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 / Summer 2011 / Issue 63(originally published by Booz & Company)


Strategic Bets

The strategic bet to escape a declining industry must not be confused with selling a business to simply rationalize operations. For example, many companies sell divisions with the assumption that the acquiring company will run them more efficiently, and to gain some cash in the process. Such divestitures are worthwhile, but unless the fate of the company is riding on their completion, they are not strategic bets.

3. To practice a form of large-scale entrepreneurship. This typically means acquiring companies, technologies, or core competencies needed to be successful in an emerging form of enterprise. For example, consider Bharti Airtel Ltd. It is the largest cellular service provider in India, with more than 120 million subscribers. Its global expansion strategy has been based on scale and efficiency: that is, acquiring customers with very low asset intensity (requiring little capital per dollar of revenue). This type of expansion can be risky, because it often requires extensive investment to move rapidly to gain first-mover advantage.

In 2009, Bharti Airtel’s management negotiated for months to acquire MTN Group Ltd., a South Africa–based multinational mobile telecommunications company operating in many Middle East and African countries. The Bharti Airtel–MTN deal was an enormous strategic bet; it was championed by Bharti Airtel Chairman Sunil Mittal, but investors and analysts opposed it, in part because of the debt financing involved. Mittal eventually called off negotiations, in the autumn of 2009, but only when the South African government withheld support for the deal.

Nonetheless, Mittal was undaunted by his critics. In June 2010, Bharti Airtel acquired Zain Africa for $10.7 billion. This branch of the Kuwaiti telecommunications company Zain had operations in 15 African counties; Mittal thus gained the foothold on that continent that he had missed with MTN. At about the same time, Bharti Airtel announced a deal to purchase 70 percent of Warid Telecom International Ltd. of Bangladesh. Analysts threw cold water on the plans, pressuring management and the board to abandon the strategy. But Mittal has resisted the pressure to withdraw; he has assembled a top-notch team of managers to go into the Middle East and Africa, and Bharti Airtel is clearly in it for the long term. Tellingly, bankers have competed aggressively to finance the deals.

Facing Up to Uncertainty

As Bharti Airtel’s negotiations with MTN show, a strategic bet’s outcome cannot be certain; indeed, that is one of the things that make it a bet. Bharti Airtel was fortunate that other acquisitions were available in its target area. The failure to acquire MTN was only a minor setback.

Sometimes, however, poor timing or external forces can produce grave consequences for a strategic bet — and threaten the life of the company. When the Federal-Mogul Corporation, a U.S. automotive parts supplier, purchased British manufacturer Turner & Newall in 1998, it inadvertently assumed an enormous asbestos liability that forced it into U.S. bankruptcy in 2001; it did not emerge until 2007. Similarly, in mid-2008, the Royal Bank of Scotland (RBS) Group’s joint acquisition of the Dutch bank ABN Amro (with Fortis and Banco Santander) was a strategic bet to build a position on the European continent. But the bidding war with Barclays PLC over the deal left RBS too financially exposed to weather the credit crisis that arrived soon thereafter.

Keeping perspective is critical with strategic bets. They are so dramatic and compelling that there is always the chance of a misstep. Consider former Bank of America CEO Ken Lewis. His decision to acquire Merrill Lynch during the panicky days following the Lehman Brothers collapse was a bold strategic bet to quickly acquire a new capability. It is likely to prove to be farsighted and rewarding for the bank and its investors, but it will take more time and suasion to realize the potential that Lewis saw at the time. He was ultimately undone by a detail of the deal — not the overall decision, but the disclosure of bonuses. Lewis was eventually forced to resign, which shows just how high the stakes are when managing these bets.

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  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:


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