Wharton@Work

September 2011 | 

The Gamble You Can’t Afford Not to Take: Making Strategic Bets

Making Strategic Bets

Global business leaders who aren't reading the signs and anticipating what's ahead are playing a dangerous game, says Ram Charan, author of the best-selling Execution: The Discipline of Getting Things Done and over a dozen other books. “Big industry changes and the pace of those changes, as well as maturing markets, mean that most global corporations will have to make a monumental bet sooner or later. Their existence will likely depend on it. Whereas strategic bets were once a matter of choice, they're now becoming a necessity.”

Charan cites Dow Chemical's 2009 acquisition of Rohm & Haas as an example of such an audacious move. “Not only did it take all of Dow's financial resources to acquire this specialty chemicals maker, but it represented a fundamental shift in their business model, one that challenged the prevailing assumptions of the industry. CEO Andrew Liveris used the word transformational to describe the US$18.8 billion all-cash deal: He said it would lower his company's reliance on low-margin, highly volatile, highly cyclical commodities and bring in specialty products whose differentiation offered global opportunities and higher margins.”

Liveris' enthusiasm wasn't widely shared. Industry analysts said the deal was too expensive, the timing wasn't right, and the chances for success were too uncertain. Financing was difficult, and there were many setbacks, including a last-minute pull-out by a major investor. “Chief executives embarking on a strategic bet should expect to face a series of harsh tests,” notes Charan. “If you don't have — in advance — the mental and organizational resolve to win at such a bet, you'll likely give up when you hit any one of those tests.”

Waiting to develop that resolve until it's needed, in other words, won't get results. Charan is working with senior global executives at Wharton in December to develop the skills he identifies as key to leadership in strategic bets, namely courage and resourcefulness. The new Global Strategic Leadership program will help develop the mindset those executives need to take their organizations to the next level. “Courage must be very strong to proceed in strategic bets. If you're hampered by the past, by business as usual, it can't be done. You must also be resourceful: search and go beyond the comfort zone to figure out a way to make it happen. It is these qualities that make the difference between people who make strategic bets and those who simply maintain business.”

Acknowledges Charan, “Business as usual is comfortable — it's safe. Executives who continue to shape their strategy the way it's always been done, who aren't acutely aware of changes in the external environment and anticipating new realities are simply opening the door for other organizations. For some firms, that could mean difficulty securing capital, a takeover, or worse.”

Charan points to three clear steps to work on in preparation for leading a strategic, game-changing bet. First, you need the ability to recognize the need for such a move. “It's better to stay ahead of change, even if it's risky,” he says. “Liveris understood that the global environment affecting the chemicals industry was rapidly changing — they would be forced to change sooner or later. Moving when he did created an advantage — one that was in fact transformational; it set up the combined Dow-Rohm & Haas enterprise for better performance than either company might have expected alone.”

Then, you need to seize the moment and execute the decision. “You're going to get some resistance, but as the leader, you need to communicate that a failure to act is in itself a bet — one of omission. Hesitation and missed opportunities put the fate of your company in the hands of others.

Finally, you need to get your board, and your organization, to understand that their feelings of reluctance can't get in the way. Business by definition involves discomfort. If what you're proposing feels comfortable, it's probably not enough of a bet."

Leading others to move past their automatic resistance to change is crucial, and depends on your own entrepreneurial judgment. For others to put their trust in that judgment, says Charan, it must come from a habit of mind that you continue to nurture. “It's a combination of due diligence, analysis, and a qualitative approach. The only way to manage in today's business environment is to think in terms of external strategy, continually cultivating an outside-in view of your company. Dispassionately evaluate strategic bets, and prepare your board ahead of time. What Liveris did, moving quickly to a new business model and acquiring and deploying necessary capabilities before competitors accepted or recognized it, can be done by many others as well."