Bush tag seminar 06 mar12
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Bush tag seminar 06 mar12 Bush tag seminar 06 mar12 Presentation Transcript

  • MEASURING STRATEGYQUANTIFYING RISK AND UNCERTAINTY “When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely in your thoughts advanced to the state of science.” -  Lord Kelvin . © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 2
  • TECHNOLOGY STRATEGY FROM MY PASTInitial Plan•  Our company had the chance to lead the medical diagnostics industry in using new biosensor technology for diabetic glucose monitoring.Business CaseForecast economics showed $240 MM NPV.Key issues and risks were listed, but not quantified.Decision makers were concerned about reliability. © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 3
  • WHY MEASURE A STRATEGY? Strategy Value ($MM) 100 200 300Medical Device Strategic Issues§ New product cost of goods§ Launch timing§ Design / Mkt Share capture§ Recall risk / QC costs§ Product support costs§ Channel costs Downsides range from $28 – 140 MM Upsides range from $5 – 48 MM © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 4
  • WHAT CONCLUSIONS WERE DRAWN?Success would require a Quality transformation of the entire operation to mitigate the risks.Simulation of top six benefits quantified the return:§ Expected value = $165 MM for expected risk mitigation§ Estimated cost of TQM/Six Sigma initiative = $12 MM How have TQM/Six Sigma initiatives done? •  Georgia Tech’s financial analysis of industry •  34% better stock price performance than benchmark firms •  43% better operating performance measured by profit growth •  Sustainable advantage has been retained over a long term © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 5
  • BENEFITS OF MEASURING STRATEGIESClarity§ Resolves ambiguous and/or conflicting values§ Communicates the purpose and aims of the decisionTransparency§ Based on collaborative expertise and rationale§ Alignment of personal & organizational agendas§ Confers understanding of uncertainty, tradeoffs, complexity, riskTransferability§ Does not rely on one individuals special insight§ Promotes systemic thinking and comprehension§ Builds an environment for effective collaboration © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 6
  • WHY IS THIS IMPORTANT TODAY?To meet the fiduciary responsibility of officers/directors§ “Duty of Care” means not taking information at face value, but being fully informed when making decisions.§ To identify risks and uncertainties that could have a material impact on the business and taking appropriate mitigation stepsQuantifying the risks for their impact on value§ Avoiding the “illustion of understanding” of qualitative methods§ “What gets measured gets done.” - Drucker§ “You get what you inspect, not what you expect.” - Deming © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 7
  • WHAT HAS BEEN DIFFICULT ORFRUSTRATING FOR YOU IN YOURSTRATEGIC DECISION PROCESS? © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 8
  • THE PATH TO VALUE HAS LOTS OF TRAPS Inappropriate reliance on intuition and speculation Adversarial advocacy positions Lack of open inquiry Competing impressions Unforeseen risks or Unrecognized disasters dismissed opportunities Lingering doubts and uncertainties Analysis paralysis Lack of buy-in Misalignment and alignment among tactics and policies © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 9
  • MONEYBALL (AND BRAD PITT) HAVEDONE A LOT TO POPULARIZE ANALYTICS © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 10
  • AVAILABLE DATA OR VALUABLE INFORMATION ? © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 11
  • COMPETING ON ANALYTICS Tom Davenport and Jeanne Harris– THE SCIENCE OF WINNINGAccording to Tom Davenport,“Companies that invest heavily inadvanced analytical capabilitiesoutperform the S&P 500 onaverage by 64%”.An IBM-CFO study shows that analytics-driven organizations had 33% morerevenue growth, 12 times the earnings (before interest, tax, depreciation,amortization) and 32 percent more return on capital invested. © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 12
  • HISTORY HAS PROVEN THESE LESSONS WELLBabylonian Triples ~2000 B.C. Quipu Peruvian knot record ~1000 B.C.Earliest recorded math table on clay Believed to be numerical recordtablets, perhaps used to calculate keeping system used by the Incas fortriangle dimensions for construction. keeping track of commerce. © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 13
  • DATA ADDS VALUE BY DRIVING DECISIONSChinese counting boards and Village Lawyer by Pieter the Younger,abacus were essential for the dated 1621 with stacks of paperEmperor’s men to assess the records for billing clients.right amount of tax to collect. © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 14
