The document outlines the key components of the strategic management process including environmental scanning, strategy formulation, implementation, and evaluation. Environmental scanning involves analyzing external threats and opportunities as well as internal strengths and weaknesses. Strategy formulation determines the organization's mission, objectives, and strategies. Implementation covers budgets, assignments, and tactical plans. Evaluation and control assesses performance and provides feedback to enable adjustment if needed.

1. THE PROCESS OF STRATEGIC MANAGEMENT
ENVIRONMENTAL SCANNING
EXTERNAL THREATS & OPPORTUNITIES
MACRO (Society), TASK (Industry), COMPETITIVE
INTERNAL STRENGTHS & WEAKNESSES
RESOURCES, STRUCTURE, FINANCIAL PERFORMANCE TRENDS
STRATEGY FORMULATION
MISSION
OBJECTIVES
STRATEGIES
IMPLEMENTATION
BUDGETS
ASSIGNMENTS
TACTICAL PLANS
EVALUATION & CONTROL
CRITERIA & ASSESSMENT TOOLS
REPORTS & FEEDBACK DEVICES
ADJUSTMENT MECHANISMS

2. THE MACRO ENVIRONMENT
(PEST)
POLITICAL
SUPPORTS GOVERNMENT STABILITY
CONTROLS ANTI-TRUST, EPA, TAX LAWS
PENDING LEGISLATION ATTITUDES TOWARD FOREIGN FIRMS
ECONOMIC
INFLATION INTEREST RATES
UNEMPLOYMENT ENERGY AVAILABILITY & COST
DISPOSABLE INCOME PRODUCTIVITY, GROWTH, GDP
SOCIO-CULTURAL
GEOGRAPHIC SHIFTS CONSUMER ACTIVISM
CUSTOMS & VALUES LIFESTYLE CHANGES
DEMOGRAPHICS BIRTHRATES & LIFE EXPECTANCIES
TECHNOLOGICAL
BASIC RESEARCH R & D SPENDING (Gvmt & Industry)
NEW PRODUCTS/SERVICES PATENT PROTECTION
PROCESS IMPROVEMENTS COMPUTER HACKING

3. EIGHT SOCIO-CULTURAL TRENDS IN
NORTH AMERICA
ENVIRONMENTAL AWARENESS
Conservation, Recycling, Landfills
GROWING HEALTH CONSCIOUSNESS
Personal Fitness, Nutrition, Genetically Altered Foods, AIDS & Bird Flu
BABY BOOMERS NEAR RETIREMENT (77 Million)
Companionship, Pets, Retirement Communities, Vacations, Senior Services
IMPACT OF “GENERATION Y” BOOMLET (70 Million)
Born between 1978 and 1994, Crowded Schools, Youth Markets
DECLINING MASS MARKET
Customized, Targeted - no generic products, Cars to Magazines
CHANGING PACE AND LOCATION OF LIFE
Instant Communication (e-mail, computers, etc), Telecommuting Possibilities
CHANGING HOUSEHOLDS
Singles, Partners, Couples with no Children (DINKS)
INCREASING DIVERSITY OF WORKFORCE AND MARKETS
Growth of Hispanic and Asian Groups, Immigrants (legal and illegal)

4. RECENT BREAKTHROUGH DEVELOPMENTS IN
TECHNOLOGY
PORTABLE INFORMATION DEVICES AND NETWORKING
Connectivity, Phones, TVs, Stereos, and Computers becoming obsolete
FUEL CELLS AND ALTERNATIVE ENERGY SOURCES
Wind, Geothermal, Hydroelectric, Solar, Biomass – 30% by 2010
PRECISION FARMING
Corporate Farming, Computerized Crop Management
VIRTUAL PERSONAL ASSISTANTS
Smart computers that monitor e-mail, voice mail, can write letters, etc.
GENETICALLY ALTERED ORGANISMS
Plants and animals that are resistant to disease, grow faster, yield more
SMART MOBILE ROBOTS
Perform sophisticated factory work, do housework, assist the disabled

