The economic shock of 2008 and the Great Recession that followed did not just create profound uncertainty over the direction of the global economy. They also shook the confidence of many business leaders in their ability to see the future well enough to take bold action.
It’s not as if CEOs don’t know how to make good Decisions Under Uncertainty. One of the tools used is scenario building.Scenarios are a powerful tool in the strategist’s armory. They are particularly useful in developing strategies to navigate the kinds of extreme events we have recently seen in the world economy. Scenarios enable the strategist to steer a course between the false certainty of a single forecast and the confused paralysis that often strike in troubled times. These approaches are extraordinarily valuable amid today’s volatility, and many well-run companies have adopted them, over the years, for activities such as capital budgeting. The very process of developing scenarios generates deeper insight into the underlying drivers of change. Scenarios force companies to ask, “What would have to be true for the following outcome to emerge?” As a result, they find themselves testing a wide range of hypotheses involving changes in all sorts of underlying drivers. They learn which drivers matter and which do not-and what will actually affect those that matter enough to change the scenario. Sudden spikes in raw-material costs, unexpected price drops, major technological breakthroughs-any of these might take down many large businesses. Companies can’t build all possible events into their scenarios and should not spend too much time on the low-probability ones. But they must be sure of surviving high-severity outcomes, so such possibilities must be identified and kept on a watch list.
The analysis generated by scenario building or any other techniques is not enough. What is very important is making decisions when the time is right and before any of the competitors. What CEO must do is to set a goal which is considered as robust scenario even in a downturn without being over optimistic. He must provide inspiring leadership and communicate single goal.
One must have innovative strategies to achieve the goal. This will be possible by bringing senior leadership on the same page. The smaller the number of leaders, the easier it is to have the intensity of interaction needed to make critical decisions effectively and collaboratively. On the other hand, the number must be large enough so that the people involved in decision making can collectively access the full spectrum of knowledge embedded in a company’s people and its relationships with other organizations. The knowledge, skill, and experience of these leaders make them better suited than anyone else to act decisively when the time is right. Such executives are also well placed to build the organizational capabilities needed to face critical issues early and then use the extra lead time to gather intelligence, to conduct the need analyses, and to debate their implications. This will require moving toward more dynamic management style which includes migrating away from rigid, calendar-based approaches to budgeting and planning. This will require collectively significant, shifts in their operating practices
Since determining what to do under uncertainty usually requires careful debate among many people across the entire company, you need processes and protocols to determine how issues are raised, how deliberation is conducted, and how decisions are made. You also need to clearly lay out the obligations of managers, once the debate and decision making are over, to put their full weight behind making the resulting actions successful.
Just-in-time (JIT) decision making:
Much of the art of decision making under uncertainty is getting the timing right. If you delay too much, opportunity costs may rise, investment costs may escalate, and losses can accumulate. However, making critical decisions too early can lead to bad choices or excessive risks. The timely decision is more important in the early identification of opportunities and threats from external factors on which company has no control. Which includes changes in demand, technology micro economic factors, valuation of currency, changing interest rate etc. If a critical issue surfaces early, there is usually enough time to use proven problem-solving approaches to making decisions under uncertainty.