How do you select strategic options in an uncertain world?
Every strategy can be seen as a portfolio of bets – a package of initiatives in which the organization invests in order to achieve its objectives. Each strategic bet has a risk/return profile. The strategic risk of a bet depends on the chance of success/failure under differing future scenarios, but also on what is at stake (risk = stake x chance). The strategic returns of a bet consist of the potential benefits in each of the future scenarios (return = benefit x chance).
Strategizing is the process of generating options and choosing which options to bet on given their risk/return profile. As most organizations have limited low-risk/high-return options available, they also need to select strategic options with a higher risk and/or lower return.
The Strategic Bets Framework outlines the three key factors that need to be considered when deciding which strategic options to bet on. The first factor, the chance of success in different scenarios, is on the left and helps to classify each strategic option on a continuum from a high to a low chance of achieving the intended outcomes. The second factor, the potential benefits, is on the top right and details various possible rewards that will justify risk-taking. The third factor, the required commitments, is at the bottom right and specifies the various investments that need to be made (‘at stake’), creating the strategic risk of getting stuck on the wrong path.
A strategic option’s risk = stake (required commitment) x chance of not being successful. A strategic option’s return = benefits x chance of being successful. The framework suggests that while bets with a high chance of success are preferable, strategists often need to ‘venture lower down’ on the continuum, taking calculated risks on more uncertain options. The most attractive are options with high potential benefits where commitments can be minimized.
The three factors to consider when selecting strategic options are the following: