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Slide 1: Managing Decision Under Uncertainties Dr. Elijah Ezendu FIMC, FCIM, FIIAN, FBDI, FAAFM, FAAPM, FCCM, MIMIS, MITD, ACIArb, ACIPM, PhD, DocM, MBA, CWM, CBDA, CMA, MPM, PME, CSOL, CCIP, CMC
Slide 2: Learning Objectives At the end of the course, participants should be able to do the following:  Recognize the importance of managing decision  Identify effects of risks and uncertainties on decisions  Identify the sources and levels of uncertainties  Manipulate uncertainties effectively while managing decision  Conduct decision profiling
Slide 3: “Decisions under uncertainty are high-stakes gambling where factors such as human life, health, economic prosperity, or the environment are concerned.” - Norman Shultz
Slide 4: “The complexity of most issues makes it impossible to completely predict what will happen if a particular decision is made or if a dispute is resolved in a particular way. This is very clear in scientific and technical disputes (on the severity or implications of greenhouse warming, for example), but it occurs in non-scientific disputes as well. (For example, how many people will lose their jobs if the government adopts a new economic policy).” Source: Conflict Research Consortium
Slide 5: “Every firm deals with uncertainty in one way or another. Uncertainty is not often addressed very well in competitive strategy formulation.” - Michael Porter
Slide 6: Event: Occurrence of something Outcome: Result or consequence of event Probability: The likelihood of an outcome Value at Risk: Amount of loss if a negative event happens
Slide 7: Certainty, Risk & Uncertainty Certainty: This is a situation wherein the outcome that will occur is known. Risk: This is a situation wherein all possible outcomes and the probability of occurrence are known , even as one does not know which outcome shall surely occur. Uncertainty: This is a situation wherein the possible outcomes or probability of the outcomes is unknown, or both the possible outcomes and probability of outcomes are unknown.
Slide 8: Positioning Uncertainty & Risk Uncertainty Risk and Uncertainty Risk Probabilities [and Outcomes] Unknown Some Knowledge Of Probabilities [and Outcomes] Probabilities [and Outcomes] Known Source: Casavant, Kenneth, Infanger and Bridges
Slide 9: Differentiating Risk from Uncertainty Risk is a state which probabilistic distributions can be assigned and expected values can be determined. In the case of uncertainty, probabilistic distribution can’t be assigned and expected values can’t be determined
Slide 10: Exercise 1. Mention 5 examples of Certainty 2. Mention 5 examples of Risk 3. Mention 5 examples of Uncertainty
Slide 11: Impact of Risk and Uncertainty on Choices During Decision Making • Lower risk and uncertainty are preferable situations: If the management of a firm fail to think about risk and uncertainty, it may end in quandary. • As risk and uncertainty increases, some strategic choices become more valuable than others: At high levels of risk and uncertainty, the best strategic choices are those that boost an organisation’s flexibility and sustain open options.
Slide 12: “Uncertainty confounds the planning process by invalidating the rules of the game under which the industry has operated, without revealing obvious new rules.” - Dennis Kennedy
Slide 13: Sources of Uncertainty Source: Elijah Ezendu, Decision-Making
Slide 14: Demand Structure • • • • Customer Preferences Market Size Price Responsiveness Segmentation Externalities • • • • Industry Structure Government Regulation Influence of Non Governmental Organisations Social Norms
Slide 15: Supply Structure • New Products • New Processes • New Technology Competitors • Nature of Competitors • Strategies of Competitors • Behaviours of Competitors
Slide 16: Internal Forces • Alignment of Ownership • Behaviour of Management • Behaviour of Employees Time • The Rapidity of a Phenomenon
Slide 17: “Whether it is uncertainty, risk, or somewhere inbetween there is one strategy that always improves the manager’s ability to make sound management decisions and that is information. The more information a manager has on the potential uncertainties and risks that they face, then the more they can establish probabilities of likely outcomes, evaluate the impact on the business, and evaluate risk management strategies accordingly.” - Kevin Bernhardt
Slide 18: Levels of Uncertainty
Slide 19: Clear Trends These are factors that are plain and can be investigated without problems, and their details are knowable, while the activities can be predictable on probing deeper therein. For example assumptions about upward trend in the society, market and economic bloc.
Slide 20: Unknowns That Are Known This second level of uncertainty is characterized by factors which when subjected to proper analysis , their probability of outcome can be known. For example demand trends and consumer preferences.
Slide 21: Residual Uncertainty This is the topmost level of uncertainty and its distinctive features are complexity and futility in every attempt of people to conduct analysis for predicting occurrence. Therefore, residual uncertainty normally cause fear, stress and discomfort to decision makers. Nevertheless, movement from one position of time to another, may be able to downgrade it to a lower level of uncertainty. For example the effect of consumer choice on the future of financial services
Slide 22: Exercise As a forward looking professional, conduct a comprehensive profile of your career and pinpoint your goals. Thereafter, identify your career certainties, career risks and career uncertainties.
