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

 
 

Strategic Bets

BHP’s CEO, Marius Kloppers, has said he believes that the industry will consolidate further. In late 2009, BHP set aside a $10 billion war chest to prepare itself to pounce on opportunities and make acquisitions. The capital markets rewarded Kloppers by pushing up BHP’s stock price. By early 2010, the stock had grown 250 percent over five years, well ahead of peers such as Rio Tinto and Alcoa. Vale and ArcelorMittal made similar strategic bets before the financial meltdown, and the market also rewarded them with higher P/E ratios. All three now enjoy great influence over prices and control over resources, particularly iron ore, upon which China dearly depends for its growth. In a testimony to this foresight, the price of iron ore went up 95 percent between 2008 and 2009.

To stay ahead of trends like this, corporate leaders must embrace the idea of strategic bets and prepare for the moment when such a bet will be necessary. This means becoming acutely aware of changes in the external environment and anticipating new realities before others do. It means being willing, when necessary, to strike out in new directions with dramatic changes in capabilities, even if the organization lacks experience. Corporate leaders will also have to prepare critical stakeholders for the kinds of dramatic strategic bets that will be necessary.

Anatomy of a Strategic Bet

A strategic bet is a big, bold move made either to transform a company and create a new growth trajectory or to create a totally new enterprise. Almost all strategic bets are potential game changers for the company, its industry, and sometimes adjacent industries; indeed, strategic bets are so comprehensive that they tend to alter most of the company’s staff, processes, and practices. Such bets require serious commitment from leaders and boards. In almost all cases, especially if the strategic bet involves a highly visible action, such as a large acquisition, there will be concerns about how the market, the analysts, and the rating agencies will react. Nonetheless, strategic bets work only if management and boards have the confidence and stamina to sustain themselves until the outside world sees the merit of their decision — a period that could last five or 10 years.

There are at least three basic reasons for making a strategic bet:

1. To acquire a controlling interest in, or even a stranglehold over, critical resources or competencies. For example, in late 2010, several strategic bets were under way in the mining and metals industry. They were driven by competition among Chinese and Indian companies for the kinds of rare elements needed for new technologies — such as lithium, a metal expected to be in greater demand for the next generation of car batteries.

2. To escape a declining industry before others see its demise. Typically, this approach is taken when a company’s leadership recognizes that part of the business is being commoditized or for some other reason is about to lose value and pricing power. Instead of riding the industry down, the company sells the business to cut its losses and puts its efforts into something with more promise.

In 1996, Allied Signal CEO Lawrence A. Bossidy made exactly that sort of clear-eyed assessment of the company’s auto parts business, which was responsible for almost 15 percent of its total sales. The company sold off the lion’s share of its car parts business for $2.1 billion, moving instead to concentrate on aerospace and chemical products. Two years later, Bossidy led the purchase of Honeywell, which was about half the size of Allied Signal, for a stock swap worth approximately $14 billion, creating a Goliath in the global aerospace and chemical products markets.

 
 
 
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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