L6: Managing Risk in
a Turbulent Environment
EC10: Innovation & Commercialisation
Uncertainty and how to make decisions
that build competitive advantage
Marcus Thompson
wmt1@stir.ac.uk
L6 Managing Risk Outline




Managing Uncertainty
Games Theory
Change Management
Opportunity Mapping
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1. Managing Uncertainty
EC10
Innovation & Commercialisation
Dictionary Definition
Innovation "making changes to something
established". Oxford English
Invention, by contrast, is the act of
"coming upon or finding: discovery".
Whereas inventors stumble across or
make new things, "innovators try to
change the status quo".
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Disruptive Innovation
New technological innovation, product or
service that eventually overturns the
existing dominant technology in the market,
despite the fact that the technology is both
radically different than the leading
technology and that it often initially
performs worse than the leading technology
according to existing measures of
performance. Source(http://en.wikipedia.org/wiki/Disruptive_Technology)
Any technology that rapidly leapfrogs over
the competition by performing the tasks of
an existing technology but in a much
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improved manner.Source:
http://wistechnology.com/article.php?id=518
Low end disruption occurs when the
rate at which products improve
exceeds the rate at which customers
can learn and adopt the new
performance
New market disruption occurs when a
product that is inferior by most
measures of performance fits a new or
emerging market segment
Source(http://en.wikipedia.org/wiki/Disruptive_Technology)
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Examples of Disruptive Innovation
Sinclair Micro FM
1965
1st pocket size fm tuner receiver
 Sony Walkman
1979
1st walkman = $500 (today’s money)
150 million sold & over 300 models –
sony alone (‘95)
 Sony Discman
1984
Transition from cassette tape to CD for
better
sound quality
 Sony Minidisc
1992
Smaller than CD with better sound quality
 MP3 player
1998
RIO 300, 1st portable MP3 player Invented by
Digital Network N.America
 Apple iPod
2001

Sources:
http://www.digitalmusicmuseum.com/history/history-of-portable-music.php
http://pocketcalculatorshow.com/walkman/history.html
http://en.wikipedia.org/wiki/Rio_PMP300
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http://www.nvg.ntnu.no/sinclair/audio/micro-fm.htm
http://tingilinde.typepad.com/starstuff/2003/10/sony_walkman_hi.html
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Why is it Disruptive?
 Change of data storage medium
 Technological innovation
From tape cassette to
compact disc & minidisc
(magneto optical disc)
 Now
Audio file format(mp3,AVI,wma)
Using flash drive (most MP3
players) and hard disk (iPod)
 From tangible devices to digital
file
Imagine what will happen to music
stores, CD manufactures, way of
selling music? (copyrights,
recording
companies)
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Source: http://en.wikipedia.org/wiki/compact_audio_cassette
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The Challenge of Discontinuity
Growing sense of unease – what’s around the
corner?
Lessons of history – shifts in the rules of the
game = shift in key players
Wisdom of hindsight - not invented here, etc.
But do we learn? ‘Disruptive innovation’ and
other studies
Problems go deep – cognitive and emotional
problems
John Bessant, Cranfield University/
Advanced Institute for Management
Multiple triggers for discontinuity Research
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Discontinuity
Smart firms fail, existing incumbents fall
Good practice routines may be part of the
problem, not the solution
Don’t have much practice at ‘do different’
innovation so don’t develop routines for it
Increasingly frequent emergence ( technologies,
markets, politics, etc.) so a priority management
issue
Need to think about managing beyond the
steady state
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Steady state vs. discontinuous
Degree of
uncertainty
Uncover
Co-evolve
Exploit
Flex
John Bessant, Cranfield University/
Advanced Institute for Management Research
Degree of instability
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Adapting to Industry Changes
What are the sector external forces transforming
industry?
What is the vision for achieving industry leadership what will be our differential advantage, core
competences and new channels of distribution?
How will the core competences necessary to achieve our
vision of world-class competitiveness be built?
What strategies must be developed to implement the
vision?
What are the leadership qualities required from the
management team to spearhead the transformation
process?”
Doyle, 20036 Managing Risk
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Trade-offs
Short-term profit versus long term growth
Profit margin versus competitive
advantage
Direct sales versus market development
Penetration of the existing versus new
markets
Profit versus long-term goals
Growth versus stability
Riskless versus risky approach to
business development.
Carson, 2000
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2. Game Theory
EC10
Innovation &
Commercialisation
Themes of Decision Theories
 “No
man is an island, entire of itself;
every man is a piece of the
continent.” John Doune
 “For every action there is NOT an
equal and opposite equal reaction”
(Newton’s Third Law)
Decision theories apply to understanding the firms
or6 Managing
its consumers
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The Art of War

On the importance of collecting strategic information about
your competitors and your company:
– Know the enemy and know yourself; in 100 battles you will
never be in peril.

