, and so on”

“ I have a deposit of twenty thousand at Barings which I will willingly risk upon it.”

“ Twenty thousand pounds!:cried Sullivan.”Twenty thousand pounds, which you would lose by a single accidental delay!”

“ The unforeseen does not exist,” quietly replied Phileas Fogg.”

Jules Verne, Around the World in Eighty Days.

Marketing for MOST: Module 11 – Managing Uncertainty

What If ?

The moment of truth arrives in everyone’s life, where we say “What if it happens”.

“What if ”,can be anything- arrival of your mother-in-law, birth, death or even natural calamities. We know not what will happen tomorrow, but preparation for the worst is the best situation we can be in.

Therefore, Scenario Planning is to prepare us for the worst, so that it hurts the least.

What is Scenario Planning?

Methods for learning about the future, by understanding the nature and impact of the most uncertain and important driving forces affecting our future.

It’s a technique developed and applied famously by Royal Dutch Shell Company to anticipate and plan profitably for the oil shocks of the seventies.

Marketing for MOST: Module 11 – Managing Uncertainty

Why do we use Scenario Planning?

Scenario planning was developed and is used largely by businesses, particularly by companies that have to make expensive long term decisions in uncertain situations.

Marketing for MOST: Module 11 – Managing Uncertainty

How is Scenario Planning Utilized?

The method is most widely used as a strategic management tool, but this and similar methods have been used for enabling other types of group discussion about a common future.

34

Marketing for MOST: Module 11 – Managing Uncertainty

When do we use Scenario Planning in Strategic Management?

Reference:wisc.edu/peterson/scenario

35

Marketing for MOST: Module 11 – Managing Uncertainty

Six-Step Process to Develop Scenarios

                                                                                                                           

Reference:horizon.unc.edu

36

Marketing for MOST: Module 11 – Managing Uncertainty

Trends of Scenarios.

•

• "High impact/low uncertainty" forces--these are (we think!) the relative certainties in our future for which our planning must prepare.

• "High impact/high uncertainty" forces--these are the potential shapers of different futures (scenarios) for which our planning should prepare.

P S

Reference:horizon.unc.edu

Marketing for MOST: Module 11 – Managing Uncertainty

How can you we use Scenarios?

To “experiment” the organization’s current strategies.

It stimulates us to explore new strategy options.

They stretch our thinking process both about the future and about our strategies.

38

Marketing for MOST: Module 11 – Managing Uncertainty

Benefits of Scenario Planning

Early Warning: Knowing when to advance or retreat keeps your business alive and flourishing.

New Opportunities: As your competitors struggle with changing conditions, your business will be poised to survive and thrive.

Risk Reduction: Preparing for possible changes can reduce over-exposure to uncertain risks.

Reference: article by Darrel Zahorsky

Marketing for MOST: Module 11 – Managing Uncertainty

Real Options Theory

40

Marketing for MOST: Module 11 – Managing Uncertainty

An Introduction to Options

Option - A right to make a decision in the futureElements of an option An underlying asset Exercise price (strike price) Expiration date European or American form

Basic options Call option Put option

Financial optionsReal optionsComplex options Contingencies - Option created by some earlier action Interdependencies - Options with interdependent values

Reference: Entrepreneurial finance by Smith & Smith

41

Marketing for MOST: Module 11 – Managing Uncertainty

Why are Options so Important?

• We live in a world of uncertainty, there's a lot of value in having options to change your mind or update your strategy in the future.

• Using an options approach, a company can change how it faces uncertainty. Options helps to limit it’s losses from bad outcomes and increase the payoff from good outcomes.

42

Marketing for MOST: Module 11 – Managing Uncertainty

Why Does this Theory Work?

The real options approach works because it helps managers, with the opportunities they have to plan and manage strategic investments. Stewart Myers of MIT coined the term "real options" to address the gap between strategic planning and finance.

