Empirical Management
What is empirical management?
Empirical management means drawing conclusions from the past about the future, i.e. systematically evaluating and using the available information.
Empirical management requires the management of knowledge, systems and artifacts and the active participation of employees as knowledge carriers in order to collect verifiable information. It also means following a process such as Lean or Scrum that systematically and continuously integrates these insights.
This improves the quality of decision-making by utilizing practical experience and treating people with respect.
Keep your options open
There is another compelling reason for managers to grasp the insights behind real options. While option-pricing models are indeed a superior valuation tool—the usual use of the theory—we believe that real options can also provide a systematic framework serving as a strategic tool and that the real power of real options lies in this strategic application. This article seeks to provide such a framework.
The real power of real options. Mc Kinsey & Company, June 2000[1]
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The Last Responsible Moment
It is usually a good idea to never leave a decision to the last responsible moment. Keeping your options open until the LRM – when the cost of not deciding is higher than the cost of deciding – increases your flexibility and the empirical basis, i.e. the quality of the decision.
A decision-making process for maximum options
- For each decision, the available options must be determined.
- Determine the latest point in time at which a decision can be made, i.e. the conditions that must be met in order to enter into a commitment. Decision time = deadline – option implementation time. The first decision is made before the first option expires.
- Until this deadline expires, the search for new options continues and existing options are refined or expanded
- Identify options for each contingency and know in advance which option to exercise under a given condition.
- Try to delay the decision point. Often this is free or has a very low cost. To do this, we must be able to implement the option as quickly as possible. During the slack period, work on how to speed up the process.
- Be aware that optimizing costs does not equal optimizing returns or minimizing risk. Sometimes it pays to invest in more than one option, even if it costs a little more. After all, options have value.
- Wait to decide… and wait… and wait… until the conditions are right.
- When you need to commit and act, do so as quickly as possible. And you can move forward with confidence, knowing you’ve made the best decision possible.
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