5. THE INTERNATIONAL DIMENSION TO THE MACRO
(SOCIETIAL) ENVIRONMENT
POLITICAL
POLITICAL IDEOLOGY REGULATION OF FOREIGN OWNERSHIP
GOVERNMENT STABILITY STRENGTH OF OPPOSITION GROUPS
PROTECTIONIST SENTIMENT TERRORIST ACTIVITY
LEGAL SYSTEM FOREIGN POLICIES
ECONOMIC
ECONOMIC DEVELOPMENT PER CAPITA INCOME & WAGE LEVELS
UNEMPLOYMENT LEVELS GDP TRENDS
CURRENCY CONVERTIBILITY OUTSOURCING CAPABILITY
SOCIO-CULTURAL
LANGUAGES SPOKEN LIFE EXPECTANCIES
CUSTOMS & VALUES RELIGIOUS BELIEFS
LITERACY LEVEL ATTITUDES TOWARD FOREIGNERS
TECHNOLOGICAL
INTERNET AVAILABILITY REGULATION ON TECHNOL TRANSFER
SKILL LEVEL OF WORKFORCE PATENT & TRADEMARK PROTECTION
TRANSPORTATION NETWORK NATURAL RESOURCE AVAILABILITY

6. THE TASK ENVIRONMENT
(INDUSTRY)
ENTITIES THAT DIRECTLY “TOUCH” THE ORGANIZATION
CUSTOMERS
SUPPLIERS
CREDITORS
GOVERNMENT AGENCIES
FEDERAL
STATE
LOCAL
UNIONS
STOCKHOLDERS
COMMUNITIES
SPECIAL INTEREST GROUPS

7. EXAMINE EACH ENVIRONMENTAL SEGMENT FOR:
COMPLEXITY
HOW MANY ENTITIES DOES THE FIRM DEAL WITH?
DYNAMISM
HOW FREQUENTLY DO THESE ENTITIES CHANGE?
IMPORTANCE (Significance)
WHAT IS THE IMPACT OF THIS SEGMENT ON THE ORGANIZATION?
PREDICTABILITY
CAN THE FIRM FORSEE PENDING SHIFTS AND CHANGES?
CONTROL
CAN THE FIRM MANIPULATE OR CONTROL THIS SEGMENT?
STRATEGICALLY…
1 - HOW CAN THE FIRM MONITOR EACH IMPORTANT SEGMENT?
2 - HOW DO WE CONTROL OR INFLUENCE EACH IMPORTANT SEGMENT?
3 - HOW SHOULD THE FIRM STRUCTURE ITSELF TO ACCOMPLISH THIS?

8. ENVIRONMENTAL UNCERTAINTY
DUNCAN (72)
COMPLEXITY
SIMPLE COMPLEX
STATIC ---------------------------------------------
LOW MODERATELY
UNCERTAINTY LOW
UNCERTAINTY
DYNAMISM ---------------------------------------------
(CHANGE)
MODERATELY HIGH
HIGH UNCERTAINTY
UNCERTAINTY
DYNAMIC ---------------------------------------------
COMPLEXITY = # of Entities the Firm must deal with?
DYNAMISM = How Frequently do these entities (or their demands) change?

9. ENVIRONMENTAL UNCERTAINTY
SCHWAB (80)
THREE ISSUES TO ADDRESS:
IMPORTANCE (Significance)
What is the impact of this environmental segment on the firm?
PREDICTABILITY
Can the firm anticipate pending shifts and changes in this segment?
CONTROL (Influence)
Can the firm manipulate or control this environmental segment?
PREDICTABILITY
HIGH LOW
HIGH ---------------------------------------------
LOW MODERATELY
UNCERTAINTY LOW
UNCERTAINTY
CONTROL ---------------------------------------------
(INFLUENCE) MODERATELY HIGH
HIGH UNCERTAINTY
UNCERTAINTY
LOW ---------------------------------------------
The firm only concerns itself with Important segments of it’s task environment.
The most difficult environments are those which are Unpredictable and Uncontrollable

