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Navigating in the Midst of More Uncertainty and Risk
Author(s) -
Butcher Jim,
Turner Nick,
Drenth Gerard
Publication year - 2006
Publication title -
journal of applied corporate finance
Language(s) - English
Resource type - Journals
eISSN - 1745-6622
pISSN - 1078-1196
DOI - 10.1111/j.1745-6622.2006.00113.x
Subject(s) - variety (cybernetics) , liberian dollar , scenario planning , risk analysis (engineering) , downside risk , hedge , risk management , scale (ratio) , value (mathematics) , business , key (lock) , limiting , financial risk , strategic planning , financial plan , finance , computer science , marketing , engineering , portfolio , mechanical engineering , ecology , physics , computer security , quantum mechanics , artificial intelligence , machine learning , biology
With the steady increase in the variety and scale of uncertainties and risks, the challenges for today's executives have become ever more complex and daunting. One powerful tool for navigating among different risks and uncertainties is scenario planning. From its early days of use within Shell, scenario planning has evolved in ways that make it better suited to the tasks of identifying, analyzing, and managing various financial risks across different industries. During the last ten years, Morgan Stanley has also been using scenario planning to gain a better understanding of key risks and uncertainties facing the financial services industry, ranging from the consequences of possible changes in the dollar to the emergence of hedge funds and the remarkable growth of China and India. In discussing the benefits of scenario planning, the authors note its potential to help management in a number of ways:• By challenging conventional thinking and current assumptions about its industry and world; • By identifying key signals or potential direction changes ahead of time, which is especially important when lead times to invest, hedge, or change assets are limiting factors; • By identifying and assessing the value of strategic or “real” options—options to invest in new opportunities or limit downside risks that may suddenly open up or disappear, and that man‐ agement must be prepared to “exercise” quickly and decisively; • By reinforcing the recognition that value added comes not just from better strategic thinking and planning, but from the role of risk management in helping companies take advantage of new opportunities; • By encouraging more cross‐divisional and firm‐wide conversations about strategic choices and options, thereby creating a shared understanding of and greater consensus about chosen strategies; and • By forcing them to go beyond the limits of typical three‐to‐five year forecasting limitations to think hard about longer‐term strategic choices.