  • COMPUTING SYSTEMS (1820 – 1950) ENABLEDMORE BUSINESSES THE COMPETITIVE ADVANTAGECharles Xavier Thomasinvented a mechanicalcalculator for his insurance First used in 1928 for vital statisticsbusiness to assure accurate tabulation by the NYC Board of Health.pricing based on actuarial data It was IBM’s most profitable product for the next 50 years with mainframe computing for businesses. © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 15
  • PROGRAMMED COMPUTERS 1950 – 1980 BEGAN DEMOCRATIZING IT TO SMALL FIRMSLyons Electronic Office (LEO) was Dan Bricklin received an award fromthe first programmed device to Osborne Computer for creating VisiCalc,evaluate costs, prices and margins a program that made it worthwhile toof that weeks baked output at buy a personal computer.Lyons London tea shop. © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 16
  • ENTERPRISE SYSTEMS 1990-2000 DECADE ERP software promises to integrate internal and external management information across an entire organization. CRM software gives business the ability to create, assign and manage requests made by customers. © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 17
  • WEB / CLOUD IS EVOLVING – 2010 DECADE © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 18
  • NEXT GEN BIG DATA IS NOW IN HYPERDRIVE © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 19
  • CAN WE REALLY DEAL WITH EXABYTES? Stage 1: Analytically Impaired – Lack of analytical skill or executive interest. Stage 2: Localized Analytics – Uncoordinated activities or silos. Stage 3: Analytical Aspirations – Good intentions with slow progress. Stage 4: Analytical Companies – Widely use analytics internally. Stage 5: Analytical Competitors – Use analytics as a competitive advantage. Competing on Analytics – The Science of Winning by Tom Davenport and Jeanne Harris © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 20
  • DARK SIDE OF THE STORY - MAJORITY OF INVESTMENTS FAIL TO DELIVER Set Direction Exploration Evaluation Implementation 100%% Successful After 2 Years Ones that Work: Improvement Dialog (internal experts) or Pilot Creative Synthesis of Options in understanding, Collaborative Participation participant buy-in, 50% use of creative ideas Framing and focus on real Business business results. Idea Case Edict or Justification Single Persuasion Option 0% Four Key Phases of Projects 127 cases studied in North America (by Paul Nutt, Ph.D., Ohio State University) © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 21
  • A QUICK EXAMPLE – AIRLINE FUEL DATAJet fuel costs - $2.1 billion per yearFuel Management system proposed to integrate all fueldata, improve data integrity and functionality.•  Project cost - $4.5 millionTangible savings (could put in the budget)•  back office cost reduction and simplification of IT systemsIntangible benefits – (could not guarantee exact value) •  reporting accuracy for fuel taxes, •  inventory and fleet fuel burn per day, •  fewer errors, optimized inventories, etc.Business case – not approved due to negative ROI © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 22
  • QUANTIFYING THE INTANGIBLESWhat decisions could real-time data significantly improve?•  Selection of fueler with lowest spot cost.•  Tankering of fuel – where to fuel at low cost & tax airportsQuantifying uncertainties:•  How big a price differential is there typically? – 0.5 to 1.5¢/gal•  How many fueling events are there per day? – 3200 to 3500•  How many gallons per event – thousands•  How often has the lowest price been missed? – 30% to 60% ProbabilityBenefit range $5-25 million per year $5 M $25 M © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 23
  • HOW TO MEASURE INTANGIBLESDo we understand what we trying to measure?•  Value of making decisions with better informationWhat does measurement really mean?•  Not a precise forecast, but quantifying what we knowHow can we find ways to make the measurement?•  Ask questions, find analogies or scenarios, etc. Summarized from Douglas W. Hubbard - “How to Measure Anything: Finding the Value of Intangibles in Business” © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 24
  • Case Study – ERP SystemMajor oil company approved a capital spending projectof $100 million for a new global ERP system.After starting with a positive NPV, the business casewas tweaked to a point where it became a whopping… © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 25
  • MUCH HAND WRINGING ENSUED… How can we justify the $$$? What should we do? ------- Maybe we should cut out all of that training cost and reduce development costs. Would this push the project NPV back into the black? © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 26
  • WHAT WENT WRONG?•  Poor problem framing•  Irrelevant sensitivity analysis•  Inappropriate accounting of value © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 27
