STRATEGY UNDER

UNCERTAINTY BY

BY SUNIL PRASAD

What is Strategy Under Uncertainty

The traditional approach to strategy lies the

assumption that executives, by applying a set of

powerful analytic tools, can predict the future of any

business accurately enough to choose a clear strategic

direction for it. The process often involves

underestimating uncertainty in order to lay out a

vision of future events sufficiently precise to be

captured in a discounted-cash-flow (DCF) analysis.

When the future is truly uncertain, this approach is at

best marginally helpful and at worst downright

dangerous:

underestimating uncertainty can lead to strategies that

neither defend a company against the threats nor take

advantage of the opportunities that higher levels of

uncertainty provide. Another danger lies at the other

extreme: if managers can't find a strategy that works

under traditional analysis, they may abandon the

analytical rigor of their planning process altogether

and base their decisions on gut instinct.

Four Levels of Uncertainty

Level one: A clear enough future

Level two: Alternative futures

Level three: A range of futures

Level four: True ambiguity

A Clear Enough Future

The residual uncertainty is irrelevant to making

strategic decisions at clear enough future,so

managers can develop a single forecast that is a

sufficiently precise basis for their strategies. To help

generate this usefully precise prediction of the future,

managers can use the standard strategy tool kit:

market research, analyses of competitors' costs and

capacity, value chain analysis, Michael Porter's five-

forces framework, and so on.

A Clear-Enough Future

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.

Alternative Futures

The future can be described as one of a few discrete

scenarios at Alternative Futures. Analysis can't

identify which outcome will actually come to pass,

though it may help establish probabilities. Most

important, some, if not all, elements of the strategy

would change if the outcome were predictable.

In Article mention that as example Many businessesfacing major regulatory or legislative changeconfront level two uncertainty. Consider US long-distance telephone providers in late 1995, as theybegan developing strategies for entering localtelephone markets. Legislation that wouldfundamentally deregulate the industry was pending inCongress, and the broad form that new regulationswould take was fairly clear to most industryobservers. But whether the legislation was going topass and how quickly it would be implemented if itdid were still uncertain. No amount of analysis wouldallow the long-distance carriers to predict thoseoutcomes, and the correct course of action

Alternate Futures

• 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

Alternate

Futures

1

2

3

What Can

Be Known?

Analytic Tools

Examples

A range of futures

A range of potential futures can be identified at A

range of futures. A limited number of key variables

define that range, but the actual outcome may lie

anywhere within it. There are no natural discrete

scenarios. As in Alternative Futures , some, and

possibly all, elements of the strategy would change if

the outcome were predictable.

A Range of Futures

• 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

What Can

Be Known?

Analytic Tools

Examples

True Ambiguity

A number of dimensions of uncertainty interact to

create an environment that is virtually impossible to

predict at level four. In contrast to level three

situations, it is impossible to identify a range of

potential outcomes, let alone scenarios within a

range. It might not even be possible to identify, much

less predict, all the relevant variables that will define

the future. Level four situations are quite rare, and

they tend to migrate toward one of the others over

time. Nevertheless, they do exist.

Consider a telecommunications company

deciding where and how to compete in the

emerging consumer multimedia market. The

company will confront a number of

uncertainties concerning technology, demand,

and relations between hardware and content

providers. All of these uncertainties may

interact in ways so unpredictable that no

plausible range of scenarios can be identified.

Anatomy of the Residual

Uncertainty

• 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

What Can

Be Known?

Analytic Tools

Examples

The Three Strategy Posture

The shape the future

Adopt to the future

Reserve right to play

The Choice of Strategic Postures

and Moves

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.

Adopt to the future

Adapting- Adapting means that choosing

where and how to compete within the current

industry structure. many telecommunications

service resellers pursue competitive

advantage through pricing and effective

execution rather than product innovation.

The shape the future

The driving the industry toward a new structure

of your devising and creating new

opportunities. Hewlett Packard shifted photo

processing from store to homes by offering

high quality, low -cost photo printers.

Reserve right to play

Reserving the right to play- making

incremental investments to stay in the game

without commitiong to a new strategy

prematurely. some pharmaceutical companies

reserve the right to play in gene therapy

applications by buying small biotech firms with

relevant expertise.

What’s in a portfolio of Actions

Options

options- modest initial investments like( pilot

trials, limited joint ventures, technology

licensing) that enable you to ramp up or scale

back your investments later as the market

evolves

Big Bets

big bets- major commitment like capital

investments, mergers, or acquisitions that will

generate large payoffs in some scenarios and

large losses in others.

No- regrets moves

No- regrets moves- actions that pay off no

matter what happens such as cost cutting

initiatives and competitor intelligence.