BN926 Strategy and Management of Change

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BN926 Strategy and Management of Change

• Scenario Planning and Real Options Reasoning
• Professor Julian Lowe

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(No Transcript)
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The problem (1)
Change? Strategic Concepts
Organisational Success Fine
Excess Decline (Products
Fit Tuning Services)
Transformation
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The problem (2)

• Environment changes faster than incremental
  strategy - hardware
• Discontinuous change is unpredictable software
• Examples education, retailing, pharmaceuticals,
  oil, ..

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Background

• How do we become more future focused in strategy?
• Approaches
• Managing the present from the future
• Forecasting and trend analysis managing the
  future from the present
• Scenario planning
• Real options reasoning

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The Experts Speak!
Heavier-than-air flying machines are
impossible Lord Kelvin, President of the British
Royal Society c. 1895 I think there is a world
market for about five computers Thomas J Watson,
Chairman of IBM, 1943 There is no reason for
any individual to have a computer in their
home Ken Olsen, President, Digital Equipment
Corporation, 1977 We dont like their sound.
Groups of guitars are on their way out Decca
Recording Executive, turning down the Beatles,
1962
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What Is Scenario Planning?

• It is a disciplined method for imagining possible
  futures
• It is a shared framework for strategic thinking
  that encourages diversity and sharper perceptions
  about external change and opportunities
• It is part of a process for generating and
  evaluating strategic options

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When Is It Appropriate?

• Uncertainty is high relative to managers ability
  to predict or adjust
• Costly surprises have occurred in the past
• Corporate inertia the quality of strategic
  thinking is low no-one thinks outside the box

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Scenario Planning Made Simple

• Define the scope of the analysis
• Identify the key trends/drivers for change
• Bring drivers together into scenario themes
• Reduce the number of scenarios
• Elaborate the story, check for consistency and
  plausibility
• Identify the issues arising

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Scenario Planning at ICL

• First experimented with scenario planning in 1993
  with Vision 2000 project
• Easy to find forward projections for hardware but
  not for software
• Belief that software industry was facing dramatic
  change

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Blurring Industry Boundaries
Info Vendors
Cable Network Ops
Entertainment Media Publishing
Telecom
Computers
Consumer electronics
Office Equipment
with ecom
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Defining the Scope

• Scenarios for information markets in 2005 a ten
  year timescale
• Focus on the question what added value will we
  provide to our customers in 2005?
• Decision to create two highly distinct scenarios

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Key Trends and Drivers 1

• Economic/Demographic
• Increasingly educated, sophisticated and
  demanding customers
• Growth in SE Asia/India and China with an
  expanding middle class
• Two billion teenagers worldwide, most in Asia and
  Latin America
• Increase in the older population in
  industrialised countries
• Continuous restructuring of organisations
• Outsourcing of IT is used by half of all Fortune
  500 companies
• Increasing environmental concerns

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Key Trends and Drivers 2

• Technology-related trends
• Bandwidth explosion and development of the
  internet
• Processing power increases
• Ease of use
• Digitalisation of content and growth of
  multi-media
• Changes in source of value added in the IT
  industry
• Litigation in IT increases
• Semiconductor content of electronics increases

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Trends and Uncertainties
Common Trends B Uncertainties happen the
other way
Common Trends A Uncertainties happen one way
Processing power increases Low adoption of
innovation
Processing power increases High adoption of
innovation
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Uncertainties

• Economic power shift to SE Asia?
• Greater economics of scale in technology?
• Major IT disasters?
• Hostilities involving major trading blocks?
• Consumer marketing dominates?
• Fragmentation occurs?
• High adoption of innovation?
• Fragmented industry?

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Scenario Scenes

• Degree influence/power exerted by government
• Social values
• Consumer behaviour
• Shape and degree of global trade

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An aid to scenario design
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An example using metaphors

• Coral reef v deep sea
• Highly visible activity v less visible
• Diverse life forms v fewer life forms
• Complex ecosystem v simpler system
• Many small fish v fewer but bigger fish
• Both environments dangerous to land animals until
  they learn the rules

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Deep Sea
Economic Background Restricted economic
growth Protectionist economics Environmental or
safety threats Competitive environment Regulation
and high barriers to entry Major mergers between
content and telecom firms Local champions
Telecoms Infrastructure Closed
networks Broadband only in some major centres of
population
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Coral Reef
Telecoms Infrastructure Open, high bandwidth
networks Universal broadband
Economic Background High economic growth Globally
interconnected economies Competitive
environment Highly competitive Many local niche
players Global specialist players
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The Issues 1

• Impact on segments
• Media and publishing coral reef-business use
  increases move from product pricing to
  transaction pricing. Deep sea lower growth,
  home use mainly stabilising on CD-ROMS
• Telecoms coral reef profitability of voice
  traffic decrease due to new entrants and growth
  in non-voice. Deep sea voice profits hold

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The Issues 2

• Core Competencies
• Project management
• Coral Reef
• Deep Sea
• Networking and Telecoms
• Coral Reef
• Deep Sea
• Change Management
• Coral Reef
• Deep Sea

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The Implications?

• Different sets of strategic challenges
• Early warning signals
• Robustness of core competencies
• Better strategic options
• Manipulating the future

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Group Work

• Form groups of three or four and create two
  scenarios for an agreed product/market
• Define the scope of the task choose a product,
  market or geographic area what time scale
• Decide on the trends and uncertainties put them
  on post-it notes
• Group the post-it notes in scenario themes
• Produce two scenarios and give them appropriate
  names
• Identify issues of strategic importance in eacy
  scenario

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Beyond scenarios real options

• Options in future markets
• More options will generally give you better
  options. But when the future is uncertain the
  degree of flexibility afforded by an option
  becomes an important part of its value.
• Real option recovery is an acknowledgement that
  you can be prepared to move in a number of
  directions without making a full scale
  investment.
• A new frame of reference that looks at
  flexibility as an asset.
• Sometimes it pays to leave your options open.

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Real Options in Practice

• Build in opportunities to defer, expand or
  contract as the future unfolds.
• Enron invested in gas fired plants which are
  only economic at very high levels of demand.
• HP delayed the automation of printers. High
  costs but with substantial benefits.

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How to use the approach

• Adopt an options perspective ie try to build in a
  recognition that there are a range of options
  that may happen.
• Structure decision processes to create points at
  which options could be assessed.
• Try to value the benefits of flexibility and
  therefore what should be paid for an option.
• Be sure to know when you exercise your options.

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Example
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Example cont.

• But if we had built in flexibility into the
  plant to operate at scaled back levels of
  demand it might be worth investing in.