Business Problem Solving
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4.1Longtimeframeshighuncertainty1.pptxLong time frames & high uncertainty: Solving problems in complex contexts
Dr. Stephen Hills
Learning objectives
To be able to identify levels of uncertainty.
To be able to employ different strategic options appropriate for different levels of uncertainty.
To be able to step-out into new and uncertain markets using a staircase approach.
To be able to theorise change.
To be able to balance strategies and investments.
Long time frames & high uncertainty
Many of the problem examples to date in the core text exhibited
low to moderate uncertainty
where the cost of error is relatively low
and where time frames are relatively short.
But there is a class of problems where
time periods are long
complexity and uncertainty are high
and the consequences of error are substantial.
Levels of uncertainty
Levels of Uncertainty
| 1 | Simple predictions and short term forecasts |
Levels of Uncertainty
| 2 | Alternative futures from legislative or technology change with a binary result |
| 1 | Simple predictions and short term forecasts |
Levels of Uncertainty
| 3 | Scenarios e.g. impact of AI on jobs, role of fossil fuels in 15 years time |
| 2 | Alternative futures from legislative or technology change with a binary result |
| 1 | Simple predictions and short term forecasts |
Levels of Uncertainty
| 4 | Sea-level in London in 2050 |
| 3 | Scenarios e.g. impact of AI on jobs, role of fossil fuels in 15 years time |
| 2 | Alternative futures from legislative or technology change with a binary result |
| 1 | Simple predictions and short term forecasts |
Levels of Uncertainty
| 5 | When will be come into contact with alien life forms? |
| 4 | Sea-level in London in 2050 |
| 3 | Scenarios e.g. impact of AI on jobs, role of fossil fuels in 15 years time |
| 2 | Alternative futures from legislative or technology change with a binary result |
| 1 | Simple predictions and short term forecasts |
Where does the Russia invasion of Ukraine fit on this tool?
Levels of uncertainty
Levels of uncertainty range from level 1 (a reasonably predictable future) to level 5 (the unknown unknowns).
Uncertainty levels 1 through 4 are the known unknowns.
Uncertainty can be a good thing for strategic problem solvers.
If your problem solving is right you can earn good returns and guard your downside while others are floundering.
Example: Hedge fund managers hope for uncertain and volatile markets when they have an analytic edge.
We need to recognise and quantify the level and type of uncertainty, and then develop approaches to move toward our desired outcomes by managing the levers that we control.
What actions you can take to deal with a particular level of uncertainty?
Dealing with uncertainty
Dealing with uncertainty: The known unknowns
What actions you can take to deal with a particular level of uncertainty?
The spectrum of actions you can take when faced with level 2 level 4 uncertainty (the known unknowns) range from buying time (i.e., doing nothing and waiting for more information) to no regret moves and taking big bets.
When uncertainty sits at level 2 (alternative futures) or greater, most decision-makers will seek to defer irreversible commitments.
Thinking probabilistically: When we can estimate the parameters of uncertainty, math can help us to calculate what is a fair bet and estimate the value of different options.
Actions for Dealing With Uncertainty – Strategic Perspective
Buying information: Ranging from data gathering and analysis of underlying processes to clarifying the sources of uncertainty and the motives of protagonists (i.e., principal actors).
Hedges: Making a reasonable cost move or investment that will counter downside events.
Examples:
Fossil fuel companies investing in renewable energy.
Buying water rights in areas expected to have lower rainfall with climate change.
Sometimes these can involve options, futures contracts, or other financial instruments.
Acquiring low-cost strategic options: Having a portfolio of initiatives, or betting on multiple horses in the race, is another way we deal with uncertainty.
Major financial institutions investing relatively small equity stakes in financial technology (fintech) start up companies to be in a position where they can first understand and then capitalize on innovation that challenges established players.
Example: In 1986 IBM had an opportunity to buy 30% of Miscrosoft for under $300 million.
Actions for Dealing With Uncertainty
Buying insurance: The threat of global warming is sometimes framed as an insurance problem, with estimates that a little over 1% of global GDP has to be committed to paying the annual premium to keep CO 2 levels below a 2-degree centigrade increase.
There are also insurance products for a range of uncertain situations, known as cat bonds or catastrophe bonds, that cover events like typhoons or hurricanes.
No regrets moves: When you are comfortable with the level of uncertainty or can edge out into a competitive space with incremental learning moves.
These are no regret moves because they involve the capability building you’ll need no matter what the outcome.
Big bets: Taken when you have a level of confidence about an outcome not shared by others.
Example: The Big Short book/movie describes how a new financial instrument called a credit default swap was used to short the housing market – to sell positions on the assumption that housing prices will drop.
The investors felt the mortgage securities were mispriced and took a big bet
Case: How should I choose my career?
