Empirical Management

What does empirical management mean

Empirical management means drawing conclusions about the future from the past, 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 holders to gather verifiable information. It also means following a process like Lean or Scrum that systematically and continuously integrates these insights.

This improves the quality of decision making by using practical experience and respectful interaction with people.

keep 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] Tweet

The last responsible moment

It’s usually a good idea to never make a decision until the last responsible moment. Keeping your options open until the LRM (last responsible moment) – 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 process for maximum options

  • For each decision, the available options must be identified.
  • Identify the final point at which a decision can be made, i.e. the conditions that must be met in order to make a commitment. Decision time = deadline – option implementation time. The first decision is made before the first option expires.
  • Until the expiry of this period, new options will continue to be sought and existing ones refined or extended
  • Identify options for each conditional case and know in advance which option to exercise under a given condition.
  • Try to postpone the decision point. Often this is free of charge or at a very low cost. To do this, we must be able to implement the option as quickly as possible. Work on how to speed up the process in the down time.
  • Realize that optimizing costs is not the same as optimizing returns or mitigating risk. Sometimes it pays to invest in more than one option, even if it may cost a little more. After all, options have value.
  • Wait to make decisions… and wait… and wait… until the conditions are met.
  • If you need to make a commitment and take action, do so as soon as possible. And you can proceed with confidence knowing you made the best decision possible.