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How do you make decisions in an uncertain world?
John Lincoln, VP of Enterprise Marketing at 'du' talks about the art of making business decisions
July 25, 2012 2:10 by kippreport
Most of us have made decisions that we have regretted later. Be it an investment choice, a major purchase, a hiring choice, a major price cut, a key strategic investment or other daily business or personal decisions or strategies, we all do wish that we have the gift and wisdom of foresight.
How do we deal with uncertainty in the business world? Any discussion of strategy or uncertainties always brings to mind an excellent McKinsey Quarterly article that discusses levels and types of uncertainty. It describes residual uncertainty – uncertainty that cannot be otherwise determined through analysis, such as the results of a legal suit or outcomes of regulatory changes – and classifies it into four levels.
Level One Uncertainty: Outcome is Known
With Level One uncertainty, the possible outcome is known so no analysis is required.
Level Two Uncertainty: Alternative Outcomes
The authors describe Level Two uncertainty as ‘one of a few discrete scenarios’. In essence any analysis cannot predict which outcomes will happen but rather require us to assign probabilities based on the best information, tools and knowledge available.
Level Three Uncertainty: A Multitude of Possible Outcomes
At Level Three, there are a range of possible outcomes that can be identified. There are very few variables to range the multitude of options. Any scenario development should facilitate easy decision-making, therefore it is recommended that the number of scenarios be limited and the scenarios should have unique implications and should not overlap.
At the very least, developing a set of scenarios should at the least enable managers to assess the wisdom of their existing or planned status quo strategies.
Level Four Uncertainty: Welcome to the Wild West!
At Level Four, It is hard to predict the outcomes. Level Four uncertainties are rare in most industries.
Shape or be shaped!
Assigning informed and reasonable probabilities will help them to develop investment, pricing and product portfolio rebalancing strategies that are phased to ensure that they don’t end up being the proverbial ‘dumb pipe’.
Addressing Level Four uncertainties requires a player to shape or be shaped, be prepared to adapt and/or reserve the right to play. The choice of strategies to address Level Four uncertainties are dependent on the competitive leverage, risk averseness of the management, financial strength and a multitude of other factors like investor appetite, organizational capability, innovation orientation and others.
Vodafone’s Level Four uncertainty
Imagine a company like Vodafone. Its Western European revenues are declining. It has invested billions on 3G and HSPA+ networks and acquired many developing market telecom players to offset the anticipated decline in revenue from their developed markets portfolio. The cash flow growths in these newly acquired companies are coming under heavy pressure due to the significant price reductions to boost market adoption.
Additionally, all players in the telecommunications value chain are forcing them to expend or reinvest their free cash flow. The processor core and network vendors are upgrading their network equipment (Moore’s Law effect). Further, all it takes is an ‘irrational’ player in any of their markets to force them to prematurely invest billions in the network.
The advent of new smartphones is forcing them to subsidize heavily on the handsets and the network just to retain their existing base. The MVNOs are forcing them to drop prices just to stay competitive. Multiple content players are forcing them to rethink and invest heavily in their networks and data strategy. The new age Internet players, such as Skype and Google, are forcing them to reduce their voice prices. The regulators are cramming them to reduce prices on their high margin roaming propositions. Informed individual customers and enterprises are demanding the best deal and the lowest prices.
On top of all these factors, imagine the range of new organizational capabilities required to transform the company into a nimble new age media player.
As you can see clearly, this is a Level Four uncertainty for its management and shareholders. How does the company justify its growth assumptions baked into its enterprise valuation?
How and where do they shape, adapt or reserve the right to play? What strategies, initiatives, actions, big bet moves, options and no regret plays should Vodafone embrace?
Don’t let your foresight be blind!
Knowing the levels of uncertainty, thinking purposefully and in a structured way about the multiple scenarios and probabilities, and the strategies needed to address the uncertainties is essential for any manager.
Understanding and addressing the levels of uncertainty is the only way to avoid Monday morning quarterbacking. The deliberate framework and tools described here can be applied to both your professional and personal life. Hindsight is 20/20 – don’t let your foresight be blind either.