Speaker 1: When formulating a strategy, managers must deal with uncertainty. It is inherent in the process. Whether it's uncertainty about the environment, competition, or future customer demands, this is something they must deal with in their strategic planning. So in this series of videos, we will discuss several tools that managers can use to help them in their strategic planning process when facing uncertainty. However, we first must define what we mean by uncertainty, as there is often confusion here. So in this first video, we will focus on defining uncertainty and also some of the other characteristics that may be associated with it. When managers are facing strategic problems and must make strategic decisions, there are several characteristics that are often involved. First, no organization is without some resource constraints. So thus, managers are making decisions and making investments for the future, but they are faced with a problem of scarcity. They must decide whether to commit now towards a future and therefore lock the firm in by locking up precious resources, or they must decide whether to keep some resources in reserve and make smaller investments to preserve flexibility to adapt in the future. Second, as we've been discussing, strategy is dynamic. One of those dynamic forces is that of competition. Managers must always be thinking about what current competitors are doing, but also what potential future competitors might do. Third, managers face uncertainty outside of the competitive sphere. First, they face external sources of uncertainty. These are often things such as the pastel factors, things such as changes in market demand or technological innovations. Second, there are internal sources of uncertainty as well. As the firm is embarking on a new plan or making investments, there are some concerns that they may not be able to do what they're trying to do or whether they have the knowledge or the capabilities to achieve a certain competitive market position. So if they're trying to develop a new capability, are they going to be able to do it? And then fourth, any firm deals with multiple stakeholders, and those different stakeholders have different preferences. As a result, when making strategic decisions, firms must balance the needs of the different stakeholders and try to account for them as they design a competitive position. Chief among those factors just discussed is the notion of uncertainty. Now, I first want to take a quick note to mention that there is often confusion around the definition of what uncertainty is, and it's often confused with risk. Risk is volatility or variation in whether it's payoffs or whether it's some sort of statistics such as interest rates. Uncertainty is something a little bit different. Most environments the firm operates in contain strategically relevant information. Even if it's highly uncertain, there's still strategically relevant information there. So the goal here is to identify and use that strategically relevant information to truly identify uncertainty. We thus think about what the firm knows or is known, what is unknown but knowable versus what is completely unknowable. Something the firm already has information about and is able to analyze is something that is known. Something that is unknown but knowable is something that the firm may not know now, but if they spent additional time and resources, it would become knowable. Now, the important thing to identify here is that what is known versus what is unknown but knowable may differ across firms. For example, larger firms often will have more known information here than, say, a small entrepreneur. But again, the idea comes down to what could we know if we spent more time and more analysis. What is unknowable are things that no matter how much time we spend, no matter how much money we spend, we still will not be able to know it. And this is often dealing with the future, things that are unpredictable because it depends on future events. This unknowable is how we will define uncertainty. So uncertainty really represents something that is in the future that we cannot forecast today with reasonable certainty. It's important to identify that firms face varying levels of residual uncertainty, and we want to tie the uncertainty to specific decisions as much as possible. Now, just because there is uncertainty doesn't mean that we should stop analysis because, again, all environments contain strategically relevant information. So what we want to do is think about providing systematic and rigorous analysis at all levels of uncertainty. However, the analysis tools that are used will probably differ across levels of uncertainty. And as noted before, the level of residual uncertainty is specific to a specific decision, or it's tied to a specific decision. It is not universal. So in the next few slides, or the next few videos, we'll be discussing several tools that managers can use when faced with different types of uncertainties.