Curious Observation – First Step in Decision Making Process
February 12, 2025
A loss distribution approach is a common approach followed by risk management practitioners in order to identify and evaluate the possible risks that they are likely to face in the due course of business. The loss distribution approach has actually been designed by the actuarial practitioners who work in the insurance industry. It is for […]
The trait model of leadership is based on the characteristics of many leaders – both successful and unsuccessful – and is used to predict leadership effectiveness. The resulting lists of traits are then compared to those of potential leaders to assess their likelihood of success or failure. Scholars taking the trait approach attempted to identify […]
Why is Change Resisted ? Any change anywhere, be it among nations, organizations, societies, or even families is hard to actualize given the human tendency to not step out of the “comfort zone” and hence, resist new ways of doing things and instead, cling on to the status quo. The change is harder in those […]
The basic laws of demand and supply work in the reinsurance market just as they work in other markets of the world. This means that when the price is lowered, the demand begins to rise and when the price is raised, the supply begins to rise. These laws are universal and also apply to reinsurance […]
People in the developed world have an affinity for pets. This is the reason why two-thirds of American households, i.e. around 80 million households have pets. All of us are aware that the costs of healthcare are rising exponentially in America and in other developed countries such as the UK. Similarly, the cost of veterinary […]
Managers in contemporary organizations are confronted with uncertainty and ambiguity in their everyday lives. Not only do they have to contend with rapidly changing trends and fluid situations, the data they get from the ground or from market research becomes redundant with no time. This has given rise to confusion and chaos in the way organizations approach the future. This situation can be remedied by the use of scenario based decision-making where the managers draw up possible scenarios that the company might have to contend with in the short term, medium term, and longer term.
By drawing up scenarios that consist of simulations of the best-case situation and the worst-case situation, the managers would be better able to take the right decision when the situation manifests itself.
The point here is that looking into the future is impossible except for oracles and clairvoyants. Hence, some sort of grip on the future must be firmed up by planning for all possibilities.
Over the last couple of years, global businesses had to contend with multiple economic shocks starting with the bankruptcy of the investment bank, Lehmann Brothers that nearly brought down the global financial system. Next, the Eurozone crisis erupted that threatened to bring entire governments to their knees. Now, we have the specter of diminishing resources and runaway inflation. In this context, it becomes important for managers to draw up scenarios that would happen with a certain degree of probability. For instance, it would be better for managers to think of the eventuality of Greece leaving the Eurozone and then planning for it accordingly. For managers in sectors that do not have exposure to financial instruments in a major way (after all, which sector is immune from financial shocks?), they can simulate models and scenarios where a war in the Middle East is predicted and then base their strategies accordingly.
The point here is that when there is so much uncertainty, it becomes tough to anticipate events. Hence, by drawing up scenarios that simulate the worst and the best as well, decisions can be taken that would derive advantage to the organizations. When one adds complexity to the uncertainty and ambiguity that pervades the current world, one is even more muddied and muddled to take decisions. For this, managing the present, it is a challenge and hence many organizations leave future forecasts to consultants and management experts. However, this need not be the case and in-house expertise can be developed to deal with emerging scenarios.
A case in point is NASSCOM (the Apex body of IT and ITES companies in India) that has been advising IT companies in India to plan for the downturn and the possible aftershocks from the Eurozone crisis and the upcoming “fiscal cliff” in the United States. NASSCOM has also been asking IT companies to draw up scenarios for these events that if not planned for have the potential to blow up on everyone’s face. Unfortunately, many organizations are rushing into the future without any thought or idea on how they would deal with “Black Swan” events. A Black Swan event is a low probability but high impact event that can surprise people with its occurrence.
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