DYNAMIC STRATEGIC PLANNING
-- how to create dynamic business plans
Prof. Richard de Neufville
A new course: The course should be
attractive to a wider range of students than before. It has a brand-new,
innovative format this year.
The course differs from earlier offerings
in two ways:
- It will not use advanced computer
- This is because the subject
only covers a week and does not benefit from a preparatory course; therefore
there is no time to cover these tools adequately. A working knowledge of
Excel is all that is required.
- It deals explicitly with the use
of options to manage business risks (i.e., "real options").
Learning process: Students will learn
by doing. They will prepare their own business plan, procedures focus on
the identification of risks, the analysis of their consequences, and the management
of these risks by using "real options', that is, options that relate to
the actual operation of a business.
Throughout the course, the students will be
learning technique and developing their business plans in parallel. The technique
motivates improvements in the business plan, and issues in this plan motivate
Overall schedule: The course has three
- A preliminary phase before the first
meeting, in which students prepare themselves through reading and thinking;
- The presentation of the course itself;
- A final phase in which students write
up their business plans using the materials presented in class.
This structure extends the course beyond
the week of presentation, so that students can assimilate and digest the
material thoughtfully, rather than try to cram it into a few days.
Grading: Each phase of the course will
be graded according to these criteria:
- At the end of the preliminary phase,
on the first day of class, the students should hand in the preliminary assignments.
These will be graded according to whether they have been (not on their
correctness, since the students will not have had a chance to meet the
teacher). 20% of total mark
- At the end of the classroom phase,
students will be graded on their performance of the daily assignments,
their participation in class and their attendance. 50% of total mark
- The final presentation will be graded
for 30% of the total mark.
Do Problem 16.10
at business plans
Prepare your own plan
Decision Analysis; Risk. Sessions 10;
Solve Problem 16.12
your business plans
For Tuesday: identify and justify 3 scenarios
of uncertainty in costs or markets
15, 17. Lectures: Bayes' Theorem; Value of Information. Sessions 11,
Exercises from book
of uncertainties in actual business plans
For Wednesday: calculate value of information
about scenarios, in terms of NPV of plan
NPV process is inadequate; Value of Flexibility; Introduction to Options.
options businesses use in practice
value of info for plans.
For Thursday: identify actions that could
provide flexibility: delay, accelerate, abort plans
Black-Scholes and issues in calculating Option value. Sessions 75,
cases illustrating value of real options
how your options create value by avoiding risks, seizing opportunities.
For Friday, Calculate the value of options
Details of assignments
- Chapter 16 of Applied Systems Analysis (and other
chapters) is available at http://msl1.mit.edu/mib/Paris_2001.shtml
(go to the bottom of the page under "supporting materials")
- Sample business plans in many fields are available
on the web, for example at: www.Bplans.com and at www.businessplans.org
- Your preliminary plan should at a minimum, for a
period of 10 years:
- Identify and describe business
- Define market and forecast sales of your product
in terms of price and quantity;
- Describe development of business in terms of investments
in phase 1, 2, 3, etc
- Define costs of production, distribution, etc.
- Thus calculate net cash flows by year
- Calculate Net present value of business and its
prospective rate of return
In class phase: