IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v266y2018i1p205-220.html
   My bibliography  Save this article

Scenario-based portfolio model for building robust and proactive strategies

Author

Listed:
  • Vilkkumaa, Eeva
  • Liesiö, Juuso
  • Salo, Ahti
  • Ilmola-Sheppard, Leena

Abstract

In order to address major changes in the operational environment, companies can (i) define scenarios that characterize different alternatives for this environment, (ii) assign probabilities to these scenarios, (iii) evaluate the performance of strategic actions across the scenarios, and (iv) choose those actions that are expected to perform best. In this paper, we develop a portfolio model to support the selection of such strategic actions when the information about scenario probabilities is possibly incomplete and may depend on the selected actions. This model helps build a strategy that is robust in that it performs relatively well in view of all available probability information, and proactive in that it can help steer the future as reflected by the scenarios toward the desired direction. We also report a case study in which the model helped a group of Nordic, globally operating steel and engineering companies build a platform ecosystem strategy that accounts for uncertainties related to markets, politics, and technological development.

Suggested Citation

  • Vilkkumaa, Eeva & Liesiö, Juuso & Salo, Ahti & Ilmola-Sheppard, Leena, 2018. "Scenario-based portfolio model for building robust and proactive strategies," European Journal of Operational Research, Elsevier, vol. 266(1), pages 205-220.
    • Handle: RePEc:eee:ejores:v:266:y:2018:i:1:p:205-220
    DOI: 10.1016/j.ejor.2017.09.012
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0377221717308020
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ejor.2017.09.012?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Herbert Moskowitz & Paul V. Preckel & Aynang Yang, 1993. "Decision Analysis with Incomplete Utility and Probability Information," Operations Research, INFORMS, vol. 41(5), pages 864-879, October.
    2. Ahti Salo & Jeffrey Keisler & Alec Morton, 2011. "An Invitation to Portfolio Decision Analysis," International Series in Operations Research & Management Science, in: Ahti Salo & Jeffrey Keisler & Alec Morton (ed.), Portfolio Decision Analysis, chapter 0, pages 3-27, Springer.
    3. Mavrotas, George & Diakoulaki, Danae & Kourentzis, Athanasios, 2008. "Selection among ranked projects under segmentation, policy and logical constraints," European Journal of Operational Research, Elsevier, vol. 187(1), pages 177-192, May.
    4. Nikolaos Argyris & Alec Morton & José Rui Figueira, 2014. "CUT: A Multicriteria Approach for Concavifiable Preferences," Operations Research, INFORMS, vol. 62(3), pages 633-642, June.
    5. Kamal Golabi & Craig W. Kirkwood & Alan Sicherman, 1981. "Selecting a Portfolio of Solar Energy Projects Using Multiattribute Preference Theory," Management Science, INFORMS, vol. 27(2), pages 174-189, February.
    6. Gordon B. Hazen, 1986. "Partial Information, Dominance, and Potential Optimality in Multiattribute Utility Theory," Operations Research, INFORMS, vol. 34(2), pages 296-310, April.
    7. Gutjahr, Walter J. & Katzensteiner, Stefan & Reiter, Peter & Stummer, Christian & Denk, Michaela, 2010. "Multi-objective decision analysis for competence-oriented project portfolio selection," European Journal of Operational Research, Elsevier, vol. 205(3), pages 670-679, September.
    8. JosÉ Figueira & Salvatore Greco & Matthias Ehrogott, 2005. "Multiple Criteria Decision Analysis: State of the Art Surveys," International Series in Operations Research and Management Science, Springer, number 978-0-387-23081-8, December.
    9. Liesiö, Juuso & Mild, Pekka & Salo, Ahti, 2008. "Robust portfolio modeling with incomplete cost information and project interdependencies," European Journal of Operational Research, Elsevier, vol. 190(3), pages 679-695, November.
    10. Vilkkumaa, Eeva & Liesiö, Juuso & Salo, Ahti, 2014. "Optimal strategies for selecting project portfolios using uncertain value estimates," European Journal of Operational Research, Elsevier, vol. 233(3), pages 772-783.
