Planning for Change and Uncertainty ISMT 200G -- March 20, 2007 Dr. Theodore H. K. Clark Associate Professor and Academic Director of MSc in IS Management Program Department of Information & Systems Management The Hong Kong University of Science & Technology and Adjunct Associate Professor of Operations & Information Management (Information Economics and Strategy Group) The Wharton School of the University of Pennsylvania

HKUST Business School 2 Organizational Planning Given Future Uncertainty and Change “One thing you can be sure of is that there’s nothing to be sure of” Business implications of new innovations Consumer behavior and future customer needs almost impossible to predict Pace of innovation MAY be predictable, but not the fit between innovations and market needs Copying cheaper than innovating (fast follower wins!) Getting timing right and moving fast is critical

HKUST Business School 3 Benefits and Costs of Investing in Flexibility for Manufacturing Flexible manufacturing versus Automation Fast Responsiveness at Low Cost (Goal) Flexible manufacturing delivers both, but at COST Automation is low cost at less investment Manual process is flexible, but high cost Why not pick either Manual or Automation, depending on what your business needs? Investments in Flexible Manufacturing can be viewed as creating an option on the future.

HKUST Business School 4 Investments in Business Planning as Future Decision Automation Traditional business planning process requires firms to make many decisions in advance Detailed plans and high level approvals Plan the work, then work the plan Limits future decisions, which can save time later However, traditional planning approaches are often criticized as being too inflexible Automation of management decisions - low cost and better planned, but not responsive to change

HKUST Business School 5 Investment in Flexible Business Planning: Scenario Planning Similar to flexible manufacturing, scenario planning creates option value for the future Traditional planning => factory automation Entrepreneurial management => manual labor Scenario planning => flexible manufacturing This is an INVESTMENT which has a COST Senior management time required for planning Management time as a scarce resource Low probability of high payoff (option investment)

HKUST Business School 6 Scenario Planning as Strategic Advantage: Shell Oil Example In mid-1970s, we had lots of data on oil prices, with price always declining over time However, there were indications of change on the horizon which could change this trend Most firms thought about this as a risk which was not quantifiable, but did little to plan for possible changes in their environment Shell Oil created a Scenario Planning model to enable fast response to external change

HKUST Business School 7 The Scenario Planning Process Brainstorm to determine most critical dimensions of future uncertainty Unknown and unknowable uncertainties (consulting study will not help us to resolve this uncertainty) Important (affect our decisions or ability to succeed) Limit of two is important due to practical planning limits (but can be relaxed if using for computer simulation models) Develop scenarios using these dimensions, and develop consistent future model for each scenario Brainstorm about implications for strategy and investment Develop ROUGH strategy plans for each scenario Look for low cost, high payoff investment opportunities

HKUST Business School 8 The Right Level of Investment in the Scenario Planning Processes Most organizations will benefit from scenario planning if the investment in time is modest However, change is essential for any future payoff Environmental change is increasingly common However, the value of scenario planning is generally low probability for high payoff Thus, scenario planning should be limited to top management in short workshop context Not very profitable or attractive for consultants

HKUST Business School 9 Summary - Scenario Planning and Simulation can “Create” Options Scenario planning for organizations, and the computer extended simulation versions of this for portfolio investments, can create new value Like options, the investments only pay off occasionally, but can have high payoffs when rapid change occurs Can be used to enable large firms to react faster, like smaller entrepreneurial firms, to environmental change Modest investments appropriate, but should not replace traditional processes or tools Unlike to be marketed by consultants, so may be a source of competitive advantage for firms that become good at using these capabilities

HKUST Business School 10 Strategic Planning and Change Strategic planning is generally only needed if there is change or uncertainty in the future Existing plans are probably adequate if no change Change is more likely in the future than stability Key Challenge is Planning with Uncertainty Predictable change is easier than uncertainty Changes can be both important and uncertain Scenario Planning Developed for Uncertainty Addressing future importance and uncertainty

HKUST Business School 11 First Step in Scenario Planning is Identifying Key Uncertainties Look for change areas that are both: Unknown and unknowable uncertainties (consulting study will not help us to resolve this uncertainty) Important (affect our decisions or ability to succeed) Evaluate the level of importance and uncertainty for each area of uncertainty or change identified Brainstorm to identify as many areas of uncertainties or change as possible at first Prioritize your list into top 4 themes using above criteria Consider different challenges for different “businesses”

HKUST Business School 12 Breakout Session: Small Groups Discuss & Identify Uncertainties Groups Designed to Encourage Discussion Not people you work with every day on the job Not all same level within groups No HIERARCHY in GROUP, but DEMOCRACY Not necessarily in group related to current job Brainstorming ideas used to drive later decision making and models for each group Build consensus on group discussion focus