the valuable paradox of uncertainty
DESCRIPTION
Traditional business analysis exposes us to unanticipated risk. You need to incorporate uncertainty in business analysis to manage risk in important business decisions.TRANSCRIPT
Why You Need to Include Uncertainty to Manage Risk in Important Business Decisions
Robert D. Brown III 678-947-5997
The Valuable Paradox of Uncertainty
Traditional business analysis exposes us to unanticipated risk
We are trained to provide the “right” answer, often based on unrecognized biases, leading to confidence in false precision
We provide arbitrary assumptions around a predicted “answer” or forecast value for a base case or desired case
Our sensitivity analysis fails to capture full range of effects on important metrics (i.e., value)
We overstate, understate or completely write off the effects of uncertainties or our exposure to risks
Consequently, we fail to plan for unforeseen risks and benefits
+Y%
-Y%
Sensitivity Analysis
$ N
PV
Best
Assumptions
+X2% -X1%
Single Point
Assumptions
Single Point Results
Calculation Engine!
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Uncertainty analysis helps us avoid those blind spots
We explicitly explore factors that can create extreme outcomes for key variables
We translate these factors into the language of probability to avoid ambiguous meanings about their range and prevalence
This gives us the power to understand what can go wrong, what the upside may be, and the likelihood for each
By exploring how much tolerance we have for failure we can develop rational risk mitigation plans
Conversely, by exploring what can go right, we can develop creative competitive strategies
We recognize assumption as uncertainties
$ NPV
Pro
babi
lity
$0
We observe results as
distributions
Simulation Engine!
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Uncertainty analysis reveals which uncertainties need our most attention for risk management
These assumptions are critical
value drivers
Minor value
drivers
$80 $0
Price of commodity product
User adoption
Regulatory approval
Market size
NPV, $million
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We don’t need to worry about every uncertainty – just those that matter!
When we compare multiple alternatives, uncertainty analysis shows where we need to…
Gather more information to avoid regret by choosing the “best” strategy over ones that could overlap in value
Explore the effects of specific value drivers to build hybrid strategies that maximize value and minimize risk
Current Strategy
0 100 200 300 400 500 600 700 800 NPV ($ millions)
Pricing
Regulatory Approval
Market Share
Market Size
Market Growth
SG&A
Acquisition Cost
COGS Device
R&D Cost
COGS Product
Acquisition Strategy
License Strategy
These assumptions are critical
value drivers
Minor value
drivers
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By not explicitly considering uncertainty in planning
We expose ourselves to unforeseen risks that could have been anticipated
We fail to look for ways to capture the full potential value available to us
We waste time and resources controlling for outcomes that don’t really matter
We fail to adopt the mature attitude of considering perspectives and outcomes beyond our biases
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