Management comprises directing and controlling a group of one or more people or entities for the purpose of co-ordinating and harmonising that group towards accomplishing a goal. Management often encompasses the deployment and manipulation of human resources, financial resources, technological resources, and natural resources.
This book deals with management problems within a global context and presents the latest research in this growing field. Dall'interno del libro. Indice Research on the Antecedents and Outcomes. Partner Selection Factors and Ventures. Influence of Industrial Structure on Managerial. Informazioni bibliografiche. Global management : strategy, challenges, and uncertainties Alejandro L. At level 4, it is critical to avoid the urge to throw up your hands and act purely on gut instinct. Managers can also identify patterns indicating possible ways the market may evolve by studying how analogous markets developed in other level 4 situations, determining the key attributes of the winners and losers in those situations and identifying the strategies they employed.
Finally, although it will be impossible to quantify the risks and returns of different strategies, managers should be able to identify what information they would have to believe about the future to justify the investments they are considering. Early market indicators and analogies from similar markets will help sort out whether such beliefs are realistic or not. Uncertainty demands a more flexible approach to situation analysis. The old one-size-fits-all approach is simply inadequate. Over time, companies in most industries will face strategy problems that have varying levels of residual uncertainty, and it is vitally important that the strategic analysis be tailored to the level of uncertainty.
Before we can talk about the dynamics of formulating strategy at each level of uncertainty, we need to introduce a basic vocabulary for talking about strategy. Second, there are three types of moves in the portfolio of actions that can be used to implement that strategy: big bets, options, and no-regrets moves.
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Any good strategy requires a choice about strategic posture. Fundamentally, posture defines the intent of a strategy relative to the current and future state of an industry. Shapers aim to drive their industries toward a new structure of their own devising. Their strategies are about creating new opportunities in a market—either by shaking up relatively stable level 1 industries or by trying to control the direction of the market in industries with higher levels of uncertainty.
Kodak, for example, through its investment in digital photography, is pursuing a shaping strategy in an effort to maintain its leadership position, as a new technology supersedes the one currently generating most of its earnings. Hewlett-Packard also seeks to be a shaper in this market, but it is pursuing a radically different model in which high-quality, low-cost photo printers shift photo processing from stores to the home. In contrast, adapters take the current industry structure and its future evolution as givens, and they react to the opportunities the market offers.
In environments with little uncertainty, adapters choose a strategic positioning—that is, where and how to compete—in the current industry. At higher levels of uncertainty, their strategies are predicated on the ability to recognize and respond quickly to market developments. In the highly volatile telecommunications-service industry, for example, service resellers are adapters.
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They buy and resell the latest products and services offered by the major telecom providers, relying on pricing and effective execution rather than on product innovation as their source of competitive advantage. The third strategic posture, reserving the right to play, is a special form of adapting. This posture is relevant only in levels 2 through 4; it involves making incremental investments today that put a company in a privileged position, through either superior information, cost structures, or relationships between customers and suppliers.
That allows the company to wait until the environment becomes less uncertain before formulating a strategy. Many pharmaceutical companies are reserving the right to play in the market for gene therapy applications by acquiring or allying with small biotech firms that have relevant expertise. A posture is not a complete strategy. It clarifies strategic intent but not the actions required to fulfill that intent. Three types of moves are especially relevant to implementing strategy under conditions of uncertainty: big bets, options, and no-regrets moves.
Big bets are large commitments, such as major capital investments or acquisitions, that will result in large payoffs in some scenarios and large losses in others. Not surprisingly, shaping strategies usually involve big bets, whereas adapting and reserving the right to play do not. Options are designed to secure the big payoffs of the best-case scenarios while minimizing losses in the worst-case scenarios.
This asymmetric payoff structure makes them resemble financial options. Most options involve making modest initial investments that will allow companies to ramp up or scale back the investment later as the market evolves. Classic examples include conducting pilot trials before the full-scale introduction of a new product, entering into limited joint ventures for distribution to minimize the risk of breaking into new markets, and licensing an alternative technology in case it proves to be superior to a current technology.
Those reserving the right to play rely heavily on options, but shapers use them as well, either to shape an emerging but uncertain market as an early mover or to hedge their big bets. Finally, no-regrets moves are just that—moves that will pay off no matter what happens. Managers often focus on obvious no-regrets moves like initiatives aimed at reducing costs, gather-ing competitive intelligence, or building skills. However, even in highly uncertain environments, strategic decisions like investing in capacity and entering certain markets can be no-regrets moves.
Whether or not they put a name to them, most managers understand intuitively that no-regrets moves are an essential element of any strategy. The choice of a strategic posture and an accompanying portfolio of actions sounds straightforward. But in practice, these decisions are highly dependent on the level of uncertainty facing a given business. Thus the four-level framework can help clarify the practical implications implicit in any choice of strategic posture and actions. The discussion that follows will demonstrate the different stra-tegic challenges that each level of uncertainty poses and how the portfolio of actions may be applied.
