Tools for Strategic Decision- Making in Turbulent Times, US Cellular

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U.S. Cellular® Proprietary and Confidential – Strategic Analysis Group

Elliot Rawls,

Sr. Director, Strategy & Corporate Development

Dec 7, 2012

Tools for Strategic Decision-Making in Turbulent Times

ABCU.S. Cellular® Proprietary and Confidential – Strategic Analysis Group

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1980:

AT&T Hires McKinsey & Co. to forecast the long-term future demand for cell phones.

Their Prediction:

‘By the year 2000, we should expect no more than 900 thousand subscribers to cellular phone service’.

Actual Cell Phone Subscriber base in 2000:

Over 109 million.

Result:

AT&T takes a pass on this ‚lackluster‛ business opportunity.

McKinsey’s Prediction


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20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Actual # of Subscribers

Predicted # of Subscribers

McKinsey’s PredictionUS Wireless Subscriber Growth


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50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

1985

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McKinsey’s Prediction

McKinsey’s PredictionUS Wireless Subscriber Growth


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What went “wrong”?


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1. Tools to effectively describe and categorize uncertainty.

2. Tools that allow us to incorporate uncertainty into our thinking and decision-making processes (rather than ignoring it).

3. Tools that facilitate better strategic decision-making –(but first, we need to better define what good strategic decision-making is).

How can we improve forecasting and decision-making when significant uncertainties exist?

Part I: Dealing with Uncertainty

Part II: Improving Decision Making


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A Clear Enough Future

A single view of the future

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A Range of Futures

A range of possible future

outcomes

Alternative Futures

A limited set of possible future

outcomes, one of which will occur

True Ambiguity

Not even a range of possible future

outcomes

Hugh Courtney’s Four Levels of Residual Uncertainty (‚20/20 Foresight‛: Hugh Courtney)

Part I: A Tool for Categorizing and Describing Uncertainty (Redeeming McKinsey)


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Categorizing Uncertainty

•McDonald’s forecasting earnings for a new restaurant

•Walmart or Home Depot determining store locations

Forecasting demand and cost variables in stable markets with relatively stable business models

‚A Clear Enough Future‛

Examples of Level One Uncertainty

Traditional Tools:

•Porter’s 5 Forces

•Market Research

•Cost Benchmarks

•SWOT analysis

•Core competencies diagnostics

•Discounted cash flow/NPV valuation models

Tools for Level One Uncertainty

Decision-making “model”:

Tools designed to produce point forecasts of key drivers.

Choose the strategy that maximizes the company’s objective (e.g., ROI).


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‚Alternative Futures‛

Examples of Level TwoUncertainty

Tools for Level Two UncertaintyA

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Traditional Tools plus:

•Decision or event trees

•Scenario-planning exercises

•Game theory

•Decision-tree Real Option Value techniques


Tools are designed to produce a ‚MECE‛ set of scenarios and show how potential strategies change the likelihood and payoffs of each scenario.

Utilize decision analysis.

•Potential regulatory, legislative or judicial changes.

•Industry standards decisions.

•Certain types of competitor responses –e.g., whether or not they’ll match new pricing.


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‚A Range of Futures‛

Examples of Level Three Uncertainty

Tools for Level Three Uncertainty

Traditional Tools plus:

•Scenario-planning exercises

•Game theory

•Latent demand market research techniques

•Systems dynamics models

•Real Option Value techniques


Complete description of a representative set of scenarios.

Utilize qualitative decision analysis.

•Demand for new products and services.

•Automaker launches a new vehicle.

•U.S. Cellular® investments in next-generation network equipment.


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‚True Ambiguity‛

Examples of Level Four Uncertainty

Working backward to what you would have to believe to support a given strategy.

• Analogies and reference cases

• Management flight simulators

Tools for Level Four Uncertainty

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Tools designed to yield a set of ‚what you would have to believe statements‛ w/ supporting analogies, reference cases, and key indicators.

Decision-making relies upon ‚getting comfortable with what you would have to believe‛.

