Using mathematical modelling to understand the difference between Passive and Active Strategy

Understanding the difference between passive and active strategy means the difference between realizing and losing an opportunity and ultimately, in a volatile environment, the difference between life and death for an organization. In a well-established industry, the reasoning for adopting a passive strategy is relatively clear and driven by known-uncertainties. On the other hand, the reasoning for adopting an active strategy is contextual and driven by uncommon opportunity/risk perception/aversion.

A strategy is the natural answer of the “What" and the “How/Why”. Our creativity and innovation generate the former while our knowledge generates the latter. In other words, Strategy is a function of both the “What” and the “How/Why”. Developing a strategy starts with a picture depicting sufficient description of the “What’s” linked through all possible “How’s/Why’s”. I have developed a mathematical method that models such a picture and identifies different symmetries. The identified symmetries could be one of two types: 1-Simple symmetry/Passive strategy OR 2-Composed symmetry/Active strategy.

Passive strategies are usually sets quantified by the corporate to preserve core values in an uncertain environment. 

For example, Oil & Gas projects portfolio strategy map has four passive strategies: 

• Minimum installed capacity to ensure minimum outages
• Physical modularity to ensure any potential bottlenecking occur downstream rather than upstream.
• Technology maturity, process reliability, to maximize unit production/economic life.
• Upgradable capacity to eliminate any potential upstream bottleneck. 

Other strategies shown on the map below, without an asterisk, are active. Initiation and delivery of which require a vigilant portfolio manager with a vision.

Let us illustrate how active strategies are adopted in a divestment/acquisition situation, for example recently Shell Royal Dutch sold Oil sands facilities to Canadian Natural Resources, CNRL. The acquisition/divestment is an active strategy and shown on the map as the most up left corner. such a strategy is composed of two passive strategies: 3-Technology/Process Reliability and 4-Upstream capacity upgrading. These passive strategies represent two core values with uncertainties, the latter is relatively easier and quicker to assess than the former. Consequently, the buyer, CNRL, would have a set of active strategies composed by combining 4-Upstream capacity upgrading with other passive strategies as shown in the table below. These active strategies would mitigate hidden uncertainty.