  • UNDERLYING BEHAVIORS AND TRADITIONS CAN OBSTRUCT THE CREATION OF VALUE•  Ratherthan quantifying the “intangible” value and risk, teams allow technical arguments and cost substitution issues to become the basis for investment decisions•  Decisions are made by negotiation or power-plays rather than focusing on expected value or fit with the strategy•  Bad ventures frequently persist for too long, wasting time and resources that could be used on better projects.•  The key to understanding and making informed decisions… is quantifying the value of the intangibles! © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 28
  • QUANTIFYING THE UNCERTAINTIESREVEALED THE CRITICAL COST DRIVERS simple business informed business case case value = $0 value = $80 NPV $million User adoption Critical cost drivers System reliability Data integrity Development Cost Important but not critical cost drivers Training © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 29
  • BY INVESTING MORE - THE TEAM MITIGATED THE USER ADOPTION RISK AND ASSURED THE UPSIDE VALUE OF DATA INTEGRITY AND RELIABILITY 1 0.9Cumulative Probability 0.8 0.7 Original strategy Hybrid strategy 0.6 NPV range NPV range 0.5 0.4 0.3 0.2 0.1 0 $80 $380 NPV $ (millions) © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 30
  • EACH STAGE RESOLVES KEY QUESTIONS BEFORE MAKING A FINANCIAL COMMITMENT Discovery Framing Evaluation Agreementü What is the real ü What are the decision ü What are the effects ü Which path best situation? boundaries and open of uncertainties on meets our objectives? decisions? solution goals?ü What is the ü How much should we opportunity? ü What are the sources ü What is the difference spend to control of uncertainty? in value among the uncertainties?ü What are our goals alternatives? and objectives? ü Can we develop an ü What are the keys to 80% confidence ü How much risk do we implementation? range for the face with each uncertainties? alternative? ü What resources will we need for ü Is the information ü What insights can we implementation? worth the time and create for contingency cost of analysis? plans or options? ü What contingent actions should we take? © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 31
  • FOCUSING ON THE OBJECTIVES IS MOREPRODUCTIVE THAN ARGUING ABOUT TACTICS Discovery Phase MaximizeFundamental Stakeholder Value Capital Operational ServiceContributing Costs Costs Execution Excellence System System System Data Service AppropriateMeans Arch. HW SW Overhead Complexity Integrity Reliability Tools © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 32
  • DECISION HIERARCHY FORCES EXPLICIT AGREEMENT ON SCOPE AND FOCUS Framing Phase •  Generate a wide array of creative, Policy (givens, boundaries) doable alternatives that are Decisions already made, foregone consistent with objectives •  Create alternatives as a coherent set of actions, usually one option Strategic (focus, open options) from each decision categoryTeam Focusfor Analysis Decisions categories with sub- •  Alternatives should represent options to be considered now strategically different themes versus the full combination of all Tactical (execution dependent) options Decisions to be made later, deferred •  Sets the stage to consider opportunity costs thoroughly © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 33
  • CLARIFYING UNCERTAINTIES AND LOGICHELPS FRAME THE EVALUATION MODEL Framing Phase •  Captures the essence of the problem and facilitates the dialog between the team members •  Becomes a well defined model of the situation, containing all the necessary and relevant information needed to assess the situation •  Used as a means to communicate the shared knowledge of the team to the organization © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 34
  • QUANTIFYING 80% CONFIDENCE INTERVALSHELPS AVOID ASSUMPTION “BLIND SPOTS” Evaluation Phase We recognize assumptions We observe results are really uncertainties as distributionsUncertaintyUncertainty Probability SimulationUncertainty Objective Engine!Uncertainty $0 $ NPVUncertainty © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 35
  • HOW EASY DO YOU THINK IT IS TO ASSESS A10/50/90 RANGE OF POTENTIAL OUTCOMES? 80% confidence interval .10! .50! .90! p10 - 90% confident the outcome will be higher than this p90 - 90% confident the outcome will be lower than this p50 - equal likelihood the outcome could be higher or lower than this © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 36
  • EXERCISE - WHAT IS YOUR 80% CONFIDENCEINTERVAL FOR THESE UNCERTAINTIES? p10 p50 p90 1.  The number of revenue passengers enplaned on U.S. airlines in 2007? 2.  The year that the the world’s first pure food and drink law got passed? 3.  The year Attila the Hun died? 4.  Annual U.S. egg production in 2008? 5.  Elevation of the highest point in Texas? © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 37
  • CULTURAL PRESSURE FOR CERTAINTYWe are trained to provide “the answer”.Uncertainty makes us restless, whereas we are comfortable and content with the appearance of certaintyPlanning is much easier if we suppress uncertaintySuppressing uncertainty is dangerous in business!§ we are surprised and unprepared to deal with the situationExplicit treatment of uncertainty in planning:§ improves communication of difficult issues, reducing surprises§ encourages contingency planning§ creates insight into potential upside potential © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 38
