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 / Summer 2012 / Issue 67(originally published by Booz & Company)


Three Games of Strategic Thinking

Decision makers struggling with uncertainty can choose from a trio of probabilistic models to match the type of risks they face.

Which of the following three games of chance would you prefer to play? In the first, you have the opportunity to make 40 blind draws from an urn containing 75 red balls and 25 black balls. You have to pay US$400 ($10 per draw) up front to play; you earn $20 for each red ball you draw but nothing for black.

The second game also offers you the chance to win $20 on each blind draw from an urn with red and black balls. In this case, the mix of red and black is unknown: It could range from 100 red and no black to 100 black and no red. But you pay only $5 per draw and you can bet on either color with each draw. You can stop anytime you want or draw up to 50 times.

In the third game, you pay only $1 per blind draw from the urn and there are no limits on how many times you can play. This urn may contain red balls and black balls, but it might also contain yellow pyramids, diamond rings, dollar bills, or used bubble gum — in short, just about anything. In this game there is no bet and no cash payoff. You simply get to keep what you draw.

Each of these games matches a different strategy paradigm reflecting a different mind-set. All three paradigms draw upon a rich base of mathematical probability theory and extensive research into business strategy. And each has proven useful for different companies at different times. The first captures a model we call Planning and Positioning, in which managers make bets about the future based on information that provides insight into the degree of uncertainty faced. The second model, Organizational Learning, sets up managers to dynamically respond to unfolding events when the degree of uncertainty cannot be predicted. Both of those models assume that strategic decisions should simply respond to external events. The third model, Constructive Transformation, is different because decisions are not just responses to the environment (which is random) or efforts to predict it, but instead focus on leveraging the player’s resources and events to shape the environment.

So, which game would you like to play? Your preference probably reflects a combination of your risk-taking profile and your business training. More importantly, which urn sounds more like your business environment? The sense of familiarity you felt for each game likely indicates the maturity of your industry — or at least your company’s role within that industry.

The first game (and its urn with relatively predictable contents) represents an expectation that many managers are trained to have, at least at the beginning of their careers, about the way decisions are made. But it doesn’t quite fit the way business works anymore. The second game (with a predictable process but unpredictable results) represents the way that many managers make decisions today, especially in mature companies with developed product lines. The third game (with a chaotic business environment and a high level of strategic intent) represents the style of decision making best suited to entrepreneurial managers. When you understand your predisposition to the different decision-making games and then skillfully match the appropriate paradigm to your circumstances, you can improve your odds of success in an uncertain world.

Planning and Positioning

To appreciate the roots of these three strategy paradigms, it is instructive to look more closely at probability theory and its history. Mathematicians and philosophers have been offering up urn experiments since the time of the ancient Greeks. (Why else would we be drawing from urns?) But the first written description of an urn model did not appear until the early 18th century, when mathematician Jacob Bernoulli published a text articulating the emerging science of probability and statistics. Bernoulli’s tools provided the capstone to the scientific revolution by allowing explicit hypothesis testing to discern the truth in the face of uncertainty. Rigorous quantification in the scientific revolution in turn laid the foundation for the methods of the Industrial Revolution. In 1900, the Tuck School of Business offered the first graduate degree in commerce, forerunner to the MBA, first offered by Harvard’s graduate school of business administration in 1908. Today more than 100,000 MBAs, known for their analytic training, graduate each year from more than 1,000 institutions in the U.S. alone.

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