Risk, Uncertainty and BusinessStrategyAtanu Mukherjee1st November, 2011Dastur Business & Technology Consulting
2The Business Environment Today> Globalization> Volatility> Macroeconomic instability> Environmental constraints> Changing...
Oil Price Volatility (1985 -2005)315202530354045501985199019952000Data/Source: World Oil Prices (current $ / Barrel)- EIA ...
4Commodity demand collapse ?http://www.investmenttools.com/futures/bdi_baltic_dry_index.htmBaltic Exchange Dry IndexCommod...
Turbulence in financial markets(VIX index)HousingBubbleInternetMania
Sustained GDP contractions
Aging population in the West
2010 2020 2030 2040 2050TonsofCO2EquivalentOECD Per CapitaWorld Per CapitaIndia Per CapitaCarbon consumption regulations..
9FastestGrowingSoaring energy consumption…
02004006008001000120014001996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20061502503504505506507508509501050Internet Tra...
…And then the housing bubble
Turbulence Ahead!…& dramatic wealth creation…as opportunities in uncertainty abound
…but fear of failure cripples thinking…So how do we formulatebusiness strategy in turbulent times ?
The Building Blocks of Strategy
Creating Value in Uncertainty –Disruptive InnovationPerformanceTimeEstablished technologyMainstream customer needsNiche cu...
16
17› Cement that sequesters CO2, instead of emitting it!Calera
18BiocrudeCrude oilRefineryKior: “biocrude” replaces crudeMillions ofYears
How not to:Financial tools:DCF, NPV, IRR Stage gatedevelopmentTop down marketanalysisDecisions based oncustomer wish list19
How to:Tackle hard problemsImagine what could beLet technology lead marketFail often, fail early, keep tryingFind the best...
“It is not because things are difficult that we do not dare, it is because we do notdare that they are difficult.”- Seneca...
When did it fail?Evaluating “Failures”HOW DO I DO IT BETTER NEXTTIME??Iteration is keyWhy did it fail?Causal vs. experient...
“Tried that before and it doesn’t work”Accumulated experience restrains/constrains thinkingAssumptions change all the time...
Innovation culturereward failureplan withoutplanning (evolvethru iteration)ignore IRR calculationsdont listen to customers...
25Source: Clay Christenson “Untangling Skill and Luck” (7/15/2010); Michael Mauboussin, Legg Mason Capital Management; Ste...
26
The mini-mill disruption in the US steel industry27
…”relevant cost”…”relevant scale”…”relevant adoption”But diffusion of innovation requires
…the adoption riskfinancial, consumer acceptance, market entry
adoption risk - $2,500 nanoInternal combustion engineorHydrogen / electric?
…the scaling modelbrute force or exponential, distributed…
But how do we evaluate solutions…?
key criteria› Trajectory: “What is” or “What Can Be”› Scalability Trajectory› Cost Trajectory› Adoption Risk› Capital Form...
…cost and tech trajectory
cost: driving down the cost curveSource: “The Carbon Productivity Challenge”, McKinsey – Original from UC Berkely Energy R...
2010 2015 2020 2025 2030 2035Cost(Normalized)2010 2015 2020 2025 2030 2035Cost(Normalized)2010 2015 2020 2025 2030 2035Cos...
37declining technology cost…Crystalline SiliconAmorphous SiliconThin-FilmThin-Film Multi-JunctionGenerations of Solar Phot...
but tech cost decline isn’t enough…2010 2015 2020 2025 2030 2035 2040Cost(Normalized)Construction CostInputs (Feedstock/La...
Legacy technologies can have largescale advantageInfeasible
…capital formation
› Short Innovation Cycles (3-5 years)› Short investor return cycles› Mitigate technical & market risk cheaply› Unsubsidize...
But be vary of irrational ideas….
irrational ideas: eat kangaroos, not cows!Source – http://www.reuters.com/article/environmentNews/idUSSYD8867720080808“SYD...
irrational ideas: toilet paperI propose a limitation be put on how many sqares[sic] of toilet paper can be used in any one...
irrational ideas: “green bikinis”• Source - http://www.alternativeconsumer.com/2008/07/29/eco-bikini-from-niksters/
46irrational ideas: zero-emission buses?3-year Oakland pilot : zero-emission hydrogen fuel cell busesdiesel @ $1.61/mile v...