10. IDENTIFYING EXTERNAL STRATEGIC FACTORS
CAMPBELL 84
AN ISSUES PRIORITY MATRIX
IMPACT ON THE FIRM
MAJOR MODERATE MINIMAL
100% ---------------------------------------------
HIGH HIGH MEDIUM
PRIORITY PRIORITY PRIORITY
PROBABILITY ---------------------------------------------
OF 50% HIGH MEDIUM LOW
OCCURRENCE PRIORITY PRIORITY PRIORITY
---------------------------------------------
MEDIUM LOW LOW
PRIORITY PRIORITY PRIORITY
VIRTUALLY 0% ---------------------------------------------
EVALUATE THE EMERGENT TRENDS IN THE MACRO & TASK ENVIRONMENTS
WHAT IS THE PROBABILITY OF EACH ENVIRONMENTAL TREND?
WHAT IS THE LIKELY IMPACT OF EACH TREND ON THE CORPORATION?
HIGH PRIORITY TRENDS = OPPORTUNITIES & THREATS FACED BY THE FIRM

11. SEVEN QUESTIONS TO ANSWER WHEN CONDUCTING AN
INDUSTRY & COMPETITIVE ANALYSIS
1--WHAT ARE THE INDUSTRY’S DOMINANT ECONOMIC TRAITS?
2--WHAT ARE THE COMPETITIVE FORCES IN THE INDUSTRY AND
HOW STRONG ARE THEY?
3--WHAT ARE THE DRIVING FORCES FOR CHANGE IN THE INDUSTRY?
4--WHICH RIVAL COMPANIES ARE IN THE STRONGEST & WEAKEST
COMPETITIVE POSITIONS?
5--WHO SHOULD BE MONITORED AND WHAT STRATEGIC MOVES ARE
THEY MOST LIKELY TO TAKE?
6--WHAT ARE THE KEY SUCCESS FACTORS IN THIS INDUSTRY?
7--HOW ATTRACTIVE IS THIS INDUSTRY IN TERMS OF ITS PROSPECTS
FOR ABOVE-AVERAGE PROFITABILITY?

12. IDENTIFYING THE INDUSTRY’S DOMINANT ECONOMIC
TRAITS
MARKET SIZE & FRAGMENTATION
NUMBER OF COMPETITORS AND THEIR RELATIVE SIZES
SCOPE OF RIVALRY –Local, Regional, National, Global
MARKET GROWTH RATE & STAGE OF DEVELOPMENT
EASE OF ENTRY AND EXIT
CAPITAL REQUIREMENTS
NUMBER OF CUSTOMERS & THEIR AVERAGE DEMAND
PREVALENCE OF VERTICAL INTEGRATION
PRODUCT/SERVICE CHARACTERISTICS –Differentiated or Generic?
SCALE ECONOMIES & EXPERIENCE CURVE EFFECTS
RATE OF CHANGE & INNOVATION IN PRODUCTS & PROCESSES
INDUSTRY PROFITABILITY
INDUSTRY CAPACITY SURPLUSES & SHORTAGES

13. POTENTIAL DRIVING FORCES IN THE ENVIRONMENT
MAJOR INNOVATIONS IN…
EMERGING TECHNOLOGIES
PRODUCT DESIGN
PRODUCTION PROCESSES
SERVICE DESIGN AND DELIVERY
MARKETING AND ADVERTISING
SIGNIFICANT CHANGES IN…
THE INDUSTRY’S GROWTH RATE
WHO BUYS THE PRODUCT AND HOW THEY USE IT
DEMAND FOR MORE (OR LESS) DIFFERENTIATED PRODUCTS
PRODUCTION/DELIVERY COSTS AND EFFICIENCIES
THE NUMBER OF MAJOR COMPETITORS
THE GLOBALIZATION OF THE INDUSTRY
REGULATORY POLICIES AND GOVERNMENTAL CONTROLS
SOCIETAL CONCERNS, ATTITUDES, AND LIFESTYLES
UNCERTAINTY AND BUSINESS RISK

