The Valuable Paradox of Uncertainty


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Traditional business analysis exposes us to unanticipated risk. You need to incorporate uncertainty in business analysis to manage risk in important business decisions.

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The Valuable Paradox of Uncertainty

  1. 1. The Valuable Paradox of UncertaintyWhy You Need to Include Uncertainty to Manage Risk in Important Business Decisions Robert D. Brown III 678-947-5997
  2. 2. Traditional business analysis exposes us to unanticipated risk Single Single Calculation Point Point Engine! Assumptions Results  We are trained to provide the “right” answer, often based on unrecognized biases, leading to confidence in false precision Sensitivity Analysis  We provide arbitrary assumptions around a predicted $ NPV +Y% “answer” or forecast value for a base case or desired case -Y%  Our sensitivity analysis fails to capture full range of -X1% +X2% effects on important metrics (i.e., value)  We overstate, understate or completely write off the effects of uncertainties or our exposure to risks Best Assumptions  Consequently, we fail to plan for unforeseen risks and benefits Incite! Decision Technologies, LLC Copyright 2009 - 2011 2
  3. 3. Uncertainty analysis helps us avoid those blind spots We observe We recognize results as assumption as distributions uncertainties Probability Simulation Engine! $0 $ NPV  We explicitly explore factors that can create extreme outcomes for key variables  We translate these factors into the language of probability to avoid ambiguous meanings about their range and prevalence  This gives us the power to understand what can go wrong, what the upside may be, and the likelihood for each  By exploring how much tolerance we have for failure we can develop rational risk mitigation plans  Conversely, by exploring what can go right, we can develop creative competitive strategies Incite! Decision Technologies, LLC Copyright 2009 - 2011 3
  4. 4. Uncertainty analysis reveals which uncertainties need ourmost attention for risk management NPV, $million $0 $80 Price of commodity product Theseassumptions User adoption are critical Regulatory approvalvalue drivers Market size We don’t need to worry about every uncertainty Minor – just those that matter! value drivers Incite! Decision Technologies, LLC Copyright 2009 - 2011 4
  5. 5. When we compare multiple alternatives, uncertainty analysis shows where we need to… NPV ($ millions) 0 100 200 300 400 500 600 700 800   Gather more These information to Pricingassumptions avoid regret by are critical Regulatory Approval choosing the value “best” strategy Market Share drivers over ones that Market Size could overlap in value Market Growth SG&A   Explore the effects Minor of specific value value Acquisition Cost drivers drivers to build COGS Device hybrid strategies that maximize R&D Cost value and COGS Product minimize risk Current License Acquisition Strategy Strategy Strategy Incite! Decision Technologies, LLC Copyright 2009 - 2011 5
  6. 6. By not explicitly considering uncertainty in planning  We expose ourselves to unforeseen risks that could have been anticipated  We fail to look for ways to capture the full potential value available to us  We waste time and resources controlling for outcomes that don’t really matter  We fail to adopt the mature attitude of considering perspectives and outcomes beyond our biases Incite! Decision Technologies, LLC Copyright 2009 - 2011 6