Case: How should I choose my career?
The impact of automation and advances in human level machine intelligence will have both a positive and negative impact on jobs.
Predictions of the labour market are much more uncertain than they have been in previous years.
Currently lots of new job titles that did not exist in previous years and in the future there will be other new job titles.
How do you navigate your way through career decisions now to avoid a high cost of error and have a good chance of realizing your goals?
How can you best position yourself in this changing labour landscape?
Logic tree: Economic labour landscape
The employment share of non-routine cognitive and manual jobs is growing, while the employment share of routine cognitive and manual jobs is shrinking.
You can use your knowledge about your personal level of ability, interests and risk tolerances to guide your career choice decisions.
Matrix: What are you passionate about and does that map against what skill sets are needed?
Each row is broad potential field or sector.
The first column is current economic predictions for the field.
The next are your personal assessments of your ability, interest and ability to take risks.
For each potential field, subject area, or employment sector, you fill in your self-assessed strength, interest, and risk-tolerance levels in the second, third, and fourth columns.
You can choose low, medium, or high, to rank your preferences.
Matrix: What are you passionate about and does that map against what skill sets are needed?
Eliminate or prune sectors in which you have low strength or abilities and low interest.
Case: How should I choose my career?
Beginning with the most promising sector, the sectors for which you have the highest interest and ability, you can use this tree to guide your next step or action.
Potential strategies or actions:
Make a big bet and embark on a path with considerable risk.
Make a no regrets move and gain a base level of education or training in a safe field that safeguards you from risk.
Hedge your bet by investing time and energy in education or training for two or more fields or positions.
Faced with high ability, high interest, high risk tolerance and high economic opportunity, a big bet entrepreneurial path is preferred.
However, where these factors don’t align, a no regrets move of obtaining an education base is preferred.
You could also hedge your bet by double majoring or studying while working.
Strategic growth staircases
Strategic growth staircases
Determining the steps that allow successful companies to edge out into new businesses in uncertain environments.
Emphasis is on learning, buying options and building capabilities.
What steps are taken and in what order to build capabilities, add assets and reduce uncertainty?
Work backwards from a planned outcome, thinking through the capabilities, assets and business learning required to be successful.
Take a step-by-step approach to strategic moves, allied to the uncertainty level, expanding commitment as uncertainty is reduced.
Frame in time the staircase steps, knowledge captured and capabilities that are being built.
Staircase architecture
Stretch: The extent of stretch in the step reflects the complexity of new capabilities and the degree of integration required. There should be a balance between the ability to absorb new skills and the competitive demand for speed to establish market presence. If not, the stretch is too much.
Momentum: The degree of momentum due to positive effect of early success from small moves and learning and confidence of the organization.
Flexibility: Maintaining fluidity in the face of uncertainty, such as avoiding sunk assets that could later become stranded, e.g., by contracting and outsourcing work.
Staircase architecture is determined by bringing these three considerations together and working through choices about staircase steps and how they are sequenced.
There are trade-offs between smaller vs. larger steps, option-laden moves vs. focused commitments (e.g., better at blocking competitors) and the speed at which moves can create momentum, which can be challenging to integrate with the existing business model
Case: J&J Contact Lenses
Case: J&J Contact Lenses
J&J were able to build a global contact lens business in little over a decade.
This was achieved in a series of initially small steps, then larger and more expansive moves
Theory of change
Theory of change
For large multiyear problems it is important to have an overall theory of change.
A theory of change is a strategic map for visualizing change for large, multiyear problems.
It is a comprehensive description and illustration of how and why a desired change is expected (i.e., theorised) to happen in a particular context.
Case: Pacific Salmon
Theory of change: Pacific Salmon
This theory of change summarises the overall strategy for preserving salmon and salmon ecosystem function.
At the bottom are the strategies, which are then mapped to how and why they will contribute to for preserving salmon and salmon ecosystem function.
Portfolio of strategies map: Pacific salmon
This matrix captures the stage of investment (see below) and level of aspiration (incremental or transformational change):
Seed: Those strategies designed to create early conditions for change,
Cultivation: Those strategies where interest groups had come to the table and were willing to work together on solutions for both ecosystems and economic users.
Harvest: Those investments to cement conservation gains and solidify institutional support for new conservation centered resource management processes.
Helps to balance the strategies and investments across logical stages of change: balance between initiatives which had transformational aspirations (i.e., expensive and risky) and initiatives aiming for incremental but important change.
Conclusions
Conclusions
Uncertainty is a feature of most difficult problems.
Understanding the level of uncertainty is the first step to problem solving under uncertainty.
Depending on level of uncertainty, you can manage risk through buying information, acquiring low-cost options, paying for insurance and taking low-regrets moves that build capabilities and knowledge.