14. COMPETITIVE FORCES
PORTER 80
INTENSITY OF COMPETITION…HOW DIFFICULT IS IT TO SUCCEED
IN THIS BUSINESS?
COMPETITIVE RIVALRY
Competition among existing firms
BARRIERS TO ENTRY
Ease of entry into and exit from the industry
SUBSTITUTE GOODS & SERVICES
Price, quality, and switching costs
POWER OF CUSTOMERS
Number, size, and relative clout
POWER OF SUPPLIERS
Number, size, and relative clout
POWER OF OTHER STAKEHOLDERS (Freeman)
Government,Unions,Communities, Special Interest Groups, etc

15. RIVALRY IS INCREASED WHEN…
THE MARKET IS GROWING VERY SLOWLY
PRODUCTS OR SERVICES ARE WEAKLY DIFFERENTIATED
THE NUMBER OF COMPETITORS INCREASE
COMPETITORS ARE EQUAL IN SIZE
IT COSTS A LOT TO LEAVE THE BUSINESS
THERE ARE BIG ADVANTAGES TO FIRST MOVERS
FIXED COSTS ARE HIGH AND VARIABLE COSTS ARE LOW
FIRMS DEAL WITH PERISHABLE PRODUCTS
“MAVERICKS” ARE COMPETING

16. BARRIERS TO ENTRY
SIGNIFICANT ECONOMIES OF SCALE EXIST
LEARNING AND EXPERIENCE CURVE EFFECTS
STRONG BRAND PREFERENCES AND CUSTOMER LOYALTY
SIGNIFICANT CAPITAL REQUIREMENTS
OTHERS HOLD PATENTS, THE MOST FAVORABLE LOCATIONS,
OR HAVE ACCESS TO CHEAP RAW MATERIALS OR CAPITAL
ACCESS TO DISTRIBUTION CHANNELS, DEALERS, AND RETAIL
OUTLETS
GOVERNMENTAL REGULATORY AGENCIES AND POLICIES
TARIFFS AND INTERNATIONAL TRADE RESTRICTIONS

17. SUBSTITUTE GOODS & SERVICES
POTENTIAL SUBSTITUTES
1. PRICE AND AVAILABILITY OF SUBSTITUTES PUTS A CEILING ON
PRICES AND PROFITS
2. UNLESS PRODUCTS ARE DIFFERENTIATED FROM SUBSTITUTES,
LOW GROWTH AND PROFITS WILL RESULT
3. HOW EASILY CAN BUYERS "SWITCH OVER" TO A SUBSTITUTE?
THE MOST INTENSE COMPETITIVE PRESSURES ARE FELT WHEN:
--THE PRICE OF SUBSTITUTES IS LOW
--SUBSTITUTES ARE HIGH IN QUALITY AND PERFORMANCE
--SWITCHING COSTS ARE LOW

18. CUSTOMER POWER IS HIGH WHEN…
THERE ARE JUST A FEW CUSTOMERS
THEY PURCHASE IN VERY LARGE AMOUNTS OR LOTS
THERE ARE MANY SELLERS OR SUPPLIERS
ALL OF THE SELLERS ARE RELATIVELY SMALL
PRODUCTS OR SERVICES ARE STANDARDIZED
THE PURCHASED ITEM OR SERVICE IS NOT AN IMPORTANT
INPUT TO THE CUSTOMER
THE PURCHASED ITEM OR SERVICE DOES NOT SAVE THE
CUSTOMER MONEY
CUSTOMERS PURCHASE FROM SEVERAL SUPPLIERS RATHER
THAN ONE
CUSTOMERS COULD INTEGRATE BACKWARD
SUPPLIERS ARE UNLIKELY TO INTEGRATE FORWARD

19. POWER OF SUPPLIERS IS HIGH WHEN…
SUPPLIES ARE CRUCIAL TO THE BUYER
THERE ARE JUST A FEW LARGE SUPPLIERS, AND THEY DON’T
COMPETE AGGRESSIVELY
IT IS DIFFICULT OR COSTLY TO SWITCH SUPPLIERS
WHEN BUYERS AREN’T SEEN BY SUPPLIERS AS IMPORTANT
CUSTOMERS
WHEN THERE ARE NO READY SUBSTITUTES
WHEN SUPPLIERS COULD INTEGRATE FORWARD
WHEN BUYERS ARE UNLIKELY TO INTEGRATE BACKWARD

