Contenu connexe Similaire à Bush tag seminar 06 mar12 Similaire à Bush tag seminar 06 mar12 (20) Plus de CMG - The Digital Transformation Association Plus de CMG - The Digital Transformation Association (6) Bush tag seminar 06 mar122. MEASURING STRATEGY
QUANTIFYING 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 .
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3. TECHNOLOGY STRATEGY FROM MY PAST
Initial Plan
• Our company had the chance to lead the medical
diagnostics industry in using new biosensor
technology for diabetic glucose monitoring.
Business Case
Forecast economics showed $240 MM NPV.
Key issues and risks were listed, but not quantified.
Decision makers were concerned about reliability.
© 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 3
4. WHY MEASURE A STRATEGY?
Strategy Value ($MM)
100 200 300
Medical 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
5. 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
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6. BENEFITS OF MEASURING STRATEGIES
Clarity
§ Resolves ambiguous and/or conflicting values
§ Communicates the purpose and aims of the decision
Transparency
§ Based on collaborative expertise and rationale
§ Alignment of personal & organizational agendas
§ Confers understanding of uncertainty, tradeoffs, complexity, risk
Transferability
§ Does not rely on one individual's 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
7. 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 steps
Quantifying 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
8. WHAT HAS BEEN DIFFICULT OR
FRUSTRATING FOR YOU IN YOUR
STRATEGIC DECISION PROCESS?
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9. 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
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10. MONEYBALL (AND BRAD PITT) HAVE
DONE A LOT TO POPULARIZE ANALYTICS
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11. AVAILABLE DATA OR VALUABLE INFORMATION ?
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12. COMPETING ON ANALYTICS Tom Davenport
and Jeanne Harris
– THE SCIENCE OF WINNING
According to Tom Davenport,
“Companies that invest heavily in
advanced analytical capabilities
outperform the S&P 500 on
average by 64%”.
An IBM-CFO study shows that analytics-driven organizations had 33% more
revenue 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
13. HISTORY HAS PROVEN THESE LESSONS WELL
Babylonian Triples ~2000 B.C. Quipu Peruvian knot record ~1000 B.C.
Earliest recorded math table on clay Believed to be numerical record
tablets, perhaps used to calculate keeping system used by the Incas for
triangle dimensions for construction. keeping track of commerce.
© 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 13
14. DATA ADDS VALUE BY DRIVING DECISIONS
Chinese counting boards and Village Lawyer by Pieter the Younger,
abacus were essential for the dated 1621 with stacks of paper
Emperor’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
15. COMPUTING SYSTEMS (1820 – 1950) ENABLED
MORE BUSINESSES THE COMPETITIVE ADVANTAGE
Charles Xavier Thomas
invented a mechanical
calculator for his insurance First used in 1928 for vital statistics
business 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.
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16. PROGRAMMED COMPUTERS 1950 – 1980
BEGAN DEMOCRATIZING IT TO SMALL FIRMS
Lyons Electronic Office (LEO) was Dan Bricklin received an award from
the first programmed device to Osborne Computer for creating VisiCalc,
evaluate costs, prices and margins a program that made it worthwhile to
of that week's 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
17. 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
18. WEB / CLOUD IS EVOLVING – 2010 DECADE
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19. NEXT GEN BIG DATA IS NOW IN HYPERDRIVE
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20. 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
21. 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
22. A QUICK EXAMPLE – AIRLINE FUEL DATA
Jet fuel costs - $2.1 billion per year
Fuel Management system proposed to integrate all fuel
data, improve data integrity and functionality.
• Project cost - $4.5 million
Tangible savings (could put in the budget)
• back office cost reduction and simplification of IT systems
Intangible 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
23. QUANTIFYING THE INTANGIBLES
What decisions could real-time data significantly improve?
• Selection of fueler with lowest spot cost.
• Tankering of fuel – where to fuel at low cost & tax airports
Quantifying 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%
Probability
Benefit range $5-25 million per year
$5 M $25 M
© 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 23
24. HOW TO MEASURE INTANGIBLES
Do we understand what we trying to measure?
• Value of making decisions with better information
What does measurement really mean?
• Not a precise forecast, but quantifying what we know
How 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
25. Case Study – ERP System
Major oil company approved a capital spending project
of $100 million for a new global ERP system.
After starting with a positive NPV, the business case
was tweaked to a point where it became a whopping…
© 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 25
26. 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
27. 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
28. 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
29. QUANTIFYING THE UNCERTAINTIES
REVEALED 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
30. BY INVESTING MORE - THE TEAM MITIGATED THE
USER ADOPTION RISK AND ASSURED THE UPSIDE
VALUE OF DATA INTEGRITY AND RELIABILITY
1
0.9
Cumulative 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
31. EACH STAGE RESOLVES KEY QUESTIONS
BEFORE MAKING A FINANCIAL COMMITMENT
Discovery Framing Evaluation Agreement
ü 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
32. FOCUSING ON THE OBJECTIVES IS MORE
PRODUCTIVE THAN ARGUING ABOUT TACTICS
Discovery Phase
Maximize
Fundamental Stakeholder
Value
Capital Operational Service
Contributing Costs Costs Execution
Excellence
System System System Data Service Appropriate
Means Arch.