Thank YouE :atanu.mukherjee@dasturco.comM:(91) 983.027.0019
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Uncertainty business strategy by bhawani nandan prasad iim calcutta

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Uncertainty business strategy by bhawani nandan prasad iim calcutta

  1. 1. Risk, Uncertainty and BusinessStrategyAtanu Mukherjee1st November, 2011Dastur Business & Technology Consulting
  2. 2. 2The Business Environment Today> Globalization> Volatility> Macroeconomic instability> Environmental constraints> Changing demography> Resource and energy limitations> Accelerated boom-bust cycles
  3. 3. Oil Price Volatility (1985 -2005)315202530354045501985199019952000Data/Source: World Oil Prices (current $ / Barrel)- EIA Office of Integration Analysis and ForecastingForecastForecastForecastForecastForecastForecastForecastActualActualActual ActualActualActualActual10-yrForecastError5-yrForecastError
  4. 4. 4Commodity demand collapse ?http://www.investmenttools.com/futures/bdi_baltic_dry_index.htmBaltic Exchange Dry IndexCommodity Research Bureau Index
  5. 5. Turbulence in financial markets(VIX index)HousingBubbleInternetMania
  6. 6. Sustained GDP contractions
  7. 7. Aging population in the West
  8. 8. 2010 2020 2030 2040 2050TonsofCO2EquivalentOECD Per CapitaWorld Per CapitaIndia Per CapitaCarbon consumption regulations..
  9. 9. 9FastestGrowingSoaring energy consumption…
  10. 10. 02004006008001000120014001996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20061502503504505506507508509501050Internet TrafficMorgan Stanley High Technology IndexTerabytesMorganStanleyHighTechnologyIndexThe dot com bubble…
  11. 11. …And then the housing bubble
  12. 12. Turbulence Ahead!…& dramatic wealth creation…as opportunities in uncertainty abound
  13. 13. …but fear of failure cripples thinking…So how do we formulatebusiness strategy in turbulent times ?
  14. 14. The Building Blocks of Strategy
  15. 15. Creating Value in Uncertainty –Disruptive InnovationPerformanceTimeEstablished technologyMainstream customer needsNiche customer needsInvasive Technology
  16. 16. 16
  17. 17. 17› Cement that sequesters CO2, instead of emitting it!Calera
  18. 18. 18BiocrudeCrude oilRefineryKior: “biocrude” replaces crudeMillions ofYears
  19. 19. How not to:Financial tools:DCF, NPV, IRR Stage gatedevelopmentTop down marketanalysisDecisions based oncustomer wish list19
  20. 20. How to:Tackle hard problemsImagine what could beLet technology lead marketFail often, fail early, keep tryingFind the best people, who disagree with you20
  21. 21. “It is not because things are difficult that we do not dare, it is because we do notdare that they are difficult.”- Seneca“Try and fail, but dont fail to try.”- Stephen Kaggwa“Courage is doing what youre afraid to do. There can be no courage unlessyoure scared.”- Eddie Rickenbacker“Only those who dare fail greatly can achieve greatly.”- Robert F. Kennedy“You will face many defeats in your life, but never let yourself be defeated.”- Maya AngelouThe willingness to fail gives us thefreedom to succeed21
  22. 22. When did it fail?Evaluating “Failures”HOW DO I DO IT BETTER NEXTTIME??Iteration is keyWhy did it fail?Causal vs. experiential reasoningAssumptions change vs. Environments change22
  23. 23. “Tried that before and it doesn’t work”Accumulated experience restrains/constrains thinkingAssumptions change all the timeReexamine everything23
  24. 24. Innovation culturereward failureplan withoutplanning (evolvethru iteration)ignore IRR calculationsdont listen to customers too closely24
  25. 25. 25Source: Clay Christenson “Untangling Skill and Luck” (7/15/2010); Michael Mauboussin, Legg Mason Capital Management; Steven Johnsondisruptive innovation & disruptorsLow-End SegmentStrategyCreate a newmarket…Amazon.com /Netflix…Google / iPhone / iPad /Facebook Twitter…Invent the marketDisrupt the market…move up marketwith lower costNew-ConsumptionStrategyCreate a newexperienceiPod / iTunes/Kindle/Netfllix OnlineInvent by designRe-inventConsumptionStrategyintroduce a low-endloss leader…a product thathasn’t existeduse design to re-invent product
  26. 26. 26
  27. 27. The mini-mill disruption in the US steel industry27
  28. 28. …”relevant cost”…”relevant scale”…”relevant adoption”But diffusion of innovation requires
  29. 29. …the adoption riskfinancial, consumer acceptance, market entry
  30. 30. adoption risk - $2,500 nanoInternal combustion engineorHydrogen / electric?