20. MAPPING COMPETITIVE POSITIONS OF RIVAL FIRMS
POSSIBLE DIMENSIONS
PRICE/QUALITY
[High, Medium, Low]
GEOGRAPHIC COVERAGE
[Local, Regional, National, Global]
PRODUCT LINE BREADTH
[Wide, Narrow]
DEGREE OF SERVICE
[No-frills, Limited, Full Service]
DEGREE OF VERTICAL INTEGRATION
[None, Partial, Full]
DISTRIBUTION CHANNELS
[One, Some, All]
USE TWO DIMENSIONS THAT AREN’T HIGHLY CORRELATED
DEVELOP AT LEAST TWO DIFFERENT MAPS (WITH DIFFERENT DIMENSIONS)
STRONGEST COMPETITION IS LIKELY WHEN FIRMS ARE CLOSE TOGETHER

21. STRATEGIC COMPETITOR “TYPES”
MILES & SNOW 78
COMPETING FIRMS IN A COMMON INDUSTRY ARE LIKELY TO TAKE ON ONE
OF FOUR BASIC STRATEGIC ORIENTATIONS…
DEFENDERS -- PROVIDES A LIMITED PRODUCT LINE
FOCUSES ON EFFICIENCY (COST) OF CURRENT OPERATIONS
NOT LIKELY TO INNOVATE
PROSPECTORS -- OFFERS A BROAD PRODUCT LINE
FOCUSES ON PRODUCT INNOVATION & MARKET OPPORTUNITIES
SOMEWHAT INEFFICIENT
ANALYZERS -- OPERATES IN TWO MARKETS (one stable, one variable)
EMPHASIZES EFFICIENCY IN STABLE AREAS
EMPHASIZES INNOVATION IN VARIABLE AREAS
REACTORS LACKS A CONSISTENT STRATEGY/CULTURE
RESPONSES TO THE ENVIRONMENT ARE OFTEN INEFFECTIVE
TENDS TO MAKE PIECEMEAL STRATEGIC CHANGES

22. TYPES OF KEY SUCCESS FACTORS
TECHNOLOGY MARKETING
Research Expertise Well-trained, Effective Sales Force
Product Innovation Quick, Dependable Customer Service
Process Innovation Customer Guarantees and Warranties
Attractive Styling and Packaging
MANUFACTURING Breadth of Product Line
Low-Cost Production Efficiency
High Utilization of Fixed Assets
High Quality of Manufacture OTHER
Low-Cost Facilities Superior Talent, Highly-Skilled Staff
High Labor Productivity Quality Control Know-How
Flexible Manufacturing Facilities Design Expertise
Convenient Locations
DISTRIBUTION Superior Information Systems
Strong Network of Distributors Quick Response to Market Shifts
Ample Shelf Space Favorable Image/Reputation with Buyers
Company-owned Retail Outlets Pleasant, Courteous Employees
Low Distribution Costs Access to Financial Capital
Fast Delivery

23. COMPETITIVE STRENGTH ASSESSMENTS
OUR Rival Rival Rival
KEY SUCCESS FACTORS FIRM # 1 #2 #3
LOW-COST PRODUCTION 7 10 8 6
PRODUCT QUALITY 9 4 6 9
DISTRIBUTION NETWORK 5 5 7 8
CUSTOMER SERVICE 6 8 7 10
FINANCIAL RESOURCES 6 4 8 8
1 = Very Weak, 10 = Very Strong

