©2004 dr. geoff wells ceo thinking business strategy in an uncertain world

©2004 Dr. Geoff Wells

CEO Thinking

Business Strategy in an Uncertain World


CEO Thinking

Achievement is based on action.

Action is based on thinking.

The quality of thinking determines the quality of action and the extent of achievement.

How to think is the pre-eminent challenge of business.

Successful CEO’s know how to think about their business and its environment. They take it as a priority.


Successful CEO thinking takes:

time, patience, persistence intelligence, insight, judgement collaboration, humility education, breadth of knowledge and understanding experience Luck

Laws of Business L

The CEO Thinker


Strategy Development



Strategy provides managers with a framework for decision making and resource allocation that leads to clarity of purpose and to the achievement of competitive advantage.

Without a strategy, valuable resources will be diluted, the work of employees will be unfocused, and distinctiveness will not be achieved.



The strategy review involves assessing the actual direction of a business and comparing that course to the direction required to succeed in a changing environment.

The strategy review results in an action plan that will achieve the company’s objectives, by aligning the internal and external environments.

The strategy review identifies a strategic horizon and a flexible path to it.

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Thinking Strategically About

The Business


External Business Environment

What are our assumptions regarding society and economy, industry and market, knowledge and technology? Are they still valid?

What does everybody know can never happen? Can it?


Customers What is satisfaction for our customers? What does the customer

value?

Who are our customers’ customers? What do they value?

How are our customers impacted by the economics of the value chain?

Who are non-customers? Why don’t they buy from us?

What would enable customers to do without our product or service?


Competitors What is our competitive advantage?

What is our competitive disadvantage?

What are we doing well, or poorly, compared to our competitors? How do we know?

Who are our non-competitors, and why?

If you were a competitor, what is the single most important thing you could you do to take us out?

Is there any innovation in technology or business processes on the horizon that could give the company who grasps it significant competitive advantage? What are we doing about it?


Industry

What is the long-term viability of the industry as a whole?

What developments could allow a company to change the rules of the game?

What trends could change the rules of the game?


Knowledge What is our specific knowledge?

Do we have the right knowledge? What do we need? How do we get it?

Do we have a knowledge creation strategy and process in place?

Are we getting paid for our knowledge?


Opportunities Where are our best opportunities? What makes them the best?

What are our key push priorities?

What are candidates for abandonment?

What is lacking to make effective what is already possible?

What are the key restraints, limitations and imbalances of the business?

What do we see as a threat to the business? Is that an accurate perception? Is there an opportunity?


Risks What are the risks that we:

must accept can afford cannot afford to take cannot afford not to take

What do we know will never happen? Are we prepared for it?

Have we built the management of risk into every part of our business planning and processes?


Economic Results Are the primary stakeholders in the business—shareholders,

management, employees—agreed on what counts as economic results?

Does that method capture the growth of wealth of the business as a whole?

Is there a well-defined process for accurately capturing and representing the economic results of the business? Is it understood and agreed on by all stakeholders?

Is this process being used as a strategic template in all areas of the business to drive the development of maximum economic value?


Managing Risk & Uncertainty


Business Uncertainty & Risk All decisions about the future carry uncertainty and therefore

risk: “The only sure thing is the past, but all we have to work with is the future.”

Business management is making decisions about the direction of business actions; and the resources to be allocated to them

for maximum future economic results.

Risk is inherent to the business. The management of risk is the management of the business.

Risk must be managed systematically. A retreat to ‘gut feel’ or to expediting is not acceptable.


Four Levels of Uncertainty


Level 1: A Clear Enough Future Business strategists face opportunities where the range of

possible future outcomes is narrow enough that this uncertainty doesn’t matter to the decision.

Point forecasts can be developed that are precise enough for strategy development.

Future path of main drivers relatively clear.

Market not prone to external shocks or internal upheaval.

Eg. pricing, market, product, service decisions for well established brands.


Sources of Level 1 Uncertainty

SOURCE OF UNCERTAINTY EXAMPLES SPECIFIC UNCERTAINTIES

Returns on common investments in mature stable markets.

Restaurant locations; retail store locations

Customer demand, cost parameters—stable market environment, business models, info sources.

Customer and competitor reactions to strategies that reposition well-established brands.

Marketing and pricing strategy for new vehicle models.

Customer and competitor response, well-established and well-understood market.

Returns on uncommon investments in mature, stable markets.

BP’s acquisition of Amoco; AWB’s acquisition of Landmark.

Post-merger integration and synergies, drivers of acquisition value.


Level 2: Alternate Futures

Set of possible future outcomes that are mutually exclusive & collectively exhaustive (MECE), one of which will occur. (cf. multiple choice).

Analysis can help establish relative probabilities but can’t tell you which one will occur.

Most common business strategy challenge.

Eg. major takeover anticipated; regulatory action pending; standards wars; stock market strategy.




Potential regulatory, legislative or judicial changes.

Development re-zoning; food safety regulations.

Project-specific feasibility; cost impacts.

Unpredictable competitor moves and countermoves.

Woolworth’s petrol retailing integration.

Coles Myer’s response; other competitor responses (Drake).

All-or-nothing industry standards competition.

Personal computer operating system developer choice in the late 1980’s.

