Compare Strategies by their Policy Trees

a strategy is defined and evaluated by the policy for its implementation.

Don’t stop at the “business case”


We should be precise when we use words like strategy and policy, because -

  • Strategy is one or more major first decisions that intend a goal.
  • Policy is the sequence of related estimated unknowns and decisions that are intended to lead to the goal.
  • A policy is measurable and manageable; a strategy is not.
  • Therefore, absent its policy, a strategy is an opinion, for good or ill.

A well-formed policy has these attributes:

  • A policy should incorporate learning (i.e., real-options) to add value.
  • A policy should present the values of information and control so that precious resources can be best allocated.
  • A policy should be valued and its risk-reward profiles presentable for discussion.

Here are two example strategies & their polices for implementaion

  • We are going to make, market, and sell our widget – ourselves.
  • Or we will just License and cash the checks.

For those two strategies, we might formulate two policies:

  • We are going to make, market, and sell our widget – ourselves. We will sell over two time-periods. If the sales in the first time period are “high”, of which we are 30% confident, then we will raise our price by 10% for the second period. Given our assumptions, including our experts’ estimations of ranges and probabilities, we should realize between -$10,000 and +$320,000.
  • We are just going to license our widget to another entity, let them make, market, and sell our widget; but we’ll avoid risks and just receive a per-unit license fee. Our assumptions remain the same as the previous policy and we should realize between $38,000 and $150,000.

And we might make this recommendation: We advise the “make, market, and sell ‘In-house’ product strategy”; it has a much greater expected ‘up-side’ in return for minimal ‘down-side’.

But the decision is open for discussion and we might do so in a decision-making meeting:

Ladies and Gentlemen, we brought some information to today’s strategy meeting. We need to discuss these today in view of our company’s risk-tolerance and make some decisions:

The recommended strategy is represented by the red risk profile; it has a greater chance on more profit, with only a small increase in the risk of loss. In the meeting, discussion might focus on the company’s tolerance for risk when pursuing profits and how the two strategies’ risk profiles “fit” the company’s tolerance.

two risk profiles. the one in green has less range of profit than the one in red.

Policy and expected value

The In-house product strategy’s policy it to wait for the first round of sales’ volume, and then decide on a price change. This strategy has an expected value (risk adjusted) of $111.1

The other ‘License’ strategy has an expected value of just $94.6

the recommended strategy’s policy for its implementation.

Conclusion


We can all come up with strategies — but unless we define the policies behind those strategies, and evaluate those policies in terms of risks and rewards — we won’t be able to distinguish the best strategy.

marc vandenplas: mjvandenplas@gmail.com