Overview
(Week 8)
This unit covers three advanced methods for business case modeling: adaptation pathways, real options, and robust decision-making.
The adaptation pathways approach involves setting objectives for a system (e.g., establishing acceptable risk exposure in a climate adaptation strategy), determining the threshold at which those objectives are no longer met, and determining what to do in response. It explicitly determines the point at which a given strategy will fail, signalling the need for a new strategy. Adaptation pathways are therefore an incremental strategy approach. New courses of action are undertaken only when conditions are such that old courses of action no longer achieve the desired outcome. Their advantage lies in the fact that they avoid over-commitment to a particular course of action before sufficient information is available to justify the strategy.
The real options approach is based on similar principles as a financial option. In finance, purchasing an option gives you the right (but not the obligation) to purchase a financial asset at a predetermined price at some point in the future. It presumes that there is value in preserving the ability to make choices in the future. Though real options analysis is fairly complex, many of us are familiar with examples of strategies that embody a real options approach. A pilot project is such an example. With a pilot project, an organization invests in a small-scale project that can be scaled up if future conditions render the project valuable, or cancelled if future conditions render it unnecessary.
Robust decision-making is a process for stress-testing strategies against a broad range of possible future scenarios. The goals of the process are to build consensus around strategies that are robust to the widest range of possible futures and to identify areas of vulnerability for each strategy in order to make explicit the kinds of trade-offs made with each decision. Robust decision making is an iterative process that alternately incorporates human judgement and computer simulation. The strengths of the model include its suitability for situations of deep uncertainty (such as climate change) and its capacity for consensus building among stakeholders.
Activities and Assessment
- Online session
- Readings and independent exploration
- Case study examples