On the importance of understanding the competition:
– Therefore, determine the enemy's plans and you will know
which strategy will be successful and which will not.

On the need to war-game strategies:
– To rely on rustics and not prepare is the greatest of crimes; to
be prepared beforehand for any contingency is the greatest of
virtues.

On the value of being able to react to changes in
circumstances:
– The general must rely on his ability to control the situation to
his advantage as opportunity dictates. He is not bound by
established procedures. A general prizes opportune changes in
circumstances.
Sun Tzu and the Art of Business. Six Strategic Principles by Mark McNeilly. ©1996 by
Oxford University Press Inc., used by permission of Oxford University Press, Inc
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Diffusion Theory

diffusion as the process by which an innovation is
communicated through certain channels over
time among the members of a social system.
– innovation - an idea, practices, or objects that is
perceived as knew by an individual or other unit of
adoption.
– communication channels - the means by which
messages get from one individual to another.

time - the three time factors are:
innovation-decision process
relative time with which an innovation is adopted by an
individual or group.
innovation's rate of adoption.
– social system - a set of interrelated that are engaged in
joint problem solving to accomplish a common goal
Rogers, 1962
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The Contradiction
Make
a better mousetrap,
and the world will beat a
path to our door. (?)
-Ralph Waldo Emerson
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Commandments
 Understand
the game you are in
 Note that the rules are flexible
 Anticipate your opponents reaction
 Understand the assumptions
 Recognise that not everyone
understands the rules - or plays to
them.
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The Golden Rule of Competitive
Advantage
COMMANDMENT
Never assume that your competitors
behavior is fixed.
Predict their reaction to your behavior.
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Rules of the “Game”
Games are Played
Simultaneously

Anticipating rival’s moves


Sequential games
Looking forward – reasoning back
Mixed strategies
Sensibility of being unpredictable

Repeated games
Cooperation and agreeing to agree
against a rival.
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Techniques For Winning
Commitment
Credibility, threats, and promises
Information
Strategic use of information
Bargaining
Gaining the upper hand in
negotiation
Auctions
Design and Participation
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Definition of a Competitive Game

Must consider the strategic environment
 Who
are the PLAYERS?
(Decision
makers)
 What STRATEGIES are available?
(Feasible
actions)
 What are the PAYOFFS?
(Objectives)

Rules of the game
 What
is the time-frame for decisions?
 What is the nature of the conflict?
 What is the nature of interaction?
 What information is available?
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Dominance & First Leader
Advantage
CAVEAT
Predict opponents’ reaction
to your behavior.
BUT
Be sure you understand who your
opponents are.
(Do you know everyone who may
react to your decisions?)
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Issues

Are the threats by the parties credible?

Can cooperation be sustained?

Are there informational advantages?
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Dominance
COMMANDMENT
If you have a dominant strategy, use it.
Expect your opponent to use her
dominant strategy if she has one.
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Equilibrium = Stability

Nash Equilibrium:
 Within
an industry sector, assume that a set of
strategies has evolved, such that each player’s
strategy is best for his or forms given that all
other players are playing their equilibrium
strategies

Best Response:
 The
best strategy I can play given the strategy
choices of all other players

Everybody is playing a best response
 No
incentive to unilaterally change my strategy
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Dominance
CAVEAT
Expect your opponent to use her
dominant strategy if she has one.
BUT
Be sure you understand your
opponents’ true payoffs.
(Do you know what
really motivates them?)
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Successive Deletion of
Dominated Strategies
 Rational
players …
– Should play dominant strategies
– Should not play dominated strategies
– Should not expect others to play
dominated strategies
– Thus, dominated strategies may be
eliminated from consideration
– This may be done iteratively
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3. Change Management
EC10
Innovation & Commercialisation
Evolution & Economics
“It is not the strongest of the
species that survives, nor the
most intelligent, but the ones
most responsive to change.”
Charles Darwin, Theory of Evolution
based on Theory of Economics
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Change Management








