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Published: May 24, 2011
 / Summer 2011 / Issue 63

 
 

Strategic Bets

The Dow Chemical example is instructive in another way; it shows the inherent uncertainty that leaders must navigate even after a strategic bet is made. Liveris had to execute the deal with Rohm & Haas under conditions neither he nor anyone else could have imagined — a global financial system turned upside down.

Preparing for Upheaval

Strategic bets were once a matter of choice, not necessity. In the 1980s, ’90s, and early 2000s, though the business environment grew steadily more turbulent, large mainstream corporations could still survive through gradual change, honing core capabilities and creatively extending them to new markets. But pursuing incremental improvements is no longer a reliable path to success. No matter what a company’s business model, at some point in the future, that model will become irrelevant or obsolete or will lose value against new competitors and new opportunities. That point can arrive abruptly, without clear advance signals.

There are several reasons for this. The first is the digital revolution. It has been in play for 20 years, but only now has it begun to routinely cause cross-industry disruptions. As Amazon and Apple have famously shown, a company with a new value proposition that takes advantage of digital media can change the game swiftly. Additionally, many innovations can become commoditized with unprecedented speed, because digital media makes it easier for other companies to learn about them and copy them.

Meanwhile, the extraordinary economic growth in China, India, and Brazil is elevating a billion people or more to higher levels of prosperity. Coupled with increasing demand for scarce resources in the Middle East and other emerging markets, this phenomenon will lead to seismic (and still unpredictable) political and economic change.

Perhaps the most significant and under-recognized force is the shift in global capital markets. They have become more volatile and less transparent, and trading has been hugely focused on the short term — even as regulators look to impose new long-term capital requirements and other constraints on trading in the wake of the Great Recession. Unpredictable movements in currency trading, often involving sudden shifts in currency value of 30 to 50 percent, add to this volatile environment. The comparative value of countries, industries, and companies can now change rapidly on any given day.

In this new business context, the power of the capital markets cannot be overstated. Capital today is more fluid, fickle, and abundant than ever; these traits exert a steady pressure on companies to either attract capital or risk seeing it flow to competitors — or, worse, flow to upstart predators that have not traditionally been in a company’s competitive line of sight. No longer are the capital markets merely a tool to execute corporate strategy; they are integral to the way a company forms its corporate strategy.

Combined with the speed of the Internet and relentless commoditization, this means the market value of a particular asset — anything from a business operation to an oil well to a brand name — may decline sharply at any time against the intrinsic value of that asset. Factoring in the volatility of markets, leadership must pragmatically and unflinchingly evaluate the fundamental depreciation of its assets on a long-term basis, and react by making strategic bets about what to keep, what not to keep, what to buy, and what timing to use on any bet.

For example, consider what occurred in the materials sector starting in the early 2000s. China’s consistent double-digit GDP growth reached a tipping point; that nation’s economy started sucking up natural resources at a prodigious rate, and it had ripple effects across the globe. In response, BHP Billiton Ltd., an Australian mining company that had been formed by a merger in 2001, made a strategic bet to become a dominant player in China. It purchased Anglo Potash, Intercor, and WMC Resources and steadily cemented ties with China — even winning the honor of producing the medals for the 2008 Beijing Olympics.

 
 
 
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Resources

  1. Greg Farrell, Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America (Crown Business, 2010): A Financial Times reporter tells the dramatic story of one of the strategic bets mentioned in this article.
  2. A.G. Lafley and Ram Charan, The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation (Crown Business, 2008): Procter & Gamble’s great strategic bet began when Lafley became CEO.
  3. Paul Leinwand and Cesare Mainardi, The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Press, 2010): Why pursuing an effective strategy often means making a strategic bet by cutting away those parts of your business that are incoherent.
  4. Bob Rice, Three Moves Ahead: What Chess Can Teach You about Business (Even if You’ve Never Played) (Jossey-Bass, 2008): Chapter 8 covers the “exchange sacrifice,” in which you trade something that seems valuable now for a better advantage.
  5. For more thought leadership on this topic, see the s+b website at: www.strategy-business.com/strategy_and_leadership