Acknowledgements xiii

1 Introduction 1

Managing Uncertainty, Risk, Threat and Opportunity 1

The Scope for Uncertainty in Managerial Decision Processes 2

Ten Tales About Uncertainty Management 5

A General Process for Supporting Managerial Decision Making 10

Constructively Simple Models 16

Other Aspects of Constructive Simplicity 18

Keep It Simple Systematically 26

2 Nicola’s tale: sizing inventories and other buffers 29

Introduction 29

A Stockholding Issue 30

Focusing the Process 31

Constructing a Model 32

Refining the Analysis: Considering Safety Stock Policy 36

Further Refinements: Influences on Holding Costs 39

Interpreting the Results of Analysis Creatively 42

Alternative Creative Interpretations 44

Other Stock Control Contexts 46

Other Buffer Contexts 47

Conclusions 50

3 Martha’s tale: setting bids and other pricing decisions 55

Introduction 55

A Bidding Opportunity for Astro 56

A Preliminary Proposal Document 58

A Proposed Multiple-pass Process 63

First-pass Uncertainty Management: Identifying Non-starters 64

Second-pass Uncertainty Management: Identifying No-hopers 66

Third-pass Initiation 72

Third-pass Cost Uncertainty Analysis 73

Third-pass Probability of Winning Analysis 88

Third-pass Uncertainty Synthesis 94

Third-pass Bid Setting Discussion 96

Managing Requisite Change 97

Some General Implications 109

Other Bidding Contexts 111

Conclusion 113

4 Eddy’s tale: estimating measures of uncertain performance 117

Introduction 117

Some Basic Concepts 118

Eddy Starts Work 126

Eddy’s First-pass Minimalist Approach 128

First-pass Interpretation and Anticipation of Further Passes 141

Anticipation of Corporate Learning 144

Scope for Automation 144

Eliminating the Use of Probability Impact Matrices 146

Managing and Shaping Expectations 148

Robustness of the Minimalist Approach 150

The User Perspective: Conditional Estimates and Cube Factors 154

Conclusion 158

5 Ian’s tale: aligning buyer and supplier motivation 163

Introduction 163

A Development Project 164

A Consultant Is Hired 166

A Framework for Project Risk Management 168

A Critical Assessment of Current Common Practice 175

Formulating An Incentive Contract 183

The Way Forward 189

Biars Contracts 191

Conclusion 195

6 Roger’s tale: assigning ownership of project uncertainty 199

Introduction 199

A Corporate Understanding of Uncertainty Ownership 200

Roger’s Defining Moment 201

A Simple Analysis of Anchor Risk 203

Distributing the Ownership of Uncertainty 204

Roger’s Simple Analysis of Distributed Uncertainty Ownership 212

An Internal Trigger Contract to Manage Good Luck 217

Designing An External Trigger Contract 226

A Revised Corporate Understanding of Uncertainty Ownership 231

Epilogue 236

Conclusion 237

7 Sarah’s tale: facilitating the precautionary principle 239

Introduction 239

The Rail Passenger Safety Trust 242

A Conventional Analysis of Railway Buffer Events 243

A Simple Scenario Analysis of Buffer Events 246

Risk Efficiency for a Railway System 254

Risk-reward Balance: How Safe Is Safe Enough? 257

Ambiguities in ‘the Relevant Public’ 260

Ambiguities in Equivalent Fatalities 262

Regulation Via Mandatory Insurance 264

Conclusion 266

8 Norman’s tale: discounting future performance measures 275

Introduction 275

Norman’s Situation 279

A First-pass Model and Parametric Analysis 280

Probabilistic Analysis to Support the First Pass 288

A Second-pass Probabilistic Analysis 289

A Third-pass Probabilistic Analysis 291

A Sudden Flash of Hindsight 294

Is a Real Options Approach Really Useful? 297

Conclusion 302

9 Tess’s tale: making decision analysis practical 305

Introduction 305

A Machine Selection Problem 306

A Basic Model and First-pass Analysis 307

Exploring the Value of More Information 311

Difficulties with the Model 314

A Project Portfolio Perspective 316

Abandoning a Common Set of Discrete Events with Certain Pay-offs 319

An Explicit Threat and Opportunity Management Structure 324

An Explicit Multiple-attribute Structure 327

Explicit Analysis of Multiple-attribute Trade-offs 333

Conclusion 339

10 Sam’s tale: concepts and issues in portfolio management 345

Introduction 345

Sam’s Assignment 347

A Basic Markowitz Mean–variance Model 348

Extending the Basic Markowitz Model 355

Sam’s Basic System 358

Further Considerations with a Simplified Portfolio 373

Robustness of Sam’s System 384

Conclusion 389

11 Conrad’s tale: formulating strategy 393

Introduction 393

Conrad’s Situation 394

Planning Horizons 396

Long-term Strategy Formulation 399

Medium-term Strategy Formulation and Integration Upwards 424

Short-term Strategy Formulation and Integration Upwards 434

Integrating Social, Environmental, Ethical and Political Issues 440

A Crisis 445

Conclusion 447

12 From concepts to culture 451

Simple Efficiency 451

Basic Concepts 453

Key Modelling Concepts 454

Key Process Concepts 456

Uncertainty Management Systems 459

Addressing Cultural Barriers to Uncertainty Management 460

Culture Change Management 472

Conclusion 473

Bibliography 475

Index 489