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All decisions are about the future. Since the future is uncertain, all your decisions will have an uncertain outcome. But because youre trying to shape the future you still need to decide. Part of this is assessing levels of uncertainty. The other part is making decisions that can give you the best chance of succeeding despite uncertainty.

Frequency: When slowed by indecision. Key participants: You and the team.

Strategy rating: ****

Facing multi-million dollar losses, Lego took the risky decision to hire its new CEO from outside the family. And the new CEO decided to scrap many of the most imaginative projects launched in recent years risking the innovation culture that had made Lego famous. He increased strategic focus by returning to the essence of Lego a unified system for creative problem solving. And then took the risky decision to return the power for delivering this strategic vision to his talented team. Working with half the colours, and half the number of components, designers were encouraged to create new toys with what they had and to work more closely with Lego enthusiasts outside the company. Successfully jumping the uncertainty gap, often by reducing complexity, has transformed Lego into the worlds biggest toy company.

Objective

Uncertainty can only be reduced by committed decisions and actions. You cant wait for uncertainty to disappear but you can choose to create certainty of purpose and direction. You cant

Taking risks (jump your uncertainty gaps)

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33Taking risks (jump your uncertainty gaps)

remove risk but you can think about how to create a culture and processes to adapt to unexpected problems.

How high are levels of uncertainty in your industry?

What uncertainty surrounds a particular decision?

What are the risks in making (or not making) certain decisions?

How could things go wrong? What would you do next?

People think differently about risk and uncertainty. Managers tend to take fewer gambles than entrepreneurs because of dif-ferences between how they view the relative benefits of win-ning and losing. Small groups tend to take bigger gambles than individuals because they get to share the benefits while also avoiding the blame. But large groups may seek to avoid risks because they get stuck in habitual, traditional ways of doing business.

Avoiding risk is not the main aim of a business. The aim of a business is to take risks and benefit from the higher returns of taking those risks. Thats why the entrepreneurial approach to making investments is attractive to growth strategy. And its why large organisations try to recapture small-group risk tak-ing. They understand doing nothing is often as risky as doing something.

Context

Some risk comes from outside the organisation, but most risk is about the ability of an organisation to complete its plan. The risky part is adapting successfully to the needs and demands of the mar-ket. The risk is dealing with competitor moves while managing to deliver products and services that customers will buy. And keeping your shareholders satisfied.

Strategy involves completion of goals, and the risk is the difference between those goals and the ability of the organisation to achieve them. So part of the risk is created by the strategy. That means

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Thinking like a strategist34

your ability to think about the way various parts of your plan fit together with what your company can do.

Which risks are outside your direct control?

Which risks are within your direct control?

How can you deal with changes outside your control?

How can you anticipate external changes?

Your task as strategist is to recognise the costs and benefits of risks. The benefits are just as important as the costs. Your strategy will have uncertain outcomes but you can try to assess the rewards and how to gain them.

The next task comes from comparing what you want to accomplish with the abilities and resources available to you. Some of this will be money and equipment but most of it will be the skills, commitment, processes and culture of your company. Part of this will be about the ability to do what is necessary, and part will be the willingness of the organisation to take action that has an uncertain outcome.

Challenge

The first challenge is to look clearly at different sources of risk. As already discussed, some are inside and some of them are outside the organisation.

Outside the organisation Inside the organisation

Is your market complex or simple?

Are the rules of the market stable, dynamic or chaotic?

Are resources scarce or plentiful?

Is the market growing or shrinking? How is the general economy doing?

Are there shocks beyond your market?

How demanding are aspirations?

How high are performance levels?

Is there a performance/aspiration gap?

How similar is the top team?

Does the top team have a stake in the business?

What levels of slack resources exist?

What skills does the organisation have?

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35Taking risks (jump your uncertainty gaps)

If the gap is large between aspirations and performance levels the risk of not succeeding is increased. If the top team is very similar they may avoid risks because they are comfortable with the sta-tus quo. Yet similarity may also increase willingness to take risks if they feel overconfident in their own view of the world. This is not necessarily a good or a bad thing, it depends on the needs of the situation. You should just be aware of team dynamics related to uncertainty so you can respond to it as useful to your objectives.

