Placing Strategic Bets in the Face of Uncertainty

January 27, 2013 Editor 0

Contrary to popular opinion, strategy is not about turning uncertainty into certainty. Lots of bureaucratically inclined board members and corporate executives want and expect this to be the case. When reviewing strategies, you can hear them asking for proof that the strategy will be successful.

This kind of exchange is a terrible mistake on all sides. Advocates are promising something they can’t control and are setting themselves up for harsh punishment if things don’t turn out the way they hope. At the same time, making a guarantee in advance simply reinforces the mistaken belief that it is possible to be certain about any future outcome.

The reality is that strategy is about making choices under competition and uncertainty. No choice made today can make future uncertainty go away. The best that great strategy can do is shorten the odds of success. When crafting a strategy, all companies need to make bets about what customers will want in the future, what competitors will do in the future, what the company itself is capable of accomplishing in the future, what will happen in the economy generally. None of these bets can be guaranteed

Strategy means making the best possible choices you can make today and then being responsive when the bets do or do not come in as hoped. In essence, the strategist says “this is what I think will happen,” watches what does happen, and then updates the strategy and bets based on the newest information.

If strategy can’t eliminate uncertainty and needs repeated adjustments, why bother doing it at all? Why not just let the world play out and react accordingly? The reason is that strategy is the only way to figure out to what to pay attention to and how to get better.

The act of articulating a desired future state — a decision about where to play and how to win — enables the tracking of progress against the desired state. Stating the set of key bets about the future that have to come true for that desired state to happen allows the monitoring of how the key bets are playing out.

For example, a company looking to win on the basis of superior consumer service would have to bet that consumers would reward it for superior service and that it could deliver that service meaningfully better than could competitors. Having articulated the strategy and the bets, the company can develop measurement systems for both the outcome and the bets.

These systems should clearly point to the things that matter, the things the company must pay attention to. Without them, as the future plays out, the company won’t know what matters or how to make sense of the things that happen. In essence, articulating a strategy raises the signal-to-noise ratio of feedback from the market.

So strategy is not about getting rid of uncertainty, it is about knowing when the world is breaking against your bets — e.g., we thought customers wanted smaller screens but they really want bigger ones. This way of thinking about strategy is helpful in two ways.

First, the company can watch the key bets like a hawk, see deviations as early as possible and take action as appropriate. Without knowing what to watch for, the company is much slower to respond.

Second, the company gets a leg up on how to modify its strategy. The company has a logical structure to its existing strategy to which it can apply the new data, updating and enhancing the strategic logic. This is much more efficient than having to create the structure from scratch.

So rather than seeing strategy as a way to get rid of uncertainty, think about strategy is as a way of dealing productively with life’s inevitable uncertainty, by continuously making and updating your bets about the future.

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Categories: HBR, Insights

Tags: future, strategy, uncertainty