1 Risk and Uncertainty
Risk and uncertainty need to be factored into the strategic and operational decision-making processes.
In the case of risk, an expected value of the outcome can be determined by summing the products of each alternative and its probability.
EV can be representative if a project is repeated many times because the EV will equate to the long-term average result. However, most strategic plans, and any projects making them up, are a "one-off".
This introduces two problems: 1. Usually the expected value is not one of the possible outcomes. 2. The expected value gives no indication about the spread of results that might occur.
Here, both scenarios have the same expected values, but Scenario 1 has substantially less variation in outcome. With Scenario 2, however, outcome 2 could be very serious for the organisation.
2 Decision Trees
Decision trees can help choose between several courses of action. They provide a highly effective structure to lay out options and investigate the possible outcomes of choosing those options.
They also help to form a balanced picture of the risks and rewards associated with each possible course of action.
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