A staircase approach can help companies step-out into new and uncertain markets, managing stretch, maintaining flexibility and driving momentum as new capabilities and assets are built.
Case: WeWork
Background
In 2008, Adam Neumann and Miguel McKelvey originally founded GreenDesk, an eco-friendly coworking space in Brooklyn, having spotted an opportunity of a market of people freelancing or starting companies, which they matched to an excess empty office space as a result of the 2007-2008 financial crisis.
They sold GreenDesk in 2010 and used the funds, alongside funding from real estate developer Joel Schreiber, who invested $15 million for a 33% interest to launch WeWork in New York’s SoHo district in 2010.
WeWork is a company that provides flexible shared workspaces and office services.
In 2011 WeWork launched WeWork Labs, which provided an open workspace to encourage collaboration between members, serving as a startup incubator.
Early investors included JP Morgan Chase, T Rowe Price and Goldman Sachs.
Then in 2016 WeWork raised a further $430 million in a new round of financing that valued the company at $16 billion, taking the amount of private capital that the company had raised to $1.7 billion.
In 2017, after extensive global expansion and another investment round, which brought in $500 million of investment primarily from Japanese investment giant SoftBank, WeWork reached a valuation of $20 billion.
A further $400 million was raised in 2018 to fund the purchase of properties directly and a further $500 million was raised later the same year to expand in China.
WeWork secured further funding of $3 billion in 2018 and $2 billion in 2019 from SoftBank.
Initial Public Offering
In 2019 WeWork confidentially filed an initial public offering (IPO), which involves offering shares of a private corporation to the public in a new stock issuance, looking to raise over $3.5 billion.
These plans became public when WeWork filed its IPO Prospectus, which included a description of the company and its operations, the terms and conditions of the initial stock offering, and any other information an investor may need to decide to invest.
The financial disclosures in the IPO prospectus revealed the heavy losses of WeWork, which brought into question WeWork’s valuation and ability to become profitable in the future.
Neumann told Forbes that WeWork’s “valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.”
The IPO Prospectus also led to heavy criticism of WeWork’s management and its business model, in particular there was heavy criticism of Neumann’s leadership.
As a result, WeWork postponed its IPO until the end of 2019 and sought to limit its costs.
It sold off its private jet, which had been purchased for $60 million for Neumann’s use, sold off businesses it had previously acquired and laid off 2,400 members (20%) of its global workforce and further layoffs followed in 2020.
Loss in value and confidence in leadership
At the end of 2019, SoftBank announced $9.2 billion in write-downs on its $10.3 billion WeWork investments, which is an accounting practice to recognize the reduced value of an asset, effectively recognizing that its investment in WeWork had dropped 90% in value.
SoftBank, WeWork’s largest investor, had lost confidence in Neumann’s leadership and wanted him removed as chief executive, as well as his family members from the board.
At its peak, WeWork was valued at $47 billion, but was now valued at $8 billion, which was less than the $13 billion that SoftBank had invested in the company.
Neumann’s behaviour was later described by the board as “tumultuous”.
He was accused of self-dealing and self-enrichment via frequent sell-offs of stock and leasing of buildings he owned to WeWork and for licensing the We trademark to WeWork from a separate entitle called We Holdings that he and other WeWork founders owned.
Other criticisms
Neumann was also criticised for WeWork’s purchase of a Gulfstream G650 private jet for $60 million for his use at a time when employees were not receiving promised bonuses or raises was heavily criticised.
Neumann’s hard partying lifestyle and his decisions to expand WeWork into areas of personal interest, such as surfing, were also criticized.
WeWork’s culture of mixing work and pleasure, including free beer at some of its locations, had become a problem.
Critics of WeWork argued that WeWork was little more than a typical real estate company with shaky finances that had been obscured by Neumann's personal charm and style.
Nuemann’s exit package was reported to be valued at $1.7 billion, including $970 million for his remaining shares, a $185 million consulting fees and a $500 million credit to repay loans.
However, as well as standing down, Neumann was required to return to WeWork any profits he had made from his real estate dealings and also the $5.9 million in stock he received from selling the We trademark to WeWork.
Workshop: WeWork team problem solving
Workshop: Team problem solving
Your team has been brought in by WeWork.
Start with the first two steps of the bulletproof problem solving process:
Define the problem.
Disaggregate the problem to reveal its structure and solution drivers.
WeWork Net Loss & Revenue
WeWork Costs
WeWork Capacity
WeWork Occupancy
WeWork Income per Desk
WeWork Breakeven Curve: Rate vs. Occupancy
Monthly desk rate would have to increase by 61% with occupancy remaining stable
With occupancy returning to pre-covid peak (+18%), monthly desk rate would need to rise by 37%
A further restructuring of costs
