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


Strategic Bets

Some executives might blanch at the fate of Federal-Mogul, RBS, and Ken Lewis — and decide that making a strategic bet is just too risky. When facing uncertainty, people have a psychological reluctance to taking on big strategic bets. This holds back many managements and boards. It is comforting, and often defensible, to continue with business as usual, especially if making a strategic bet would mean putting pressure on the board and the organization and having to convince them of a grand vision for corporate change.

Indeed, sometimes it is right to pull back from the brink of a poor strategic bet. In 2005, Johnson & Johnson abandoned its $24 billion bid for the Guidant Corporation, a maker of pacemakers, defibrillators, and stents, after safety issues cropped up. The Boston Scientific Corporation stretched to buy the company instead and eventually had to cope with a huge legal liability. Shortly after the acquisition, Fortune magazine called it the second-worst acquisition of all time, after the AOL–Time Warner merger. The stock price sank, and the founders are now selling their holdings.

But not making a strategic bet is often a worse move — and, in some cases, fatal. A passive failure to act may not look like a move at all, but it is a bet just the same — a bet of omission. The consequences are potentially dire. Hesitation and a missed opportunity can quickly turn a company into an acquisition target. Executives who make bets of omission are in effect putting the fate of their company in the hands of outsiders: a government regulator, competitors, or private equity investors and hedge funds.

Take, for instance, AOL’s decision not to build a search engine. In the mid-1990s, AOL was the dominant Internet player, ahead of Yahoo and a bevy of now extinct portals and search engines. AOL’s decision eventually put its fate in the hands of a couple of brainy kids from Stanford whose creation, Google, ultimately relegated the Time Warner portal to also-ran status. Today, AOL CEO Tim Armstrong, formerly of Google, is making a new strategic bet: realigning the company into a content provider through a series of acquisitions, partnerships, and organic growth initiatives. AOL’s acquisition of the Huffington Post in February 2011 was a very visible component of this bet, with widely observed risks and many potential rewards.

Heroic Leadership

When senior management begins plotting a strategic bet, whether to combat the decline in the long-term value of an asset, to compete for natural resources, or for any other reason, the boardroom is often psychologically unprepared for such an audacious move. Even when the business case is compelling, the board or senior management team might resist — particularly if those groups are dominated by cautious people or people with little or no experience with strategic bets. We have seen board members, gripped by anxiety, break the momentum of a strategic bet with the assertion “Most acquisitions don’t work, so we shouldn’t do it.” Typically, directors fear the stock price will go down, the rating will be cut, or the adverse publicity will be too severe for the company and their own individual reputations.

Ultimately, it’s the leader’s job to get the board to face up to the risks of not making a decision. For companies the size of Siemens AG or Procter & Gamble Company, the risks may not be as great as for smaller companies. Traders can create negative press, but they cannot turn Siemens or P&G into takeover targets. The issue is trickier for companies already on the radar as acquisition targets. At such times, a frank boardroom discussion might convince directors that a takeover is inevitable if the company doesn’t make the strategic bet. By choosing to take the bet, leadership could propel the company to the next level.

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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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