•The outcomes of major technological, economic, or social discontinuities.

•Early e-commerce investments.

•Long-term investment value of alternative technologies.


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When a wireless carrier like U.S. Cellular® evaluates a next-generation technology investment, it must address the following key risks and uncertainties:

Can’t adequately address all of

these uncertainties using only level

one tools.

• Likely technology decisions of competitors;

• Device evolution and associated customer demand;

• Future bandwidth requirements and the likelihood of being able to acquire it;

• Content evolution (i.e., new applications) along with associated customer demand;

• Associated capital and opex costs for all of the above.


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Expanded Mindset and Enhanced Perspective …..that is, a better understanding of the challenge along with

its potential risks leading to better preparation and/or solutions .

(even more likely and arguably, more important)

What are the benefits of using this expanded set of tools?

Improved Analytical Accuracy(likely)


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Where was McKinsey’s focus when they were providing AT&T with a future forecast of wireless devices?

Mindset

Prediction


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What if McKinsey’s prediction had gone like this:

“Our best forecast suggests 900,000 customers by 2000.”

Suggesting level one uncertainty

“But, that’s from a range of between 250,000 and 10,000,0000 customers.”

Suggesting level three uncertainty


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Part II: How does identifying uncertainty help me make the right decision?

So what is a good decision and how do we know we’ve made one?

The “right” decision versus a “good” decision.


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What Makes a Decision a Good Decision?

Bob spends his monthly paycheck on Lotto instead of paying his mortgage…then he hits the jackpot.

Laura, in an effort to improve her cardiovascular health, goes out for a jog. 5 minutes into her run, she sprains her ankle.

Example 1:

Example 2:

……good decision or bad decision?

……good decision or bad decision?


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Decisions Versus Outcomes

DecisionGood Bad

Good

Bad

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tcom

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Bob spends his monthly paycheck on Lotto instead of paying his mortgage…then he hits the jackpot.

Laura, in an effort to improve her cardiovascular health, goes out for a jog. 5 minutes into her run, she sprains her ankle.

Good decisions don’t guarantee good outcomes…but they increase their likelihood.

Bad outcomes don’t invalidate good decisions.

Good decision-making isn’t actually about the outcome – it’s about the quality of

the decision.


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The more we tend to judge decisions by outcomes, the more we remain in

“Prediction Mode”

i.e., using your time and resources in an effort to validate a likely outcome.

But high uncertainty requires that you devote appropriate time and resources to

“Strategic Decision Mode”

i.e., how to ensure good decision-making given high uncertainty.


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Prediction Mode tends to keep you here

…… when your focus may need to shift this way

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So if outcomes are not what you focus on to ensure a good decision, what do you focus on?


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1. Appropriate

Frame

3.

Meaningful, Rel

iable

Information

4. Clear

Values &

Trade-offs

5. Logically

Correct

Reasoning

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Creative, D

oable

Alternatives

6. Commitment

to Action

Decision

Quality

Strategic Decision Group’s Decision Quality Checklist


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Decision Quality Checklist

Achieving quality in each of these six elements produces quality in the overall decision.

1. Appropriate Frame

• Clear Purpose; Defined Scope; Conscious Perspective. Critical for building confidence throughout the rest of the process.

2. Creative, Doable Alternatives

• Creative; Achievable; Significantly Different; Coherent; Compelling; Complete – has value-creation potential been fully explored?

3. Meaningful, Reliable Information

• Judge the quality of available information before plunging into evaluation.

4. Clear Values and trade-offs

• Trade-off between long-term and short-term results; Trade-off between risk and return. Is there a shared understanding of what we want? – Must be clear on strategic objectives, company values, etc.

5. Logically Correct Reasoning

• Judging the quality of the reasoning indicates whether the evaluation should be refined.

– Opportunities to evaluate risk.

6. Commitment to Action

• Judging the quality of commitment to action reveals the effectiveness of the decision-making process.


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End

Tools for Strategic Decision- Making in Turbulent Times, US Cellular

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