    11. Peter Wakker & Daniel Deneffe, 1996. "Eliciting von Neumann-Morgenstern Utilities When Probabilities Are Distorted or Unknown," Management Science, INFORMS, vol. 42(8), pages 1131-1150, August.
    12. T. H. Matheiss & David S. Rubin, 1980. "A Survey and Comparison of Methods for Finding All Vertices of Convex Polyhedral Sets," Mathematics of Operations Research, INFORMS, vol. 5(2), pages 167-185, May.
    13. Robert J. Lempert & David G. Groves & Steven W. Popper & Steve C. Bankes, 2006. "A General, Analytic Method for Generating Robust Strategies and Narrative Scenarios," Management Science, INFORMS, vol. 52(4), pages 514-528, April.
    14. Liesio, Juuso & Mild, Pekka & Salo, Ahti, 2007. "Preference programming for robust portfolio modeling and project selection," European Journal of Operational Research, Elsevier, vol. 181(3), pages 1488-1505, September.
    15. T Ritchey, 2006. "Problem structuring using computer-aided morphological analysis," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 57(7), pages 792-801, July.
    16. Robert T. Clemen & James E. Smith, 2009. "On the Choice of Baselines in Multiattribute Portfolio Analysis: A Cautionary Note," Decision Analysis, INFORMS, vol. 6(4), pages 256-262, December.
    17. Bunn, Derek W. & Salo, Ahti A., 1993. "Forecasting with scenarios," European Journal of Operational Research, Elsevier, vol. 68(3), pages 291-303, August.
    18. Ram, Camelia & Montibeller, Gilberto & Morton, Alec, 2011. "Extending the use of scenario planning and MCDA for the evaluation of strategic options," LSE Research Online Documents on Economics 32215, London School of Economics and Political Science, LSE Library.
    19. C Ram & G Montibeller & A Morton, 2011. "Extending the use of scenario planning and MCDA for the evaluation of strategic options," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 62(5), pages 817-829, May.
    20. William B. Poland, 1999. "Simple Probabilistic Evaluation of Portfolio Strategies," Interfaces, INFORMS, vol. 29(6), pages 75-83, December.
    21. James S. Dyer & Rakesh K. Sarin, 1979. "Measurable Multiattribute Value Functions," Operations Research, INFORMS, vol. 27(4), pages 810-822, August.
    22. Paul Goodwin & George Wright, 2001. "Enhancing Strategy Evaluation in Scenario Planning: a Role for Decision Analysis," Journal of Management Studies, Wiley Blackwell, vol. 38(1), pages 1-16, January.
    23. Eeva Vilkkumaa & Ahti Salo & Juuso Liesiö, 2014. "Multicriteria Portfolio Modeling for the Development of Shared Action Agendas," Group Decision and Negotiation, Springer, vol. 23(1), pages 49-70, January.
    24. Dyer, M. E. & Proll, L. G., 1982. "An improved vertex enumeration algorithm," European Journal of Operational Research, Elsevier, vol. 9(4), pages 359-368, April.
    25. Fred Mobasheri & Lowell H. Orren & Fereidoon P. Sioshansi, 1989. "Scenario Planning at Southern California Edison," Interfaces, INFORMS, vol. 19(5), pages 31-44, October.
    26. Gülseren Kiziltan & Erkut Yucaou{g}lu, 1983. "An Algorithm for Multiobjective Zero-One Linear Programming," Management Science, INFORMS, vol. 29(12), pages 1444-1453, December.
    27. Ilmola, Leena & Rovenskaya, Elena, 2016. "Three experiments: The exploration of unknown unknowns in foresight," Technological Forecasting and Social Change, Elsevier, vol. 106(C), pages 85-100.
    28. Edi Karni & David Schmeidler, 2016. "An expected utility theory for state-dependent preferences," Theory and Decision, Springer, vol. 81(4), pages 467-478, November.
    29. Liesiö, Juuso & Salo, Ahti, 2012. "Scenario-based portfolio selection of investment projects with incomplete probability and utility information," European Journal of Operational Research, Elsevier, vol. 217(1), pages 162-172.
    30. Theodor J Stewart, 2005. "Dealing with Uncertainties in MCDA," International Series in Operations Research & Management Science, in: Multiple Criteria Decision Analysis: State of the Art Surveys, chapter 0, pages 445-466, Springer.
    31. Cornelis A. De Kluyver & Herbert Moskowitz, 1984. "Assessing Scenario Probabilities Via Interactive Goal Programming," Management Science, INFORMS, vol. 30(3), pages 273-278, March.
