1. Risk, Uncertainty and Business
Strategy
Atanu Mukherjee
1st November, 2011
Dastur Business & Technology Consulting

2. 2
The Business Environment Today
> Globalization
> Volatility
> Macroeconomic instability
> Environmental constraints
> Changing demography
> Resource and energy limitations
> Accelerated boom-bust cycles

3. Oil Price Volatility (1985 -2005)
3
15
20
25
30
35
40
45
50
1985
1990
1995
2000
Data/Source: World Oil Prices (current $ / Barrel)- EIA Office of Integration Analysis and Forecasting
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Actual
Actual
Actual Actual
Actual
Actual
Actual
10-yr
Forecast
Error
5-yr
Forecast
Error

4. 4
Commodity demand collapse ?
http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm
Baltic Exchange Dry Index
Commodity Research Bureau Index

5. Turbulence in financial markets
(VIX index)
Housing
BubbleInternet
Mania

6. Sustained GDP contractions

7. Aging population in the West

8. 2010 2020 2030 2040 2050
TonsofCO2Equivalent
OECD Per Capita
World Per Capita
India Per Capita
Carbon consumption regulations..

9. 9
Fastest
Growing
Soaring energy consumption…

10. 0
200
400
600
800
1000
1200
1400
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
150
250
350
450
550
650
750
850
950
1050
Internet Traffic
Morgan Stanley High Technology Index
Terabytes
MorganStanleyHigh
TechnologyIndex
The dot com bubble…

11. …And then the housing bubble

12. Turbulence Ahead!
…& dramatic wealth creation
…as opportunities in uncertainty abound

13. …but fear of failure cripples thinking
…So how do we formulate
business strategy in turbulent times ?

14. The Building Blocks of Strategy

15. Creating Value in Uncertainty –
Disruptive Innovation
Performance
Time
Established technology
Mainstream customer needs
Niche customer needs
Invasive Technology

16. 16

17. 17
› Cement that sequesters CO2, instead of emitting it!
Calera

18. 18
Biocrude
Crude oil
Refinery
Kior: “biocrude” replaces crude
Millions of
Years

19. How not to:
Financial tools:
DCF, NPV, IRR Stage gate
development
Top down market
analysis
Decisions based on
customer wish list
19

20. How to:
Tackle hard problems
Imagine what could be
Let technology lead market
Fail often, fail early, keep trying
Find the best people, who disagree with you
20

21. “It is not because things are difficult that we do not dare, it is because we do not
dare that they are difficult.”
- Seneca
“Try and fail, but don't fail to try.”
- Stephen Kaggwa
“Courage is doing what you're afraid to do. There can be no courage unless
you're scared.”
- Eddie Rickenbacker
“Only those who dare fail greatly can achieve greatly.”
- Robert F. Kennedy
“You will face many defeats in your life, but never let yourself be defeated.”
- Maya Angelou
The willingness to fail gives us the
freedom to succeed
21

22. When did it fail?
Evaluating “Failures”
HOW DO I DO IT BETTER NEXT
TIME??
Iteration is key
Why did it fail?
Causal vs. experiential reasoning
Assumptions change vs. Environments change
22

23. “Tried that before and it doesn’t work”
Accumulated experience restrains/constrains thinking
Assumptions change all the time
Reexamine everything
23

24. Innovation culture
reward failure
plan without
planning (evolve
thru iteration)
ignore IRR calculations
don't listen to customers too closely
24

25. 25
Source: Clay Christenson “Untangling Skill and Luck” (7/15/2010); Michael Mauboussin, Legg Mason Capital Management; Steven Johnson
disruptive innovation & disruptors
Low-End Segment
Strategy
Create a new
market…
Amazon.com /
Netflix…
Google / iPhone / iPad /
Facebook Twitter…
Invent the marketDisrupt the market
…move up market
with lower cost
New-
Consumption
Strategy
Create a new
experience
iPod / iTunes/Kindle/
Netfllix Online
Invent by design
Re-invent
Consumption
Strategy
introduce a low-end
loss leader…
a product that
hasn’t existed
use design to re-
invent product

26. 26

27. The mini-mill disruption in the US steel industry
27

28. …”relevant cost”
…”relevant scale”
…”relevant adoption”
But diffusion of innovation requires

29. …the adoption risk
financial, consumer acceptance, market entry

30. adoption risk - $2,500 nano
Internal combustion engine
or
Hydrogen / electric?

31. …the scaling model
brute force or exponential, distributed…

32. But how do we evaluate solutions…?

33. key criteria
› Trajectory: “What is” or “What Can Be”
› Scalability Trajectory
› Cost Trajectory
› Adoption Risk
› Capital Formation
› Optionality

34. …cost and tech trajectory

35. cost: driving down the cost curve
Source: “The Carbon Productivity Challenge”, McKinsey – Original from UC Berkely Energy Resource Group, Navigant Consulting

36. 2010 2015 2020 2025 2030 2035
Cost(Normalized)
2010 2015 2020 2025 2030 2035
Cost(Normalized)
2010 2015 2020 2025 2030 2035
Cost(Normalized)
cost: not all technology curves are the same
2010 2015 2020 2025 2030 2035
Cost(Normalized)
Cheapest now does not mean
cheapest later!
Trajectory Matters!Solar PV
Wind
Coal

37. 37
declining technology cost…
Crystalline Silicon
Amorphous Silicon
Thin-Film
Thin-Film Multi-Junction
Generations of Solar Photovoltaics…

38. but tech cost decline isn’t enough…
2010 2015 2020 2025 2030 2035 2040
Cost(Normalized)
Construction Cost
Inputs (Feedstock/Land)
Technology Cost
Total Cost
Total cost decline is based on relative
proportion of cost “types”…

39. Legacy technologies can have large
scale advantage
Infeasible

40. …capital formation

41. › Short Innovation Cycles (3-5 years)
› Short investor return cycles
› Mitigate technical & market risk cheaply
› Unsubsidized market competition
Private money will flow to
ventures that return investment in
3-5 year cycles!
capital formation

42. But be vary of irrational ideas….

43. irrational ideas: eat kangaroos, not cows!
Source – http://www.reuters.com/article/environmentNews/idUSSYD8867720080808
“SYDNEY (Reuters) - Farming kangaroos
instead of sheep and cattle in Australia could
cut by almost a quarter the greenhouse
gases produced by grazing livestock, which
account for 11 percent of the nation's
annual emissions, said a new study.”

44. irrational ideas: toilet paper
I propose a limitation be put on how many sqares
[sic] of toilet paper can be used in any one
sitting. Now, I don't want to rob any law-abiding
American of his or her God-given rights, but I think
we are an industrious enough people that we can
make it work with only one square per restroom
visit, except, of course, on those pesky occasions
where 2 to 3 could be required.
- Sheryl Crow
• Source - http://blogs.usatoday.com/ondeadline/2007/04/singer_turned_a.html

45. irrational ideas: “green bikinis”
• Source - http://www.alternativeconsumer.com/2008/07/29/eco-bikini-from-niksters/

46. 46
irrational ideas: zero-emission buses?
3-year Oakland pilot : zero-emission hydrogen fuel cell buses
diesel @ $1.61/mile vs. hydrogen @ $51.66/mile!
Source: ABC News - http://abclocal.go.com/kgo/story?section=news/local&id=5984013
solutions must make
economic sense!

47. Thank You
E :atanu.mukherjee@dasturco.com
M:(91) 983.027.0019