In predictable business environments, most companies are adapters. When the underlying analysis is sound, such strategies are by definition made up of a series of no-regrets moves. Adapter strategies in level 1 situations are not necessarily incremental or boring. In both cases, managers were able to identify unexploited opportunities in relatively low-uncertainty environments within the existing market structure.
The best level 1 adapters create value through innovations in their products or services or through improvements in their business systems without otherwise fundamentally changing the industry. It is also possible to be a shaper in level 1 situations, but that is risky and rare, since level 1 shapers increase the amount of residual uncertainty in an otherwise predictable market—for themselves and their competitors—in an attempt to fundamentally alter long-standing industry structures and conduct.
Smith commissioned detailed consulting reports that confirmed the feasibility of his business concept, only a broad range of potential demand for overnight services could be identified at the time. Over time, the industry returned to level 1 stability, but with a fundamentally new structure. What portfolio of actions did it take to realize that strategy?
How Do You Plan for Uncertainty?
Like most shaper strategies, even in level 1 situations, this one required some big bets. That said, it often makes sense to build options into a shaper strategy to hedge against bad bets. Such moves would have limited the amount of capital he would have needed to sink into his new strategy and facilitated a graceful exit had his concept failed. Thus Smith stuck mainly to big bets in implementing his strategy, which drove him to the brink of bankruptcy in his first two years of operation but ultimately reshaped an entire industry.
If shapers in level 1 try to raise uncertainty, in levels 2 through 4 they try to lower uncertainty and create order out of chaos. In level 2, a shaping strategy is designed to increase the probability that a favored industry scenario will occur. Consequently, shapers in such cases might commit their companies to building new capacity far in advance of an upturn in demand to preempt the competition, or they might consolidate the industry through mergers and acquisitions. A few years ago, one could identify a discrete set of possible ways in which transactions would be conducted between networked computers.
Either proprietary networks such as MSN would become the standard, or open networks like the Internet would prevail. Uncertainty in this situation was thus at level 2, even though other related strategy issues—such as determining the level of consumer demand for networked applications—were level 3 problems. Microsoft could reasonably expect to shape the way markets for electronic commerce evolved if it created the proprietary MSN network. It would, in effect, be building a commerce hub that would link both suppliers and consumers through the MSN gateway.
The strategy was a big bet: the development costs were significant and, more important, involved an enormously high level of industry exposure and attention. In effect, for Microsoft, it constituted a big credibility bet. But even the best shapers must be prepared to adapt. In the battle between proprietary and open networks, certain trigger variables—growth in the number of Internet and MSN subscribers, for example, or the activity profiles of early MSN subscribers—could provide valuable insight into how the market was evolving.
When it became clear that open networks would prevail, Microsoft refocused the MSN concept around the Internet. Shaping strategies can fail, so the best companies supplement their shaping bets with options that allow them to change course quickly if necessary. Microsoft was able to do just that because it remained flexible by being willing to cut its losses, by building a cadre of engineers who had a wide range of general-programming and product-development skills, and by closely monitoring key trigger variables.
In uncertain environments, it is a mistake to let strategies run on autopilot, remaining content to update them only through standard year-end strategy reviews. Shaping strategies can fail, so the best companies supplement their shaping bets with options that let them change course quickly. Because trigger variables are often relatively simple to monitor in level 2, it can be easy to adapt or reserve the right to play. For instance, companies that generate electricity—and others whose business depends on energy-intensive production processes—often face level 2 uncertainty in determining the relative cost of different fuel alternatives.
Discrete scenarios can often be identified—for example, either natural gas or oil will be the low-cost fuel. Many companies thus choose an adapter strategy when building new plants: they construct flexible manufacturing processes that can switch easily between different fuels. Chemical companies often choose to reserve the right to play when facing level 2 uncertainty in predicting the performance of a new technology. If the technology performs well, companies will have to employ it to remain competitive in the market.
But if it does not fulfill its promise, incumbents can compete effectively with existing technologies.
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Most companies are reluctant to bet several hundred million dollars on building new capacity and retrofitting old plants around a new technology until it is proven. Thus many will purchase options to license the new technology within a specified time frame or begin retrofitting a proportion of existing capacity around the new technology.
In either case, small, up-front commitments give the companies privileged positions, but not obligations, to ramp up or discontinue development of the new technology as its performance attributes become clearer over time. Shaping takes a different form in level 3. If at level 2, shap-ers are trying to make a discrete outcome occur, at level 3, they are trying to move the market in a general direction because they can identify only a range of possible outcomes.
Consider the battle over standards for electronic cash transactions, currently a level 3 problem since one can define a range of potential products and services that fall between purely paper-based and purely electronic cash transactions, but it is unclear today whether there are any natural discrete scenarios within that range. Mondex International, a consortium of financial services providers and technol-ogy companies, is attempting to shape the future by establishing what it hopes will become universal electronic-cash standards. Its shaping posture is backed by big-bet investments in product development, infrastructure, and pilot experiments to speed customer acceptance.
In contrast, regional banks are mainly choosing adapter strategies. An adapter posture at uncertainty levels 3 or 4 is often achieved primarily through investments in organizational capabilities designed to keep options open. Because they must make and implement strategy choices in real time, adapters need quick access to the best market information and the most flexible organizational structures.
