Sources of uncertainties:
In order for a business to meet its arising obligations, it must deal with the risk that is as a result of desired or planned results not being achieved. In a business due to the numerous factors at play, there will always be uncertainties. Some of the uncertainties that could plague a business will include; uncertainty about customer needs – created by shifts in the environment. Customers and consumers have dynamic needs and this keep changing depending on the factors currently having a major impact on the environment. An individual will be influenced by other people, society, values among other factors in determining their needs from time to time. Uncertainty about technological possibilities – is as a result of rapid shifts in technological discoveries. This is the current most critical factor that has a single major effect on uncertainties by business people. Business has to operate in a dynamic world where emerging technologies make yesterdays breakthroughs obsolete and outdated. The challenge that business people have to contend with on a daily basis is to balance between their forecast of long-term technology and that which is about to become obsolete.
Uncertainty about distribution channels – created by power shifts in the value chain. Daily businesses rise and others fall. Conversely, environmental factors sometimes can make some businesses to maintain operations while others fold. As such, a business person, worries on the strength and reliability of the distribution channel both as a transmitter of raw material and final product to the consumer. This uncertainty is in some instances guarded against by business people holding huge quantities of inventory. This is especially so in places where supply is haphazard and demand is relatively high.
Uncertainty about the viability of an existing business model – this is created by potential changes in regulation or industry standards. Changes in the way a business conducts business or the standards that guide a industry could result in instability of a business especially if the changes happen abruptly without prior warning and without giving business an opportunity to adjust and adopt to them. In the long run the instability they cause to a business is the source of uncertainty.
All in all, the uncertainty in business when harnessed and used constructively is the base from which innovation is launched from. The uncertainties create a market for new solutions. The use of tried and tested business strategies in an effort to avoid uncertainty stifles innovations and creativity.
Consider planning. In a high-certainty world, a good measure of the effectiveness of a manager is whether the numbers and commitments in the plan are what later happens. This makes absolutely no sense when you simply don’t have enough knowledge to accurately predict what is going to happen. Instead, insisting that managers stick to plan can lead to dangerous escalation of commitment to a failing operation or unwarranted investment in the core business well beyond the returns a company is going to receive. Further, imposing the expectation that one will ‘make one’s numbers’ or ‘deliver the earnings’ is unrealistic when the underlying business logic for an operation has shifted.
Calculate the effect of perfect control:
This is determined by considering the option that the decision model suggests should be preferred and determining how the probability distribution of the annual profit would change if the decision maker is able to exercise control over the events that the model assumed were uncertain. For example is the uncertainty facing a business is annual fixed costs, variable costs, whether a major contract to supply will be awarded and the level of open-market demand. The challenge in calculating the effect of perfect control is determining the effect of controlling one of the uncertain factors and experiencing the change on the other factors either positively or negatively. If the fixed costs would be determined conclusively what would be the effect of the probability of the other uncertain factors affecting the business.
By varying this uncertain factors, a business person is able to determine which has the greatest effect on the overall operations of the business. If by increasing the probability of keeping having the contract awarded, the profitability has a minimal increase this shows that the expected pay-off from this move will not be significant. This could be interpreted to mean this factor – whether the contract is awarded, has little effect on the profitability of the company and that though uncertain, the business is better of addressing other uncertain factors that will have a significant effect on the profitability of the business.
By carrying out similar analysis on other uncertain quantities, varying each in turn to its most favorable value, while assuming the other quantities can not be controlled, helps determine the effect of perfect control.
Estimated values for uncertain factors:
Market corner Bond Street
Factors Lowest Most Highest Lowest Most Highest
Annual fixed costs 8 9.5 11 4 6 8
Variable costs / unit 3.7 4.0 4.3 4.2 4.5 4.8
Annual demand 3 8 12 3 8 12
Contract awarded 0 0.7 1 0 0.7 1
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