Which operating system would become the industry standard.


Level 3: A Range of Futures

A range of possible future outcomes can be identified, but no obvious point forecast emerges.

Strategists can only define a representative set of outcomes within the range of possible outcomes (set is not MECE).

Eg. customer demand for new products and services (range out possible outcomes from market research, experiments, pilots, analogies).

Unstable macroeconomic conditions—unpredictable GDP growth, inflation and interest rates, currency fluctuations, etc.




Customer demand for new products or services.

Virgin Blue entry into the Australian market.

Customer response to benefits and costs of low-cost flying in Australia.

Performance and customer preference for new technologies, business models or processes.

Wireless rollout. Delivery and perception of value.

Unstable macroeconomic conditions.

Government contracting in Argentina.

Impact of potential international debt default.


Level 4: True Ambiguity

Uncertainties are unknown and unknowable.

Analysis cannot identify the range of potential future outcomes or scenarios within that range.

Not possible to identify all the relevant variables that will define the future.

Limitless range of future outcomes.

Typical of new political, scientific, technological developments and environments.




Major technological, economic, or social discontinuities

Companies bidding on reconstruction work in Iraq.

Military, political and social uncertainties.

Market evolution in markets that are just beginning to form.

Early e-commerce investments. Commercial implications of the emergence of the Internet as a communications/interactions network.

Unusually long time frames required to evaluate potential strategies.

Royal Dutch/Shell’s long-term renewable energy strategy.

Alternative energy demand-and-supply conditions over a sixty-year period.


Managing Uncertainty: The Tools


Level 1: A Clear Enough FutureSITUATIONAL ANALYSIS

TOOLSEND PRODUCTS DECISION-MAKING

MODEL

Traditional tools:Business diagnostics market research competitor intelligence etc.

Porter’s Five Forces.

SWOT analysis.

Discounted Cash Flow/NPV valuation models.

Forecasts of key value drivers under different strategic assumptions.

DCF valuation of alternative models..

Choose the strategy that maximizes the company’s objective.


Level 2: Alternate Futures

SITUATIONAL ANALYSIS TOOLS

END PRODUCTS DECISION-MAKING MODEL

Traditional tools, plus:

Decision-tree analysis.

Scenario-planning.

Game theory.

Complete description of a MECE set of scenarios:

--industry structure, conduct, performance in each scenario

--dynamic path to each scenario, including trigger events or variables

--relative probabilities of each scenario

--valuation model for each scenario

Analysis of probabilities and payoffs.

Decision analysis.


Level 3: A Range of Futures



Traditional tools, plus:

Scenario-planning.

Game Theory.

Latent demand market research techniques.

System dynamics models.

ROV techniques based on option-pricing models.

Complete description of representative set of scenarios.

Analysis of probabilities and payoffs.

Analysis of strategy impacts on probabilities within the range of outcomes.

Qualitative decision analysis.


Level 4: True Ambiguity



Fore-sighting.

Analogies and reference cases.

Simulation.

Complete set of what you would have to believe statements to support different strategies.

Supporting analogies and reference cases.

Key market indicators.

Getting comfortable with what you would have to believe.


Managing Strategic Uncertainty: Representative Tools


Level 1: DCF Forecasting & Valuation DCF techniques of calculating economic value provide a systematic

method for comparing the financial outcomes of strategic directions and their associated business models.

The DCF forecasting and valuation process:

1. A comprehensive description of the business under each strategic direction.

2. The translation of this description into projected financial outcomes (financial performance, position, cash flows).

3. Discounted Cash Flow analysis of the projected financial statements to identify the strategic direction of maximum economic value.

4. The decision analysis brings together both strategy analysis and DCF analysis.

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Level 2: Decision Analysis

Analyse the complete logical structure of the strategic decision.

Quantify as many of the relevant factors as possible.

Use probabilities to value the outcomes of different strategic directions.

Doesn’t eliminate judgement: makes more explicit areas where judgement is required.

Allows systematic exploration of the range of risk.

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Level 3: Scenario Planning Origin in Dutch-Shell; emergence of an entire discipline

Qualities of a good scenario: Plausible and surprising Breaks old assumptions and stereotypes Makes assume ownership and put them to work.

The scenario process:1. Identify focal issue or decision2. Key forces in the local environment (customers, suppliers, competitors)3. Driving forces (social, economic, political, environmental, technological)4. Rank by importance and uncertainty5. Selecting scenario logics (continuum, matrix, space)6. Filling out the scenarios (narrative: forces+trends+logics)7. Implications (for focal issue)8. Selection of leading indicators and signposts (industry-specific implications)

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Conclusions Uncertainty, and the risk that goes with it, is inseparable from the

conduct of business. Business is risk and reward.

Uncertainty is being driven to new levels by the environment of the global economy.

Uncertainty can be systematically managed by tools such as DCF analysis, decision analysis, and scenario analysis.

These processes create a coherent framework for the best exercise of business judgement.

The outcome is the establishment of a baseline for the increasingly effective management of uncertainty over time.

The management of uncertainty is a new and powerful driver of competitive advantage. Firms that manage uncertainty professionally will survive and dominate in the new business environment.

©2004 dr. geoff wells ceo thinking business strategy in an uncertain world

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