Address the “human side” systematically.
Start at the top
Involve every layer of the organisation.
Make the Business Case
Create ownership.
Communicate the message.
Address culture explicitly.
Prepare for the unexpected. Jones & Aguirre, 2004
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Heuristic Decisions: Goal Formulation
Bias / Process
Adapted
from
Schwenk
1984:115
Effect
(1) Prior hypothesis bias
Evidence ignored, gaps not
perceived
(2) Adjustment and
anchoring
Evidence under used, gaps
not perceived
(3) Escalating commitment
Significance of gap
minimized, strategy not
revised
(4) Reasoning by analogy
Problem mis-defined
(oversimplified),
inappropriate strategy
revision
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Heuristic Decisions
Bias / Process
Effect
(1) Single outcome calculation
Restricts alternatives to a
single one
(2) Inferences of impossibility
Premature rejection of
alternatives
(3) Denying value trade-offs
Biased use of evaluation
criteria
(4) Problem sets
Alternatives restricted
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Heuristic Decisions
Bias / Process
Effect
(1) Representativeness
a. insensitivity to predictability
b. insensitivity to sample size
c. illusion of validity
Inaccurate prediction of
consequences of alternatives.
(2) Illusion of control
Inaccurate assessment of risks of
alternatives.
(3) Devaluation or partially
described alternatives.
Rejection of strong but poorly
presented alternatives.
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Type of Bias
 Search for supportive evidence
– Willingness to gather facts that lead towards certain conclusions and
to disregard other facts that threaten them.
 Inconsistency
– Inability to apply the same decision criteria in similar situations.
 Conservatism
Adapte
d from
Makrida
kis,
1990
– Failure to change (or change slowly) one’s own mind in light of new
information.
 Recency
– The most recent events dominate those in less recent past, which
are downgraded or ignored.
 Availability
– Reliance upon specific events easily recalled from memory, to the
exclusion of other pertinent information.
 Anchoring
– Predictions are unduly influenced by initial information which is given
more weight in the forecasting process
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Bias Of Decision Making
 Illusory correlations
– Belief that patterns are evident and/or two variables are causally
related when they are not.

Selective Perception
– People tend to see problems in terms of their own background and
experience.

Insensitivity to regression effects / misconceptions of regression
– Persistent increases in some phenomenon might be due to random
reasons, which would raise the chance of a subsequent decrease
and vice versa.

Bias in attribution of success and failure
– Success is attributed to one’s skills while failure to bad luck or
someone else’s error. This inhibits learning from mistakes.

Optimism or wishful thinking
– People’s preferences for future outcomes affect their forecast of
such outcomes.

Underestimating uncertainty
– Excessive optimism, illusory correlation, and the need to reduce
anxiety result in underestimation of future uncertainty
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Integrated Framework

1) Prior hypothesis and focusing on limited targets
– Decision makers are likely to bring prior hypotheses into decisionmaking situations, e.g. they may have prior hypotheses about the
relationships between variables, and they therefore may overlook
or fail to look for evidence which may not support their
hypotheses. Managers focus their attention on those key
objectives that appeal to their interest and tend to ignore
information about other worthwhile objectives.

2) Exposure to limited alternatives
– Decision-makers expose themselves to only a limited number of
options that can achieve a goal due to incomplete
information. Rather than attempting to specify all relevant goals
and values and generate a number of courses of action (as
normative theory would suggest), decision-makers are exposed to
limited options.
Adapted from Makridakis,
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 3) Insensitivity to outcome probabilities
– Decision-makers tend not to use or understand estimates of outcome
probabilities, and are more influenced by the value of possible outcomes
than by the magnitude of the probabilities. Decision-makers tend to feel
their problems are unique. This is another reason why they do not use
outcome probabilities. Decision-makers are characterised by their
insensitivity to the validity of estimates.
 4) Illusion of manageability.
– Decision-makers may inappropriately perceive a success probability higher
than the objective probability would warrant, and they then have an illusion
of control. Decision-makers may also overestimate the extent to which an
outcome is under their control, believing that risk can be reduced by using
their professional skills. Managers also have the illusion that
consequences of decisions are manageable and this eases managers’
anxiety over such outcomes.
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Modes of Decision Making

Rational Mode
– Decision-making is a comprehensive and normative process, in which
decision-makers are assumed to be rational and are assumed to enter
decision situations with known objectives. Decision-makers gather
information (from both the internal and external environment), develop
alternatives and objectively select the optimal alternative. Their
organisations employ formal, comprehensive analyses to deal with
uncertainties in decision making.

Avoidance Mode
– The avoidance mode is concerned with the fact that strategic decisionmaking processes often lead to a resistance to change. Organisations
tend to avoid uncertainty (Cyert & March, 1963).
– Maintaining the status quo is a desirable objective. Decision-makers tend
to avoid strategic change and avoid identification of new problems.

