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VALUE MAPS

A value map is a graphical illustration of both threats and opportunities. Because threats and opportunities are two sides of the same coin, a value map also has two sides, as illustrated. Reference points have been added for valuation and measuring variation from the expected outcome. Threats are plotted on the left side of the map while opportunities are located on the right side. Rather than plotting a single point on a risk map, the value map illustrates the range of the magnitude of each threat and the potential gain of each opportunity. This is an important consideration because operational conditions during the year or years are not stagnant. A value map can also plot the time duration of risks. Some risky events occur and last for only a short period – perhaps a matter of days. Others have long tails and last for many years. Some long-lasting risks can have significant strategic importance. A value map can also plot correlations between risks. Some volatile situations are highly associated with others. For example, the threat of a patent lawsuit may have a strong link to a consequential decrease in revenues. A weather-related catastrophe may be highly correlated with the chance of personnel being injured, property damage, business interruption expenses, crisis management, and perhaps a

Value Map Outcomes

Exhibit 16.2 Value Map Outcomes

declining stock price. These associations can be shown on the value map so senior management is fully aware of the total consequences of an event.

Exhibits 16.2 through 16.4 show how a value map differs from traditional heat maps. Exhibit 16.2 shows that the outcomes from a volatile situation are not necessarily negative. In fact, organizations take on risky projects in order to create value. The value map provides cells to record both negative and positive outcomes of business situations. These events may be investments in new products, operating a factory, or providing a customer service.

Exhibit 16.3 plots two risks in their current state. That is, the ellipses show the expected outcomes (the center of the ellipses) as well as the spread of possible outcomes. On the vertical axis, the range of possible probabilities is shown; on the horizontal axis, the range of possible values is shown. This mapping differs significantly from traditional heat maps in that for the first time the variation (the risk) is plotted. The outcome is plotted as the Cartesian product of the event's value (on the horizontal x-axis) and its likelihood (on the vertical y-axis). This plotting of so-called expected outcomes is typical of all traditional heat maps as well. But where value maps improve on this display is in also showing the range of both inputs. These ranges are shown as ellipses. The wider (on the x-axis) the ellipse

Value Map with Two Risks – Current State

Exhibit 16.3 Value Map with Two Risks – Current State

Value Map Showing Risk Evolution

Exhibit 16.4 Value Map Showing Risk Evolution

is, the greater the range of outcome values. Risk #1 in Exhibit 16.3 shows such an outcome. The taller (on the y/-axis) the ellipse is, the greater the uncertainty of the outcome. Risk #2 in Exhibit 16.3 shows an example of this uncertain outcome. In contrast, a narrow and short ellipse displays an outcome that is certain in both value and probability.

Exhibit 16.4 shows how the risks are evolving over time. There are several methods to include a risk's time dimension. In this graph, a two-period scale is used. For example, risk#l has not changed in its possible spread of value outcomes. However, it has become much more likely in the current state. Risk #2 changed in both dimensions. Its probability range has grown, which indicates there is much less certainty in what outcome might occur. In addition, although its values have the same spread, they are all negative in the current state. Risk #2's situation has drastically degraded. The value map in Exhibit 16.5 shows risk correlations.

 
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