    32. Arnd Huchzermeier & Christoph H. Loch, 2001. "Project Management Under Risk: Using the Real Options Approach to Evaluate Flexibility in R...D," Management Science, INFORMS, vol. 47(1), pages 85-101, January.
    33. Fliedner, Thomas & Liesiö, Juuso, 2016. "Adjustable robustness for multi-attribute project portfolio selection," European Journal of Operational Research, Elsevier, vol. 252(3), pages 931-946.
    34. Stewart, Theodor J. & French, Simon & Rios, Jesus, 2013. "Integrating multicriteria decision analysis and scenario planning—Review and extension," Omega, Elsevier, vol. 41(4), pages 679-688.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Klerkx, Rik & Pelsser, Antoon, 2022. "Narrative-based robust stochastic optimization," Journal of Economic Behavior & Organization, Elsevier, vol. 196(C), pages 266-277.
    2. Ahti Salo, 2023. "On the boundaries of experimental research on scenario planning: A commentary on Derbyshire et al. (2022)," Futures & Foresight Science, John Wiley & Sons, vol. 5(2), June.
    3. Harju, Mikko & Liesiö, Juuso & Virtanen, Kai, 2019. "Spatial multi-attribute decision analysis: Axiomatic foundations and incomplete preference information," European Journal of Operational Research, Elsevier, vol. 275(1), pages 167-181.
    4. Liesiö, Juuso & Andelmin, Juho & Salo, Ahti, 2020. "Efficient allocation of resources to a portfolio of decision making units," European Journal of Operational Research, Elsevier, vol. 286(2), pages 619-636.
    5. Ahti Salo & Edoardo Tosoni & Juho Roponen & Derek W. Bunn, 2022. "Using cross‐impact analysis for probabilistic risk assessment," Futures & Foresight Science, John Wiley & Sons, vol. 4(2), June.
    6. Ian Durbach, 2019. "Scenario planning in the analytic hierarchy process," Futures & Foresight Science, John Wiley & Sons, vol. 1(2), June.
    7. Salo, Ahti & Doumpos, Michalis & Liesiö, Juuso & Zopounidis, Constantin, 2024. "Fifty years of portfolio optimization," European Journal of Operational Research, Elsevier, vol. 318(1), pages 1-18.
    8. Zhang, Xinwei & Yan, Yong & Wang, Lilin & Wang, Yang, 2024. "A ranking approach for robust portfolio decision analysis based on multilinear portfolio utility functions and incomplete preference information," Omega, Elsevier, vol. 122(C).
    9. Barbati, Maria & Corrente, Salvatore & Greco, Salvatore, 2020. "A general space-time model for combinatorial optimization problems (and not only)," Omega, Elsevier, vol. 96(C).
    10. Salo, Ahti & Andelmin, Juho & Oliveira, Fabricio, 2022. "Decision programming for mixed-integer multi-stage optimization under uncertainty," European Journal of Operational Research, Elsevier, vol. 299(2), pages 550-565.
    11. Seeve, Teemu & Vilkkumaa, Eeva, 2022. "Identifying and visualizing a diverse set of plausible scenarios for strategic planning," European Journal of Operational Research, Elsevier, vol. 298(2), pages 596-610.
    12. Liesiö, Juuso & Salo, Ahti & Keisler, Jeffrey M. & Morton, Alec, 2021. "Portfolio decision analysis: Recent developments and future prospects," European Journal of Operational Research, Elsevier, vol. 293(3), pages 811-825.
    13. Liesiö, Juuso & Xu, Peng & Kuosmanen, Timo, 2020. "Portfolio diversification based on stochastic dominance under incomplete probability information," European Journal of Operational Research, Elsevier, vol. 286(2), pages 755-768.
    14. Liesiö, Juuso & Kallio, Markku & Argyris, Nikolaos, 2023. "Incomplete risk-preference information in portfolio decision analysis," European Journal of Operational Research, Elsevier, vol. 304(3), pages 1084-1098.
    15. Xu, Peng, 2024. "Testing out-of-sample portfolio performance using second-order stochastic dominance constrained optimization approach," International Review of Financial Analysis, Elsevier, vol. 95(PA).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Salo, Ahti & Doumpos, Michalis & Liesiö, Juuso & Zopounidis, Constantin, 2024. "Fifty years of portfolio optimization," European Journal of Operational Research, Elsevier, vol. 318(1), pages 1-18.
    2. Liesiö, Juuso & Salo, Ahti, 2012. "Scenario-based portfolio selection of investment projects with incomplete probability and utility information," European Journal of Operational Research, Elsevier, vol. 217(1), pages 162-172.