  31. 31. …the scaling modelbrute force or exponential, distributed…
  32. 32. But how do we evaluate solutions…?
  33. 33. key criteria› Trajectory: “What is” or “What Can Be”› Scalability Trajectory› Cost Trajectory› Adoption Risk› Capital Formation› Optionality
  34. 34. …cost and tech trajectory
  35. 35. cost: driving down the cost curveSource: “The Carbon Productivity Challenge”, McKinsey – Original from UC Berkely Energy Resource Group, Navigant Consulting
  36. 36. 2010 2015 2020 2025 2030 2035Cost(Normalized)2010 2015 2020 2025 2030 2035Cost(Normalized)2010 2015 2020 2025 2030 2035Cost(Normalized)cost: not all technology curves are the same2010 2015 2020 2025 2030 2035Cost(Normalized)Cheapest now does not meancheapest later!Trajectory Matters!Solar PVWindCoal
  37. 37. 37declining technology cost…Crystalline SiliconAmorphous SiliconThin-FilmThin-Film Multi-JunctionGenerations of Solar Photovoltaics…
  38. 38. but tech cost decline isn’t enough…2010 2015 2020 2025 2030 2035 2040Cost(Normalized)Construction CostInputs (Feedstock/Land)Technology CostTotal CostTotal cost decline is based on relativeproportion of cost “types”…
  39. 39. Legacy technologies can have largescale advantageInfeasible
  40. 40. …capital formation
  41. 41. › Short Innovation Cycles (3-5 years)› Short investor return cycles› Mitigate technical & market risk cheaply› Unsubsidized market competitionPrivate money will flow toventures that return investment in3-5 year cycles!capital formation
  42. 42. But be vary of irrational ideas….
  43. 43. irrational ideas: eat kangaroos, not cows!Source – http://www.reuters.com/article/environmentNews/idUSSYD8867720080808“SYDNEY (Reuters) - Farming kangaroosinstead of sheep and cattle in Australia couldcut by almost a quarter the greenhousegases produced by grazing livestock, whichaccount for 11 percent of the nationsannual emissions, said a new study.”
  44. 44. irrational ideas: toilet paperI propose a limitation be put on how many sqares[sic] of toilet paper can be used in any onesitting. Now, I dont want to rob any law-abidingAmerican of his or her God-given rights, but I thinkwe are an industrious enough people that we canmake it work with only one square per restroomvisit, except, of course, on those pesky occasionswhere 2 to 3 could be required.- Sheryl Crow• Source - http://blogs.usatoday.com/ondeadline/2007/04/singer_turned_a.html
  45. 45. irrational ideas: “green bikinis”• Source - http://www.alternativeconsumer.com/2008/07/29/eco-bikini-from-niksters/
  46. 46. 46irrational ideas: zero-emission buses?3-year Oakland pilot : zero-emission hydrogen fuel cell busesdiesel @ $1.61/mile vs. hydrogen @ $51.66/mile!Source: ABC News - http://abclocal.go.com/kgo/story?section=news/local&id=5984013solutions must makeeconomic sense!
  47. 47. Thank YouE :atanu.mukherjee@dasturco.comM:(91) 983.027.0019

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