book.chapter Define situation & doubt level

Decision makers can achieve 20/20 foresight when they accurately identify the key variables and residual uncertainties in the marketplace. There are four levels of residual uncertainty to consider: Level 1 uncertainty means there is a single clear view of the future. The growth patterns of each major variable can be forecast with certainty based on comparable historical data. This level of uncertainty is now quite rare in today's volatile economy. It generally requires mature markets that are not prone to external shocks or internal upheaval. A example would be how the market penetration rate of broadband internet was very similar to the earlier adoption curve for cable television. Level 2 uncertainty occurs when there is a limited set of possible outcomes, one of which will eventually occur even if it is not yet obvious which one will prevail. In other words, the potential answers are collectively exhaustive but the correct choice will be mutually exclusive. An example would be how the U.S. stock markets faced uncertainty about confirming George W. Bush as the winner versus Al Gore for several weeks after the contested 2000 election. Another example is waiting to see whether MS-DOS would emerge as the industry standard operating system when personal computers first came to market. Level 3 uncertainty includes a range of possible future outcomes, where something is going to happen but it is unclear exactly what. The eventual "winner" will likely come from within an expected range, but the final outcome may shift due to unstable market conditions, changing consumer preferences, or new entrants. For example, Airbus has committed to building a new super-jumbo A380 jet based on estimated worldwide demand for 1,500 such aircraft over 20 years. Boeing believes the market will only be one-fourth that size at 350 planes, and has not invested as heavily. The actual result will probably fall somewhere between those forecasts, unless a new travel mode emerges that reduces airplane demand. Level 4 uncertainty occurs when markets are extremely volatile, making it impossible to identify all the variables that will influence the future. There is effectively an unlimited range of possible outcomes, with no one choice clearly better than another. These situations are rare and tend to evolve into other uncertainty levels fairly quickly. An example is how investors faced ambiguity when trying to decide whether to put money into the Russian economy in the early 1990s, as the regulatory climate and visibility of supply and demand dynamics were completely unclear at that time. In most cases, strategic decisions need to be made under Level 2 or Level 3 uncertainty, as analyzing those situations is challenging yet also presents opportunities to shape the competitive landscape. Some other key points regarding uncertainty: Uncertainty tends to decline over time and evolve into Level 1 certainty. Major shocks can still occur and generate new uncertainties, especially in emerging markets. Choosing the right time horizon is crucial since it impacts the uncertainty level. Uncertainty fluctuates within industries as issues arise and recede. A quote on residual uncertainty creating the proper mindset: "It creates an expectation that systematic rigor is called for under uncertainty. It biases decision making towards the assumption that even seemingly high-uncertainty value drivers can and should be analyzed, and that such analysis often leads to strategic insight." A quote on 20/20 foresight in business strategy: "Having 20/20 foresight doesn’t mean you can always make flawless future predictions. Even with 20/20 foresight you’ll occasionally be blind-sided, and you’ll take some missteps along the way. But think of 20/20 foresight as you do 20/20 eyesight: they can see the best that human beings can, given our natural physiological constraints."