Slide 23: Bernoulli’s Model of Different Risk Perspectives Utility Risk-Averse Risk-Seeking Risk Neutral Money Source: Begg, Bratvold and Campbell, Decision-Making Under Uncertainty
Slide 24: Risk Perspectives in Decision Making i. Risk-Averse: This involves preference for a certain outcome instead of a gamble with expected value of wealth. When a Risk-Averse decision-maker acts, a risky opportunity would be exchanged for one that has a definite outcome. This is characterized by diminishing marginal utility of wealth. ii. Risk Neutral: This is indifferent between the certain outcome and gamble. The Risk Neutral attitude to decisionmaking focuses on expected value. iii. Risk-Seeking: This involves preference for the gamble instead of the certain outcome. Risk-Seeking decisionmaker would want to be paid an amount higher than the expected value, so as to exchange the risky decision for the certain one. This is characterized by increasing marginal utility of wealth.
Slide 25: “Most decisions to do something positive…. Can only be taken as a result of animal spirits- of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” - John Maynard Keynes
Slide 26: Common Biases Hindering Effective Management of Decisions • • • • Availability Bias Undue Optimism and Overconfidence Seeing Object of Belief Anchoring on Idea
Slide 27: Handling Uncertainties Exogenous Uncertainty • Identify technological uncertainties and ascertain market potential • Limit the firm’s exposure • Uphold flexibility Endogenous Uncertainty • Identify optimal entry time with reference to competitor entry • Build internal teams and alliance relationships.
Slide 28: Limitations of Using NPV Analysis Under Uncertainties 1. Information pertaining to cash flow may not be available. 2. Assumes uncertainty and risk remains constant 3. It does not track the value of future strategies that are enabled by current strategy
Slide 29: The Place of Scenario Analysis in Managing Decision Under Uncertainties • It gives room for alternative values of strategies based on alternative contributory factors • It does not handle the second and third limitation of NPV Analysis
Slide 30: Limitations of Real Options in Managing Decision Under Uncertainty 1. The problem of balancing flexibility with commitment 2. Variation in responsiveness of products/opportunities to capital market assumptions
Slide 31: Flexibility Versus Commitment 1. When commitment become successful, it gives superior performance 2. Flexibility to go for additional options could be connected to previous commitment 3. Even if the value of flexibility is increased by uncertainty, obviously it’s not right to be totally flexible.
Slide 32: Decision Profiling This is done by identifying and examining the past choices and their basis in line with standards , so as to ensure compliance of decision thrust to stated objectives.
Slide 33: Case Study The Chief Executive Officer of Kestel Bank invited you as a consultant to conduct management decision profiling, so as to ascertain the veracity of their decision thrust in improving competitiveness. Explain how you would conduct it vis-à-vis the internal and external realities of the bank.
Slide 34: Dr. Elijah Ezendu is a multidisciplinary professional whose business experience mounts through diverse fields. He is a Certified Management Consultant, licensed by International Council of Management Consulting Institutes which has a Special Consultative Status in United Nations Economic and Social Council. As a result of his strides in management consulting, he received Merit Award for Excellence in Consulting. He is concurrently Senior Partner, Shevach Consulting; Director of Strategy and Performance, Fortuna; Lead Assessor and Member of Governing Council, Institute of Management Consultants; Director of Training, International Council of Business Development Professionals; Member of Marketing Committee, International Council of Management Consulting Institutes; Honorary Global Advisor, International Project Management Commission; and Programme Coordinator (Nigeria), Regent Business School, South Africa. He holds a doctoral degree in Management from St. Clements University, British West Indies. He is a Chartered Manager certified by Canadian Institute of Management, Canada and holds numerous professional qualifications including Master Project Manager; Project Manager E-Business; Fellow, Institute of Management Consultants; Fellow, Certified Institute of Cost Management; Fellow, Institute of Business Development; Fellow, American Academy of Financial Management; Fellow, Institute of Internal Auditors; Member, Nigerian Institute of Training and Development; Member, Institute of Analytics Professionals; Associate, Chartered Institute of Personnel Management of Nigeria; Associate, Chartered Institute of Arbitrators (Nigeria). He is a Certified Business Development Analyst and Competitive Intelligence Professional. Additionally, he is an information technology management professional certified by Institute for the Management of Information Systems, UK along with Microsoft Corporation, USA and stands as a Member of International Association of Software Architects. He is an outstanding motivational speaker with a knack for recalibration of positive influence; and a world-class consultant, who has functioned as Speaker/Facilitator at myriad programmes of professional institutes, international development organisations, private and public firms including extra-governmental agencies and institutions. He is a prolific writer and author who had served as Editor-in-Chief, Cost Management Journal; Part-Time Lecturer & External Examiner (MBA Programme), Ladoke Akintola University of Technology; Director of MBA Programme (Nigerian Outreach), Management Institute of Canada; Chief Operating Officer, Rohan Marine; Second Vice President and Member of Governing Council, Certified Institute of Cost Management; Director of Programmes and Member of Governing Council, The Institute of Business Development; Director, Refined Shipping; and Examiner to various Professional Institutes.
Slide 35: Merci Beaucoup For additional information: Dr. Elijah Ezendu elezendu@yahoo.com, 234 8033024596, 234 8058835237