In addition, many regional banks are making small investments in industry consortia as another way to monitor events. Reserving the right to play is a common posture in level 3. The decision hinged on level 3 uncertainties such as demand for interactive TV service. However, making incremental investments in broadband-network trials could provide useful information, and it would put the company in a privileged position to expand the business in the future should that prove attractive. By restructuring the broadband-investment decision from a big bet to a series of options, the company reserved the right to play in a potentially lucrative market without having to bet the farm or risk being preempted by a competitor.
Paradoxically, even though level 4 situations contain the greatest uncertainty, they may offer higher returns and involve lower risks for companies seeking to shape the market than situations in either level 2 or 3. Recall that level 4 situations are transitional by nature, often occurring after a major technologi-cal, macroeconomic, or legislative shock. This is truly a level 4 strategy problem at this point.
Potential products are undefined, as are the players, the level of customer demand, and the technology standards, among other factors. By leveraging incentives like a ten-year exemption from the tax on profits, the MSC has received commitments from more than 40 Malaysian and foreign companies so far, including such powerhouses as Intel, Microsoft, Nippon Telegraph and Telephone, Oracle, and Sun Microsystems.
Shapers need not make enormous bets as the Malaysian government is doing to be successful in level 3 or 4 situations, however. All that is required is the credibility to coordinate the strategies of different players around the preferred outcome. Netscape relied on its credibility, rather than deep pockets, to shape Internet browser standards.
Reserving the right to play is common, but potentially dangerous, in level 4 situations. Oil companies believed they were reserving the right to compete in China by buying options to establish various beachheads there some 20 years ago. However, in such level 4 situations, it is extremely difficult to determine whether incremental investments are truly reserving the right to play or simply the right to lose. A few general rules apply. First, look for a high degree of leverage. If the choice of beachhead in China comes down to maintaining a small, but expensive, local operation or developing a limited joint venture with a local distributor, all else being equal, go for the low-cost option.
Higher-cost options must be justified with explicit arguments for why they would put the company in a better position to ramp up over time. Options should be rigorously reevaluated whenever important uncertainties are clarified—at least every six months. Remember, level 4 situations are transitional, and most will quickly move toward levels 3 and 2.
How to think about risk when there is extreme uncertainty?
The difficulty of managing options in level 4 situations often drives players toward adapter postures. As in level 3, an adapter posture in level 4 is frequently implemented by making investments in organizational capabilities. Most potential players in the multimedia industry are adopting that posture today but will soon be making bigger bets as the industry moves into level 3 and 2 uncertainty over time. At the heart of the traditional approach to strategy lies the assumption that by applying a set of powerful analytic tools, executives can predict the future of any business accurately enough to allow them to choose a clear strategic direction.
In relatively stable businesses, that approach continues to work well. But it tends to break down when the environment is so uncertain that no amount of good analysis will allow them to predict the future. Levels of uncertainty regularly confronting managers today are so high that they need a new way to think about strategy. It offers a discipline for thinking rigorously and systematically about uncertainty. On one plane, it is a guide to judging which analytic tools can help in making decisions at various levels of uncertainty and which cannot.
On a broader plane, our framework is a way to tackle the most challenging decisions that executives have to make, offering a more complete and sophisticated understanding of the uncertainty they face and its implications for strategy. The authors would like to thank their STI colleagues for their significant contributions to this article.
Three ways you can turn uncertainty into opportunity
Managing uncertainty. November—December Issue Explore the Archive. The Idea in Brief Are you using traditional analytic tools—market research, value chain analysis, assessments of rivals—to inform your strategy? The Idea in Practice Confronting Uncertainty 1. Apply appropriate analytic tools to identify strategic options. They can take three forms: Shaping—driving your industry toward a new structure of your devising and creating new opportunities.
Three ways you can turn uncertainty into opportunity
Hewlett-Packard shifted photo processing from stores to homes by offering high-quality, low-cost photo printers. Adapting—choosing where and how to compete within the current industry structure. Many telecommunications service resellers pursue competitive advantage through pricing and effective execution rather than product innovation.
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Reserving the right to play—making incremental investments to stay in the game without committing to a new strategy prematurely. Some pharmaceutical companies reserve the right to play in gene-therapy applications by buying small biotech firms with relevant expertise. Use one or more of these moves depending on your strategic posture: Big bets—major commitments capital investments, mergers or acquisitions that will generate large payoffs in some scenarios and large losses in others. Options—modest initial investments pilot trials, limited joint ventures, technology licensing that enable you to ramp up or scale back your investment later as the market evolves.
No-regrets moves—actions that pay off no matter what happens, such as cost-cutting initiatives and competitor intelligence. Under uncertainty, traditional approaches to strategic planning can be downright dangerous. How to Use the Four Levels of Uncertainty. The following sources will help managers get started: Scenario Planning.
Game Theory. System Dynamics. Agent-Based Models. Real Options. The Three Strategic Postures. Partner Center.