  • THE RIGHT EXPERT CAN EXPLORE CAUSES OFUNCERTAINTY AND AVOID SURPRISESTraditional Analysis (Forecaster)§  Make assumptions to get to a forecast§  Focus on what has to go right for success, often blinding us to what could go wrongUncertainty Analysis (Desired Expert)§  Explore the factors that create extreme outcomes or contribute to uncertainty§  Understand what could go wrong and what the upside and downside may be§  Develop a range of possible outcomes © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 39
  • P50 ± 10% ANCHORS ON THE ESTIMATECREATING AN ILLUSION OF THE UNCERTAINTY p50 value What will be the $2/Gal average price of gasoline over the next 5 years? -10% +10% 1.40 1.60 1.80 2.00 2.20 2.40 2.60 Product price, $/gal © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 40
  • AN 80% CONFIDENCE RANGE EXPLORES AMUCH MORE ROBUST VIEW OF REALITYRange p10 p50 p90 Initial Ranged p50 value p50 valueAnchored 1.80 2.00 2.20 $2/gal $2.40/galCalibrated 1.00 2.40 3.15 Range -58% +31% -10% +10% 0.50 1.00 1.50 2.00 2.50 3.00 3.50 Product price, $/gal © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 41
  • MONTE CARLO SIMULATION REVEALS THEVARIATION IN VALUE CAUSED BY UNCERTAINTY 1 A B C •  Demonstrates the aggregate 0.9 effect of all the uncertainties 0.8Cumulative Probability 0.7 by both their impact & 0.6 prevalence 0.5 0.4 •  Shows the probability of 0.3 important intervals and the 0.2 opportunity for optimization 0.1 0 •  Shows if one decision Low High dominates another Value Metric © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 42
  • SENSITIVITY ANALYSIS - WHAT REALLYMATTERS AND WHAT TO STOP ANALYZING Value Measure of Primary Objective 0 Effect of Uncertaintyi on Value Measure Critical Value Drivers Minor Value Drivers © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 43
  • ASKING “WHAT IF” QUESTIONS CAN CREATETREMENDOUS VALUE IN A DECISION Value of Information What if we had better information? What would it tell us? How much should we pay for it? Value of Control What if we more had leverage over critical uncertainties? What might we do? How much should we pay for it? © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 44
  • “WHAT IF” WE COULD REDUCE THE RISK WHILE CAPTURING THE UPSIDE? A B 1 0.9 0.8Cumulative Probability 0.7 Hybrid Strategy 0.6 Hybrid 0.5 ™  Limits downside to A 0.4 0.3 ™  Captures potential of B 0.2 0.1 0 Low High Value Metric © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 45
  • DECISION ANALYSIS PROCESS FLOW Discovery and Framing Policy Strategic NPV Tactical Cost Revenue Do we understand the situation What outcomes are and our strategic question? we targeting? What decisions & creative strategies to consider? Quantifying Insights Low High Strategy, NPV, M$ Base Value: $360 $100 $150 $200 $250 $300 $350 $400 $450 $500 $550 $600 Uncertainty One Uncertainty Two Uncertainty Three Uncertainty Four Uncertainty Five Uncertainty Six Uncertainty Seven Uncertainty Eight Uncertainty Nine Uncertainty Ten $ How to realize theWhat are the ranges of How to gain insights from the value through effectiveuncertainty and risk? uncertainty to maximize value? implementation? © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 46
  • AUDITS HAVE SHOWN MAJOR BENEFITS OF DA OVER TRADITIONAL METHODS Value realization from alignment and effective execution Value of framing & ROI increases from measurement and continuous improvement quantifying alternatives Value ofEconomic Value focusing on the right problem Value promised Audited results: in the business case 80% do not achieve their business case number Opportunity Alternatives Transformation Implementation Measurement & Identification Evaluation Roadmap and Change Optimization USED BY PERMISSION OF CHEVRON CORPORATION 47
  • IT FEELS LIKE MORE TIME UPFRONT, BUT A BETTER DECISION IS IMPLEMENTED SOONERQuantitative Save time & energy, DecisionDecision Analysis Making Create Definition Options create confidence.Traditional Definition Solution Decision Re-visitDecision Development Making DecisionMaking Recycle time © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 48
  • QUESTIONS?Gerald A. Bush, Ph.D.Tel: (678) 641-6254Email: gabush@mac.comRobert D. Brown IIITel: (678) 947-5997Email: rdbrown@incitedecisiontech.com © 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 49
  • SELECTED READINGS“Value Focused Thinking: A Path to Creative Decision-making”by Ralph L. Keeney“How to Measure Anything: Finding the Value of Intangibles in Business”by Doug Hubbard“Smart Choices: A Practical Guide to Making Better Decisions”by John Hammond, Ralph Keeney and Howard Raiffa“Why Cant You Just Give Me The Number?by Patrick E. Leach“Decision Traps”by Edward Russo and Paul Shoemaker“Against the Gods: The Remarkable Story of Risk”by Peter L. Bernstein