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Marketing for MOST Module 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.

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Presentation on theme: "Marketing for MOST Module 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."— Presentation transcript:

1 Marketing for MOST Module 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

2 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.

3 Marketing for MOST: Module 11 – Managing Uncertainty Strategy Under Uncertainty

4 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.

5 Marketing for MOST: Module 11 – Managing Uncertainty Anatomy of the Future

6 Marketing for MOST: Module 11 – Managing Uncertainty Anatomy of the Residual Uncertainty A Clear Enough Future Alternate Futures A Range of Futures True Ambiguity

7 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.

8 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

9 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

10 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

11 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 role In establishing how the industry operates, for example: -Setting standards -Creating demand Adapt to the future Win through speed, agility, and flexibility in recognizing and capturing opportunities in existing markets. Reserve the Right to Play Invest sufficiently to stay in the game but avoid premature commitments. The Three Strategic Postures

12 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 that Have positive payoffs in Any scenario Options Decisions that yield a Significant positive payoff in Some outcomes, and a (small) negative effective in Others. Big Bets Focused strategies with positive payoffs In one or more scenarios but a negative Effect 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.

13 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 AA B C D

14 Marketing for MOST: Module 11 – Managing Uncertainty The Choice of Strategic Postures and Moves Compatibility of Postures and Moves Big Bets Options No Regrets ShapeAdaptReserve ? O X O O o O OX X

15 Marketing for MOST: Module 11 – Managing Uncertainty The Choice of Strategic Postures and Moves Options: –Strategic Options –Financial Options

16 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.

17 Marketing for MOST: Module 11 – Managing Uncertainty Decision Science

18 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 PDFVIEW PDF

19 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 … Heads Tails 1234512345 BinaryMultiple Uncertain Events Decisions

20 Marketing for MOST: Module 11 – Managing Uncertainty Decision Making under Uncertainty Diagrams for Continuous Models

21 Marketing for MOST: Module 11 – Managing Uncertainty Decision Making under Uncertainty Application of Continuous Models for Product Development Decision (example)

22 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

23 Marketing for MOST: Module 11 – Managing Uncertainty Decision Making under Uncertainty Are YOU Risk Averse? –Preferences and Calculation of Certainty Equivalents Certainty Equivalent Definition: The certainty equivalent for an uncertain event is 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

24 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.

25 Marketing for MOST: Module 11 – Managing Uncertainty Decision Making under Uncertainty Preference Curve Example: Reference Gamble Ref: Addendum xxx Source: Charles A Holloway

26 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

27 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.

28 Marketing for MOST: Module 11 – Managing Uncertainty Scenario Planning

29 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.

30 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.

31 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.

32 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.

33 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 33 When do we use Scenario Planning in Strategic Management? Reference:wisc.edu/peterson/scenario

35 Marketing for MOST: Module 11 – Managing Uncertainty 34 Six-Step Process to Develop Scenarios Reference:horizon.unc.edu

36 Marketing for MOST: Module 11 – Managing Uncertainty 35 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

37 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 37 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

39 Marketing for MOST: Module 11 – Managing Uncertainty Real Options Theory

40 Marketing for MOST: Module 11 – Managing Uncertainty 39 An Introduction to Options Option - A right to make a decision in the future Elements of an option  An underlying asset  Exercise price (strike price)  Expiration date  European or American form Basic options  Call option  Put option Financial options Real options Complex 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 40 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 41 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 42 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 43 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 44 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 45 ©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 46 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 47 Six levers of Real Options Source:nyu.edu`adamor

49 Marketing for MOST: Module 11 – Managing Uncertainty 48 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.

50 Marketing for MOST: Module 11 – Managing Uncertainty Pitfalls of Emerging Technologies

51 Marketing for MOST: Module 11 – Managing Uncertainty 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).

52 Pitfalls of Emerging Technologies Pitfalls Tube light Manager The Unseen World Boyfriend Syndrome Staying in the Game

53 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.

54 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?

55 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.

56 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.

57 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.

58 Marketing for MOST: Module 11 – Managing Uncertainty Disruptive Technologies

59 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 59 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 Technologies Sustainable Technologies

61 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).

62 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)

63 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.


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