43

Marketing for MOST: Module 11 – Managing Uncertainty

Real Options and Finance

"Strategic planning needs finance. Present value calculations are needed as a check on strategic analysis and vice versa. However, standard discounted cash flow techniques will tend to understate the option value attached to growing profitable lines of business. Corporate finance theory requires extension to deal with real options." --Stewart C. Myers, Sloan School of Management, MIT (1984).

44

Marketing for MOST: Module 11 – Managing Uncertainty

Real Options

• Real options capture the value of managerial flexibility to adapt decisions in response to unexpected market developments.

• As a strategic management tool, real options helps you characterize and communicate the value of an investment project effectively.

• Real options enable managers to leverage uncertainty and limit downside risk.

45

Marketing for MOST: Module 11 – Managing Uncertainty

1. Defer – Delay investment and learn.

2. Contract or Expand - The flexibility to reduce or increase the rate of output.

3. Abandon - Stop investing.

4. Staging - Substitute a series of small investments for one large.

5. Switching - Re-deploy resources or change inputs (terminate).

6. Change Scope - Expand or contract scope.

© Reference: Entrepreneurial finance by Smith & Smith

Examples of Real Options

46

Marketing for MOST: Module 11 – Managing Uncertainty

©2000, Entrepreneurial Finance, Smith and Kiholm Smith

Extending brand names to new products or marketing through existing distribution channels

Defer

Expand or contract

Abandon

Switch inputs or outputs

Grow

To wait before taking an action until more is known or timing is expected to be more favorable

To increase or decrease the scale of a operation in response to demand

To discontinue an operation and liquidate the assets

To commit investment in stages giving rise to a series of valuations and abandonment options

To alter the mix of inputs or outputs of a production process in response to market prices

Stage investment

To expand the scope of activities to capitalize on new perceived opportunities

ExamplesDescriptionOption

Adding to the daily flights on an airline route or adding memory to a computer.

When to harvest a stand of trees, introduce a new product, or replace an existing piece of equipment

Discontinuing a research project, closing a store, or resigning from current employment

Staging of research and development projects or financial commitments to a new venture

The output mix of refined crude oil products or substituting coal for natural gas to produce electricity

Examples of Real Options

Reference: Entrepreneurial finance by Smith & Smith

47

Marketing for MOST: Module 11 – Managing Uncertainty

Real Options approach compared to other alternatives

Real option valuation is based on objective and precise inputs. Those inputs are used in a way that produces market values and the real options approach guides the user on where to look and why.

Experienced users of the real options approach see the patterns, the types of options, and the important sources of uncertainty.

The real options approach provides a framework for revising expectations and for managing investments over time.

The optimal exercise of managerial options requires frequent scans of the environment and updates of important information.

Reference: real-options.com

48

Marketing for MOST: Module 11 – Managing Uncertainty

Six levers of Real Options

Source:nyu.edu`adamor

49

Marketing for MOST: Module 11 – Managing Uncertainty

The Final Word

• The final, and perhaps greatest, benefit of real-options thinking is precisely that—thinking. The very exercise of working through options systematically begins to change the way management thinks.

• Remember, the most important word in

Real Options ----- REAL.

Marketing for MOST: Module 11 – Managing Uncertainty

Pitfalls of Emerging Technologies

Marketing for MOST: Module 11 – Managing Uncertainty

Committing

Evaluating

Scoping

Predict firm’s ability tochange and redeploy

resources

Define firm’starget market

Assesses firm’score capabilities

Survey, discover, andsearch for emergent

technology

Predict & assessmarket need

Searching

Plan development ofnew technology

Project how technologyserves market needs

and competitive goals

The Technology Assessment Process

Reference: Don S. Dearing, Roch Parayne: Identification and assessment of emerging technologies, Chap. 4: Wharton on managing emerging technologies, Wiley(2000).

