Context
Risk and uncertainty are often used interchangeably in everyday discussions, but they are different, in business, two different concepts. Risk describes a situation in which we do not know the outcome, but we do know all the possible outcomes and can assign probabilities to each of these outcomes happening. Risked can be managed. Knowing the potential costs of errors, allows managers to hedge and/and or insure against costly outcomes. For example, ever since you quarterback had shoulder surgery, he only connects with the receiver one out of every four passes. You know that your kicker can score 80% of the time when your team is within 25 yards of the goal. You can make the calculation. Every time you are within 25 years of the goal, an attempted pass will get .25*6 points or the point payoff is 1.5 points. Versus the point payoff for a kick is .80*3 or the point payoff is 2.4 points. You can make a plan for the game.
Uncertainty is the situation in which we do not know all the possible outcomes and, therefore, can’t reasonably assign probability to outcomes. Uncertainty is the unknown factor(s) in decision making for managers. Per the Warfighting Manual of the U.S, Marines, Because we can never eliminate uncertainty, we must learn to fight (manage) effectively despite it. We do this by deploying simple, flexible plans; planning for likely contingencies; developing standing operating procedures; and fostering initiatives among subordinates.” (See reference in the Welcome on this week’s page.) Two entirely new teams have just joined the league. They will play each other. Someone will win, but who? (Beware of false probability, each team does not necessarily have an even chance of a win)
Assignment
Government support for the development of Covid-19 vaccines took two different forms. Some firms accepted grants (a.k.a, direct monetary support) for vaccine development and testing. As a condition of the grant, the government has options to purchase a first and specific number of vaccine doses. Other firms chose not to accept grants. Instead they negotiated advanced-purchase agreement to support pre-approval manufacturing of vaccines. The purchase agreement stipulates that payment will be made upon delivery of the pre-specified number of doses.
You are advising the CEO at the point in time when he/she must make to decision to undertake the research and development of a covid-19 vaccine. You know the CEOs job is to consider what is best for shareholders. The bottom line is all about profitability.
- 1. Is the successful development and delivery of a vaccine for Covid-19 virus risky or an uncertainty?
- 2. In the case of direct support agreements, who bears the cost of failure?
- 3. In the case of advanced purchase agreements, who bears the cost of a failure?
- 4. Pfizer was the first firm to have its vaccine authorized for use in the U.S. It did not accept a grant to support development and testing, but the Pfizer did negotiate an advance-purchase agreement for $1.95 billion to support the manufacturing of 100 million doses. Looking back, what hidden information is revealed by Pfizer’s deal?