HW SW
Overhead Complexity Integrity Reliability Tools
© 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 32
33. 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 category
Team Focus
for 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
34. CLARIFYING UNCERTAINTIES AND LOGIC
HELPS 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
35. QUANTIFYING 80% CONFIDENCE INTERVALS
HELPS AVOID ASSUMPTION “BLIND SPOTS”
Evaluation Phase
We recognize assumptions We observe results
are really uncertainties as distributions
Uncertainty
Uncertainty
Probability
Simulation
Uncertainty Objective
Engine!
Uncertainty
$0 $ NPV
Uncertainty
© 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 35
36. HOW EASY DO YOU THINK IT IS TO ASSESS A
10/50/90 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
37. EXERCISE - WHAT IS YOUR 80% CONFIDENCE
INTERVAL 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
38. CULTURAL PRESSURE FOR CERTAINTY
We are trained to provide “the answer”.
Uncertainty makes us restless, whereas we are comfortable
and content with the appearance of certainty
Planning is much easier if we suppress uncertainty
Suppressing uncertainty is dangerous in business!
§ we are surprised and unprepared to deal with the situation
Explicit 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
39. THE RIGHT EXPERT CAN EXPLORE CAUSES OF
UNCERTAINTY AND AVOID SURPRISES
Traditional 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 wrong
Uncertainty 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
40. P50 ± 10% ANCHORS ON THE ESTIMATE
CREATING 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
41. AN 80% CONFIDENCE RANGE EXPLORES A
MUCH MORE ROBUST VIEW OF REALITY
Range p10 p50 p90 Initial Ranged
p50 value p50 value
Anchored 1.80 2.00 2.20
$2/gal $2.40/gal
Calibrated 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, $/gal
© 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 41
42. MONTE CARLO SIMULATION REVEALS THE
VARIATION IN VALUE CAUSED BY UNCERTAINTY
1
A B C • Demonstrates the aggregate
0.9
effect of all the uncertainties
0.8
Cumulative Probability
0.7
by both their impact &
0.6 prevalence
0.5
0.4 • Shows the probability of
0.3 important intervals and the
0.2 opportunity for optimization
0.1
0 • Shows if one decision
Low High dominates another
Value Metric
© 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 42
43. SENSITIVITY ANALYSIS - WHAT REALLY
MATTERS AND WHAT TO STOP ANALYZING
Value Measure of Primary Objective
0
Effect of Uncertaintyi on Value Measure
Critical
Value
Drivers
Minor
Value
Drivers
© 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 43
44. ASKING “WHAT IF” QUESTIONS CAN CREATE
TREMENDOUS VALUE IN A DECISION
Value of Information
What if we had better information?
What would it tell us? How much should
we pay for it?
Value of Control
What if we more had leverage over
critical uncertainties? What might we
do? How much should we pay for it?
© 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 44
45. “WHAT IF” WE COULD REDUCE THE RISK
WHILE CAPTURING THE UPSIDE?
A B
1
0.9
0.8
Cumulative Probability
0.7 Hybrid Strategy
0.6
Hybrid
0.5 ™ Limits downside to A
0.4
0.3 ™ Captures potential of B
0.2
0.1
0
Low High
Value Metric
© 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 45
46. DECISION ANALYSIS PROCESS FLOW
Discovery and Framing Policy
Strategic
NPV Tactical
Cost Revenue
Do we understand the situation What outcomes are
and our strategic question? we targeting?
What decisions & creative
strategies to consider?
Quantifying Insights Low
High Strategy, NPV, M$
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 the
What are the ranges of How to gain insights from the value through effective
uncertainty and risk? uncertainty to maximize value? implementation?
© 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 46
47. 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 of
Economic 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
48. IT FEELS LIKE MORE TIME UPFRONT, BUT A
BETTER DECISION IS IMPLEMENTED SOONER
Quantitative
Save time & energy,
Decision
Decision Analysis
Making
Create
Definition
Options create confidence.
Traditional
Definition
Solution Decision Re-visit
Decision Development Making Decision
Making
Recycle
time
© 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 48
49. QUESTIONS?
Gerald A. Bush, Ph.D.
Tel: (678) 641-6254
Email: gabush@mac.com
Robert D. Brown III
Tel: (678) 947-5997
Email: rdbrown@incitedecisiontech.com
© 2012 COPYRIGHT ROBERT D. BROWN III AND GERALD A. BUSH - ALL RIGHTS RESERVED 49
50. 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 Can't 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