24. UNDERSTANDING YOUR COMPETITORS
KENDRICK & BLACKMORE 2001
COMPETITIVE INTELLIGENCE QUESTIONS
Why do your competitors exist?
Do they exist to make profits or just to support another unit?
Where do they add customer value?
Do they offer higher quality, lower price, better service, or excellent credit terms?
Which customers are your competitors most interested in?
Do they seek your best customers, the ones you don’t want, or do they go for everyone?
What is their cost base and liquidity?
How much cash and working capital do they have?
Are their suppliers better than yours?
Are they less exposed with their suppliers than your firm?
What do they intend to do in the future?
Do they have a your market segments targeted? Are they committed to growth?
How will their activity affect your strategies?
Should you adjust your plans and operations?
Do either of you have a competitive advantage in the marketplace?
How much better than your competitor do you have to be to attract customers?
Will new competitors emerge over the next few years?
Who is a potential new entrant?
If you were a customer, would you choose your product over those offered by others?
What irritates your current customers?

25. DRAWING CONCLUSIONS ABOUT OVERALL
INDUSTRY ATTRACTIVENESS
FACTORS WHICH MAKE THE INDUSTRY ATTRACTIVE?
FACTORS WHICH MAKE THE INDUSTRY UNATTRACTIVE?
SPECIAL ISSUES AND PROBLEMS WHICH ARE UNIQUE TO THIS
INDUSTRY?
IMPACT, PROBABILITY, SEVERITY
THE PROFIT OUTLOOK
ABOVE OR BELOW AVERAGE?
DEGREE OF RISK & UNCERTAINTY IN THE INDUSTRY’S
FUTURE

26. ENVIRONMENTAL SCENARIOS
WHAT ARE YOUR ASSUMPTIONS ABOUT THE ENVIRONMENT?
WHAT ARE THE POSSIBLE “STATES OF NATURE” IN THE FUTURE?
WHAT ARE THE MOST IMPORTANT ENVIRONMENTAL
OPPORTUNITIES AND THREATS IN YOUR INDUSTRY?
WHAT IS THE PROBABILITY THAT EACH OF THESE TRENDS
WILL OCCUR IN THE NEXT 5 –7 YEARS? (Assign a probability)
DEVELOP A PARAGRAPH WHICH INTEGRATES THESE
TRENDS INTO A “MOST LIKELY” SCENARIO.
WRITE AT LEAST TWO MORE PARAGRAPHS WHICH
DESCRIBE OTHER POSSIBLE, PROBABLE, OR FAIRLY
LIKELY FUTURE ENVIRONMENTS (Optimistic, Pessimistic, Etc).

27. USING ENVIRONMENTAL SCENARIOS
WHAT ARE OUR SCENARIOS?
ENVIRONMENTAL EVENTS WE CAN’T CONTROL
IT IS REASONABLE TO ASSUME THAT EACH EVENT COULD OCCUR
WHAT STRATEGIC ALTERNATIVES DO WE HAVE?
WE HAVE SEVERAL OPTIONS WE CAN PURSUE
THE ORGANIZATION CAN MAKE A CHOICE
WHAT OUTCOMES OR RESULTS ARE POSSIBLE?
WHAT RESULTS ARE LIKELY WHEN A SPECIFIC ENVIRONMENTAL
SCENARIO COMBINES WITH A CHOSEN ALTERNATIVE?
HOW CERTAIN ARE WE OF EACH OUTCOME?
VIRTUALLY CERTAIN? …WHAT IS THE PROBABILITY?

28. A PAYOFF TABLE ILLUSTRATION
UNDER TOTAL UNCERTAINTY
EXPECTED PROFITS $ / ACRE
STATES OF NATURE / ENVIRONMENTAL SCENARIOS
ALTERNATIVE CROPS NORMAL WET DRY VIOLENT
--------------------------------
CORN $ 900 450 -800 250
--------------------------------
POTATOES 800 -300 400 500
--------------------------------
HAY/GRASS 300 500 0 100
--------------------------------
1. MAXI-MAX (Optimist) *Corn 900, Potato 800, Hay 500
2. MAXI-MIN (Pessimist) Corn -800, Potato -300, *Hay 0
3. MINI-MAX (Regret) Regrets..Corn 1200, Potato 800, *Hay 600
4. AVERAGE (Rational) Ex Value…Corn 200, *Potato 350, Hay 225