Pitfalls of Emerging Technologies

Pitfalls

Tube light ManagerThe Unseen

WorldBoyfriend Syndrome

Staying in the Game

Marketing for MOST: Module 11 – Managing Uncertainty

Tube Light Managers

• They are like tube lights, take time to light up.• Limited vision on part of managers.• It’s better to play safe than to risk it and be

blamed for it.• The vision is limited, they miss the bus and

usually important decisions are not important for them.

• Focus is narrow, only on big markets and not foreseeing the growth potential in the smaller ones.

Marketing for MOST: Module 11 – Managing Uncertainty

The Unseen World

• People like familiar territory and are afraid to venture into the unknown.

• Getting cautious and suspicious of the new technology, rather than embracing it.

• The price factor, where less margins and more markets is not very attractive.

• Who takes the responsibility of failure?• If someone thinks different isn't he or she crazy?

Marketing for MOST: Module 11 – Managing Uncertainty

Boyfriend Syndrome

• Commitment phobia.• Half hearted participation in the program rather

than full commitment to it.• Too cautious in the approach.• Resistance from channel partners. • Profits are usually low in the beginning, which

results in low interest from management.

Marketing for MOST: Module 11 – Managing Uncertainty

Staying in the Game• Low persistence.• Missed forecasts disappoint investors and

managers, therefore lack of interest develops and viability of the technology is questioned.

• Sometimes it takes time to be profitable, and some companies lose patience and pull the plug on investments.

• Sometimes cost cutting forces many companies to get rid of new non-profitable investments first.

Marketing for MOST: Module 11 – Managing Uncertainty

Remedies

1. Understand the technology emergence from birth to development to testing and finally into mass production. It’s a slow process so patience helps.

2. Continuous help from senior management to encourage and support autonomy, and separation of new ventures from ongoing business.

3. Collective learning within the company with emphasis on diversity and openness, and getting rid of prevailing mindset.

4. Continuous experimentation and investments in new technology,identifying the real opportunity, and cashing in when the time comes.

Marketing for MOST: Module 11 – Managing Uncertainty

Disruptive Technologies

Marketing for MOST: Module 11 – Managing Uncertainty

Disruptive Technologies

• Disruptive technology changes the industry in such a way that previous competitive and business rules do not apply.

• Since the internet has had such a profound effect on the fundamental rules of business, it can be considered a disruptive technology.

• Disruptive technologies initially serve isolated market niches and, as they mature, expand to displace established technologies from mainstream segments.

60

Marketing for MOST: Module 11 – Managing Uncertainty

Distinction Between Sustaining Technologies and Disruptive Technologies

• Companies depend on investors and customers for resources.

• Small markets don’t solve the growth needs of large companies

• Entry into non-existent markets.• Technology supply may not

equal to market demand.• Target customers are

innovators.

• Usually companies use their own resources.

• Markets are large and has lots of potential for growth.

• Markets already exist.• Technology supply is usually

more than market supply.• Target customers are early

majority and late majority users.

Disruptive TechnologiesDisruptive Technologies Sustainable TechnologiesSustainable Technologies

Marketing for MOST: Module 11 – Managing Uncertainty

The Effects of Disruptive Technologies

• A shift from isolation to disruption lowers prices and increases social welfare, but may either increase or decrease the profits of firms using the new technology.

• While disruptive technologies tend to be simpler, cheaper, and less-sophisticated technologies, they may address different needs (e.g. disk drives for PDAs – less memory capacity, but smaller in size).

Marketing for MOST: Module 11 – Managing Uncertainty

Examples of Industries Affected by Disruptive Technologies

• Automobile Industry ( Electric cars).• Bookstores ( Internet sales).• Network Television ( cable and satellite

television).• Records (CD’s).• Telephone-long distance ( Internet Phone)

Marketing for MOST: Module 11 – Managing Uncertainty

Drawbacks of Disruptive Technologies

• Initial opportunities exist in smaller markets.• Markets conditions are unknown for acceptance

and future growth.• They are not aimed to satisfy current customers

needs and requirements.• They offer low profit margins.