Logic Incrementalist Mode
– Strategic decision-making is a step-by-step incremental process.
 The process is incremental and no dramatic decision is made at any time.
 It is a consistent movement towards a broad global goal.
 The purpose of moving incrementally is to gather more information and feedback
from the initial action.
–
In this mode goals are broad and relatively vague, so that they can be
modified when more information becomes available.
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Modes of Decision Making
 Political Mode
– Decision-makers are often unable to attain even a broad consensus on
organisational objective. This mode assumes that groups of individuals in
the organisation have conflicting interests and fight for a decision
favourable to them. Therefore the outcome is decided by who can form the
most powerful coalition. The strategic decision process in this mode is a
power struggle and the most powerful win.
 Garbage Can Mode
– This is the most uncertain and fluid mode of strategic decision-making. As
organisations are viewed as ‘organised anarchies’ there is no particular
rationale for making a strategic choice. The decision process consists of
four components: 1) choice opportunities 2) solutions, 3) participants and
4) problems. What accounts for the outcome is only timing and chance.
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Personal Construct Theory
 the individual creates his or her own ways of seeing the
world in which he lives; the world does not create them for
him;
 (s)he builds constructs and tries them on for size;
 After
theKelly
constructs are sometimes organized into systems,
1955
group of constructs which embody subordinate and
superordinate relationships;
 the same events can often be viewed in the light of two or
more systems, yet the events do not belong to any system;
and
 the individual's practical systems have particular foci and
limited ranges of convenience.
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Alternative Constructs
 “We assume that all of our present interpretations
of the universe are subject to revision or
replacement... There are always some alternative
constructions available to choose among in
dealing with the world." Kelly 1955
 "Constructive alternativism argues for an open
society in which the pursuit of alternatives is
central to the way in which we live. Political
doctrines favoring authoritarian forms of social
structure require the acceptance of indisputable
truths, indisputable 'realities.'" Bannister (1981)
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Different Aspects of Reality
 Individuality
– "persons differ from each other in their construction of
events."
 Communality
– "to the extent one person employs a construction of
experience which is similar to that employed by another,
his psychological processes are similar to those of the
other person."
 Socialty
– "to the extent that one person construes the construction
processes of another, he may play a role in a social
process involving the other person."
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4.
Opportunity Mapping
EC10
Innovation & Commercialisation
Adaptive Decision making
Normative
Decision Making
Problem definition
Information gathering
Identification of solutions
Evaluation of solutions
Choice of ideal solution
Implementation
Factors Distorting Decision-Making
Management
Experience
Skills
Style
Intuition
Judgement
Motives
Resources
Information
Time
Access
Analysis
Decision making
Uncertainty
Impact
Structure
Complexity
Formality
Routine
Review of effectiveness
Source: Adapted from Marketing & Entrepreneurship, Carson Et al, 1995, p115 & 117
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Fuzzy front-end
 (FFE) of innovation is the period between
when an opportunity is first considered
and when it is judged ready for
development.
 a clear, well-defined product concept;
 clear development requirements;
 a business plan aligned with corporate
strategy.
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Managing a Portfolio
 An organisation should have a number of
projects running simultaneously.
 Allocating resources is a challenge.
 Value. Which projects are worth doing
 Balance Which group (portfolio) fits together.
 Portfolio Management is dynamic
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Elements of a Good
Portfolio
 Valuation Criteria
 Each project should represent good value.
 The collection of projects must make
efficient use of (scarce) resources.
 Portfolio Balance
 High risk projects should be balanced by lowrisk
 Innovation portfolio should fit to strategic need.
Goffin, Mitchell, Innovation Management, p189, 2005
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Opportunity Mapping
 Stages
 Build a market-technology map to identify
current & future market & technology trends
within the competitive landscape.
 Define product/technology specifications (or
main parameters of value) and optimum
innovation paths required for achieving growth
goals, including time horizons for each path.
 Opportunity Matchmaking & Identification
 Identifying the set of potential technology
opportunities based upon the
product/technology specifications and optimum
innovation paths. 6 Managing Risk
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Opportunity Mapping
 Opportunity Evaluation & Targeting
 Systematically evaluating the set of potential
opportunities, based upon your business
goals, needs, and requirements, resulting in
a set of singular opportunities.
 Product & Technology Road-Mapping
 Developing and recommending a detailed
roadmap for pursuing the identified
opportunities.
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Solutions
Identification
Leading to . . .
 Product/Process Cost Reduction
Product/Process Function & Feature
Improvement
New Product/Process Development
Identifying & Leveraging Technology
Platforms
External Technology Sourcing
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Scenario Planning
 Drivers for Change
 Create framework to judge viability &
relevance
 Produce initial scenarios
 Reduce to two or three scenarios
 Write Scenarios into Strategic Plan
Mercier, 1997
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