29. BUILDING A REGRET MATRIX
EXPECTED PROFITS $ / ACRE
STATES OF NATURE / ENVIRONMENTAL SCENARIOS
ORIGINAL MATRIX
ALTERNATIVE CROPS NORMAL WET DRY VIOLENT
--------------------------------
CORN $ 900 450 -800 250
POTATOES 800 -300 400 500
HAY/GRASS 300 500 0 100
--------------------------------
REGRET MATRIX
CORN 0 50 1200 250
POTATOES 100 800 0 0
HAY/GRASS 600 0 400 400
------------------------------------
MINIMIZE THE MAXIMUM REGRETS
Corn = 1200, Potatoes = 800, Hay = 600**

30. A PAYOFF TABLE ILLUSTRATION
UNDER RISK (ASSIGNED PROBABILITY)
EXPECTED PROFITS $ / ACRE
PROBABILITIES COME FROM “GOOD” GUESSES. CALCULATE THE EXPECTED VALUES
INDIAN JOE’S ESTIMATES = Normal 30%, Wet 25%, Dry 20%, Violent 25%
STATES OF NATURE / ENVIRONMENTAL SCENARIOS
ALTERNATIVE CROPS NORMAL WET DRY VIOLENT EXPECTED
WEIGHTS .30 .25 .20 .25 VALUES
=======================
CORN $ 900 450 -800 250 $ 285
--------------------------------
POTATOES 800 -300 400 500 370**
--------------------------------
HAY/GRASS 300 500 0 100 240
= = = = = = = = = = = = = = = = = = = = = = = == =
You should PLANT POTATOES EVERY YEAR. In any one year you’ll either make 800,
lose 300, make 400, or make 500 …but over the years, you’ll average $370 of profits.

31. A PAYOFF TABLE ILLUSTRATION
UNDER RISK (FACTUAL PROBABILITY)
EXPECTED PROFITS $ / ACRE
PROBABILITY INFORMATION COMES FROM RELIABLE (FACTUAL) SOURCES
WEATHER BUREAU HISTORY = Normal 35%, Wet 30%, Dry 15%, Violent 20%
STATES OF NATURE / ENVIRONMENTAL SCENARIOS
ALTERNATIVE CROPS NORMAL WET DRY VIOLENT EXPECTED
WEIGHTS .35 .30 .15 .20 VALUES
=======================
CORN $ 900 450 -800 250 $ 380**
--------------------------------
POTATOES 800 -300 400 500 350
--------------------------------
HAY/GRASS 300 500 0 100 275
=======================
You should PLANT CORN EVERY YEAR. In any one year you’ll either make 900,
make 450, lose 800 or make 250 …but over the years, you’ll average $380 of
profits.

32. A PAYOFF TABLE ILLUSTRATION
UNDER RISK (WHAT IS THE VALUE OF PERFECT INFORMATION?)
WE KNOW ONLY GOD CONTROLS THE WEATHER, BUT IF WE HAD PERFECT
PREDICTION EACH YEAR, WE’D KNOW EXACTLY WHAT THE WEATHER
WOULD BE AND WHAT WE SHOULD PLANT. WE’D HAVE NORMAL
CONDITIONS 35% OF THE TIME, AND DURING THOSE TIMES, WE’D PLANT
CORN. 30% OF THE TIME IT WOULD BE WET AND WE’D PLANT HAY, ETC.
STATES OF NATURE / ENVIRONMENTAL SCENARIOS
ALTERNATIVE CROPS NORMAL WET DRY VIOLENT EXPECTED
WEIGHTS .35 .30 .15 .20 VALUES
=======================
CORN $ 900 450 -800 250 $ 380**
POTATOES 800 -300 400 500 350
HAY/GRASS 300 500 0 100 275
=======================
Expected Profits given Perfect Information (EPPI) = $625.
Expected Value of Perfect Information (EVPI) = EPPI – EV = $625 –380 = $
245
Therefore, you can increase your profits by up to $245 if you have a perfect
weather forecast each spring.