Mastering Uncertainty - #EVA25evaintheuk.org/wp-content/uploads/2018/05/StephenBungay.pdf© Copyright 2018 Bungay and Homkes Navigating in uncertainty Reappraise the situation. Title:

© Copyright 2018 Bungay and Homkes

Mastering Uncertainty

Making better strategic decisionsin an uncertain world

Stephen BungayAshridge Strategic Management Centre

© Copyright 2018 Bungay and Homkes 2

It is an uncertain worldPolitical Economic

TechnologicalSocial


What does your business environment look like?


Uncertainty - two common but dysfunctional reactions

Assume we can predict –so plow ahead (aka ‘I’ve got this’)

Assume we must wait until uncertainty clears (aka ‘the holding pattern’)

DELUSIONConsequence: hit the rocks

PARALYSISConsequence: drift and sink


The issue:how to make good decisions when you

cannot make good predictions


Understanding uncertainty: mental attitudes

Real uncertainty is a fundamental state of reality we have to take account of

Uncertainty is simply the totality of future events which may or may not occur – and may be good or bad

We should place uncertainty at the centre of our approach, not something to adjust for

Higher relative rate of learning results in competitive advantage


Exploiting real uncertainty – chance events can be opportunities

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Approaching uncertainty: practices

1. Assess the situation and state your beliefs

2. Set compass heading and pace

3. Avoid killers and look for kickers

4. Choose a stance, observe the effects and reappraise


Business Agenda:Known Options

Decide how to make them robust and affordable

Executive Agenda:Big Bets

Decide when and how much to commit

Operational Agenda: Business as Usual

Decide about what is needed to maintain operations

Emerging Agenda:Watching Brief

Decide how much to invest to learn and create options

High

Low

Potential Impact

Familiarity to the Organisation

High Low

Orientate by assessing the uncertainty of the environment


Probabilistic Exploratory

Familiarity to the Organisation

Potential Impact

Different types of uncertainty imply different approaches

Based on data

Variables are identifiable

Known unknowns

Set destination

Manage

Optimise decisions for value

Based on beliefs

Variables are unknown

Unknown unknowns

Set compass heading

Exploit

Optimise decisions for robustness


Articulate a set of plausible beliefs

1. Oil and gas will form a significant but declining part of the energy mix for the next two decades

2. US shale and gas are new swing producers of hydrocarbons, thereby setting a cap on long-term prices

3. Most likely cap is around $60/bbl for Brent crude

4. OPEC will not make any major interventions in the market over the next two years


Take bearings, set compass heading and pace

© Copyright 2017 Rebecca Homkes 13

Destination vs Direction


Mapping the probability space

KiIlers

Weigh and playthe odds:JUDGE

Identify where we are

vulnerable:PROTECT

Exposure to serendipity:

EXPLOIT

Kickers

Likelihood

ConsequencesWhat could kill us?

What is non-negotiable for survival?

Are there options with a kicker?What chance events could we

exploit?

What decisions do we have to make?What uncertainties can we identify?

What are our current beliefs?

UnfamiliarFamiliarUnfamiliar


Avoid what could kill you

‘I’m a functional paranoid – I have the unhappy life of having to spend 98% of my time worried about the 2% worst contingencies.’

Lloyd Blankfein, CEO, Goldman Sachs, Business Insider June 11 2014


Assume you do not know and avoid big mistakes

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“Past does not predict the future”

“Forecasts are inappropriate”

“Radically uncertain future”

“Consider a range of plausible futures”

“Consider ‘minimise maximum regret’”

Shell Scenarios, modelling and decision-making, September 6 2017

© Copyright 2018 Bungay and Homkes 17

And be open to exploiting serendipity-rich environments

‘Nitric oxide was a sexy compound, attracting a lot of scientific attention. In 1992 it was nominated ‘Molecule of the Year’.

Peter Ellis, research scientist, Pfizer


The strategy journey involves adopting a series of stances

Wait

Act

Analyze

Watch

Ready to pounce

Shape

Results

Learn Experiment

Evolutionary design

Based on analysis

Based on beliefs

The analytical approach

The apprehensive crouch

The crouching tiger

The savvy shaper

The experimenter

The evolutionary designer

The calculating player

The bold player


Honda motorcycles in the US, 1959-1964

Wait

Act

Analyze

Watch

Ready to pounce

Shape

Results

Learn Experiment

Evolutionary design

Based on analysis

Based on beliefs

1. Analyse US market and make aplan: go through dealers, target enthusiasts with 250-300cc bikes

3. Forced to wait for bikes to beModified but observe interest in Supercubs

5. Shape market with ‘You meet thenicest people on a Honda’ campaign

2. Summer 1959 set up in LA –poor sales, bikes break down

4. Sign up Sears


Advantage lies in relative rate of learning

20


Navigating in uncertainty

Reappraise the situationHas the situation changed?Are our beliefs still valid?

Take action

Choose a stance

Make a New DecisionCheck compass heading and

paceLook out for new hazards and

look for kickersA decision can be to do nothing

or carry on (Decide not to decide)

Observe the effects:

new datanew events

Documents

Mastering Uncertainty - #EVA25evaintheuk.org/wp-content/uploads/2018/05/StephenBungay.pdf© Copyright 2018 Bungay and Homkes Navigating in uncertainty Reappraise the situation. Title: