In the first part, we had introduced the concept of strategic decision making under uncertainty and the different types of uncertainty. We had also identified four levels of uncertainty, and the first two levels were discussed in detail. Refer to our earlier article "Strategy under uncertainty - Part 1 of 2"
Here we discuss the remaining two levels of uncertainty.
Level 3: Range of futures
A range of potential futures can be identified and these are defined by a few key variables whereas the actual results may lie anywhere within it. As in level two, soma, and possibly all, elements of the strategy may change if the outcome were predictable.
Companies entering new markets or companies in technology-driven fields may often face level three uncertainty. The research may indicate a broad range, say 10 to 30 % success and there would be no obvious scenarios within that range making it difficult to determine the demand. When deciding whether to invest in new technology only a broad range of cost and performance attributes.
The analysis is similar to that in level two - a set of scenarios describing alternative outcomes to be identified. However, developing a set of outcomes is less straight forward in level three. There are no other natural discrete scenarios, deciding on the outcome is a real art.
First, develop a limited number of scenarios, not more than four. Second, avoid developing scenarios that do not imply decisions making. Third, develop a set of scenarios that account for the probable range of outcomes. This should also the managers to establish how robust their strategies are, likely winners or losers, and the risk of the strategies.
Strategies: Shaping in level three is to try to move the market in a general direction as they can identify only a range of possible outcomes. One may adopt an adapter posture through investments in organizational capabilities designed to keep options open. Reserving the right to play is often the common posture.
Level four: True ambiguity
Various dimensions of uncertainty interact to create an environment where it is impossible to predict an outcome. It might not even be possible to identify, much less predict, all relevant variables that will define the future.
This situation is rare and they tend to move towards the other three levels. It is very difficult to make strategic decisions in level four but at the same time, it should be understood that level four situations are transitory and they will gradually migrate to level three or two as the industry begins to take shape over the next several years.
The situation analysis at level four is qualitative. It is critical not to act purely on instinct. Managers need to catalog what they know and what is possible to know. Even if it is impossible to give a range of possible outcomes, managers can give valuable strategic perspectives. They can identify a subset of variables determining how the market will behave over time. They can also identify the favorable and unfavorable indicators of these variables and adjust their strategy as new information is available. Though it will be impossible to quantify the risk and returns, managers must identify what information they must believe to justify the investment. Early market indicators would help sort out if these beliefs are realistic.
Though level four involves the greatest uncertainty, they may offer higher returns and lower risks for companies seeking to shape the markets. Level four situations are transitional by nature, the shaper's role is to provide a vision for industry structure and standards that will drive coordinate the strategies of other players and drive the market towards a more stable and favorable outcome. Shapers need not make heavy investments but have the credibility to coordinate the strategies of different players in line with the preferred outcome.
Reserving the right to play is not an option in level four. Level four situations are transitional and move quickly toward level three or two. The difficulty in managing options at level four drivers players to adapter postures. Such a posture in level four is frequently implemented by investing in organizational capabilities.
This approach offers a discipline for thinking rigorously and systematically about uncertainty. It makes it possible for companies to analyze which tools can and which cannot help them make decisions at various levels of uncertainty. It provides a framework to tackle the most challenging decisions executives have to make, offering a complete understanding of the uncertainty they face and its implications for the strategy.
Strategy under uncertainty by
Hugh G. Courtney, Jane Kirkland, and S. Patrick Viguerie
Mckinsey 2000/03
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