Strategic decisionmaking in times of turbulence

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Strategic decision-making in times of turbulence

• Robin Stonecash
• AGSM

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Strategic decision-making

• What is strategic decision-making?
• What makes for uncertain times?
• How does uncertainty affect our strategies?
• Can we improve our strategies in times of
  turbulence?

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Traditional approach to decision-making

• Choose a project or scenario
• Do scenario analysis to test sensitivity of
  possible outcomes to changes in key variables
• Build a strategy around the outcome that gives
  highest present value

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Strategy in uncertain times

• Two key components of planning
• Information
• What do you know?
• What can you only guess about?
• What do you not have a clue about?
• Attitude towards risk
• Defending
• Taking advantage of opportunities

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Information

• Identify clear trends
• Market demographics
• Economic cycles
• Political trends government responses
• Distinguish between thingsunknown, but knowable
  things unknowable

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The known unknown

• Knowable
• Demand elasticities for your products
• Rate of increase of housing prices in your
  preferred area over the last few years
• Performance attributes of a competitors new
  product

• Unknowable
• Assassination of Arch-Duke Ferdinand starting WWI
• Destruction of the World Trade Centre Towers on
  September 11
• Russian government decision to arrest Mikhail
  Khodorkovsky

Guesswork Intelligence
Unknowable
Knowable
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Risk vs uncertainty

• Uncertainty the possibility of several different
  outcomes when the probabilities of various events
  are not known
• Whether or not the US will catch Saddam Hussein
  or Osama Bin Laden
• Risk the possibility of several different
  outcomes, each with known probabilities
• Variability in share prices

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Attitude towards risk

• Depends on personal preferences
• Do you like skydiving?
• Are you willing to bet the whole business on a
  new product?
• Depends on your companys financial position
• Are you cashed up or suffering a liquidity
  crisis?
• What pressure are you feeling from your
  competitors?

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Modeling the future

• A clear-enough future
• Alternative futures
• A range of futures
• True ambiguity

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A clear-enough future
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A number of clear possibilities
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2
3
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A range of futures
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True ambiguity
?
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Structured decision-making in times of uncertainty

• What game are you in?
• Who are the players?
• Who is key?
• Who is peripheral, but important?
• What is the range of possible actions of each
  important player, including nature?

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Structured decision-making in times of uncertainty

• What information do you have that will help you
  assign probabilities to the possible actions?
• Having ranked the possible actions, use the
  fundamentals of game theory to determine what
  your responses will be to each possible/likely
  outcome
• Look forward reason backwards
• Put yourself in your counterpartys shoes

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Structured decision-making in times of uncertainty

• Two possible approaches
• Come up with a response to each every possible
  action by each every possible player.
• well, no, bounded rationality limitations on
  time cost prevent this
• Sort the outcomes according to likelihood
  strength of effect on your business