    3. Harju, Mikko & Liesiö, Juuso & Virtanen, Kai, 2019. "Spatial multi-attribute decision analysis: Axiomatic foundations and incomplete preference information," European Journal of Operational Research, Elsevier, vol. 275(1), pages 167-181.
    4. Liesiö, Juuso & Salo, Ahti & Keisler, Jeffrey M. & Morton, Alec, 2021. "Portfolio decision analysis: Recent developments and future prospects," European Journal of Operational Research, Elsevier, vol. 293(3), pages 811-825.
    5. Marttunen, Mika & Haara, Arto & Hjerppe, Turo & Kurttila, Mikko & Liesiö, Juuso & Mustajoki, Jyri & Saarikoski, Heli & Tolvanen, Anne, 2023. "Parallel and comparative use of three multicriteria decision support methods in an environmental portfolio problem," European Journal of Operational Research, Elsevier, vol. 307(2), pages 842-859.
    6. Antti Punkka & Ahti Salo, 2014. "Scale Dependence and Ranking Intervals in Additive Value Models Under Incomplete Preference Information," Decision Analysis, INFORMS, vol. 11(2), pages 83-104, June.
    7. Liesiö, Juuso & Andelmin, Juho & Salo, Ahti, 2020. "Efficient allocation of resources to a portfolio of decision making units," European Journal of Operational Research, Elsevier, vol. 286(2), pages 619-636.
    8. Mavrotas, George & Makryvelios, Evangelos, 2021. "Combining multiple criteria analysis, mathematical programming and Monte Carlo simulation to tackle uncertainty in Research and Development project portfolio selection: A case study from Greece," European Journal of Operational Research, Elsevier, vol. 291(2), pages 794-806.
    9. Liesiö, Juuso & Punkka, Antti, 2014. "Baseline value specification and sensitivity analysis in multiattribute project portfolio selection," European Journal of Operational Research, Elsevier, vol. 237(3), pages 946-956.
    10. Seeve, Teemu & Vilkkumaa, Eeva, 2022. "Identifying and visualizing a diverse set of plausible scenarios for strategic planning," European Journal of Operational Research, Elsevier, vol. 298(2), pages 596-610.
    11. Ram, Camelia, 2020. "Scenario presentation and scenario generation in multi-criteria assessments: An exploratory study," Technological Forecasting and Social Change, Elsevier, vol. 151(C).
    12. Selin Özpeynirci & Özgür Özpeynirci & Vincent Mousseau, 2021. "An interactive algorithm for resource allocation with balance concerns," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 43(4), pages 983-1005, December.
    13. Vilkkumaa, Eeva & Liesiö, Juuso & Salo, Ahti, 2014. "Optimal strategies for selecting project portfolios using uncertain value estimates," European Journal of Operational Research, Elsevier, vol. 233(3), pages 772-783.
    14. Zhang, Xinwei & Yan, Yong & Wang, Lilin & Wang, Yang, 2024. "A ranking approach for robust portfolio decision analysis based on multilinear portfolio utility functions and incomplete preference information," Omega, Elsevier, vol. 122(C).
    15. Tom Pape, 2020. "Value of agreement in decision analysis: Concept, measures and application," Papers 2012.13816, arXiv.org.
    16. Pape, Tom, 2017. "Value of agreement in decision analysis: concept, measures and application," LSE Research Online Documents on Economics 68682, London School of Economics and Political Science, LSE Library.
    17. Juuso Liesiö, 2014. "Measurable Multiattribute Value Functions for Portfolio Decision Analysis," Decision Analysis, INFORMS, vol. 11(1), pages 1-20, March.
    18. C Ram & G Montibeller & A Morton, 2011. "Extending the use of scenario planning and MCDA for the evaluation of strategic options," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 62(5), pages 817-829, May.
    19. Liesiö, Juuso & Kallio, Markku & Argyris, Nikolaos, 2023. "Incomplete risk-preference information in portfolio decision analysis," European Journal of Operational Research, Elsevier, vol. 304(3), pages 1084-1098.
    20. Scholten, Lisa & Schuwirth, Nele & Reichert, Peter & Lienert, Judit, 2015. "Tackling uncertainty in multi-criteria decision analysis – An application to water supply infrastructure planning," European Journal of Operational Research, Elsevier, vol. 242(1), pages 243-260.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:266:y:2018:i:1:p:205-220. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.