If the skills are high enough then the capability gap is reduced. This may reduce risk by increasing performance, but it may also increase aspirations to unattainable levels. All of this will affect the risk inherent in the strategy. It is the gap between aspiration and ability that is ultimately the source of risk.

There are various methods some organisations use to analyse risk. These include Net Present Value (NPV) (not covered in this book) where subjective judgements about risk are given numerical val-ues that are subject to a simulation method. Yet the basis of the method is still subjective and does not deal with complex choices.

For complex choices, decision trees have been used. Alternative options and change events are identified alongside likely perfor-mance and outcomes. Like NPV these can either be too simple to be accurate or too complex to be useful. They can fool managers into believing they have control over the future. Just as impor-tantly they can stop managers feeling they can intuitively manage the gap between capability and aspiration.

Another approach is scenario planning (see page 183) whereby the strategist uses imagination to see into the future and design actions that can be taken to shape the future. This is about reducing uncertainty by taking certain actions that are under the control of the organisation.

Success

The strategist is attempting to find a course of action that leads to activities which bring attractive results for the organisation and its stakeholders. You are succeeding if you can think your way

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Thinking like a strategist36

Strategists measures of success

You have identified attractive destinations and objectives.

A credible strategy for attaining objectives is created.

Level of outside uncertainty is understood.

Size of performance/aspiration gap is identified.

The capability/uncertainty gap is managed effectively.

Pitfalls

Taking on too much risk happens when you dont have the ability to do what you set out to achieve. People may be overconfident because of past successes or excessively high optimism in world markets. People may take on too much because they either over-estimate the ability of colleagues or underestimate the difficulty of the task. This is made worse if a lack of openness or excessive politeness stops people voicing concerns. Defensiveness can lead to ignorance that increases risk.

It is just as much of a problem if ambitious projects and goals are not attempted. The returns to the business will be low and may be too low to keep the business safe. Shareholders may find this un-acceptable and the business will not survive if excessive caution loses market share and profit. The task of the strategist and lead-ership team is to reduce uncertainty in the areas that they can di-rectly influence in order to pursue attractively difficult objectives.

forward from the current position to a new position that is better. Move from where you are with what you have to where you want to be.

You need to recognise what is in your control and what is outside of your control. You need to get a good understanding of any gap between aspiration and performance. And you need to bridge that gap either by increasing aspiration to the point that people are willing to try to achieve more, or by increasing performance to the point that it can achieve what is desired.

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37Taking risks (jump your uncertainty gaps)

Strategists checklist

Identify the areas inside and outside your control.

Assess levels of uncertainty inside and outside the organisation. Look at the list of questions in this section. Talk about them with your team and think about the likely direction of change. Think about how the organisation can cope with unexpected and expected problems.

Compare performance aspirations and expectations. If aspirations are greater than expectations consider how to reduce the gap by increasing performance or by reducing aspirations in the short term. If expectations are higher than aspirations then consider how to raise aspirations.

Use scenario planning tools (see page 183) to consider how strategies may increase or decrease risk in the future. Use the 5 forces model (see page 169) to identify forces that may increase or decrease risks to your competitive position.

Explore the use of risk analysis and decision-making tools (NPV and Decision Trees). Are they stopping appropriate levels of risk taking? Would they be helpful in improving understanding of risk?

Think about the capability of the company to do what is required by the strategy. Consider also the ability of culture and skills to adapt to unforeseen problems, particularly if the strategy is ambitious.

Related ideas

Nassim Taleb, in his book The Black Swan, argues that people have an inaccurate view of risk. This means that they take on risk that they underestimate and avoid risk that they overestimate. This is exacerbated by lack of information, personal fears and group dynamics.

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Being aware of these tendencies can help you to take the kind of actions that your competitors fear to attempt while in fact not taking foolish risks. This is what entrepreneurs do instinctively as they demonstrate a form of functional impulsiveness along with superior pattern-recognition skills.

Unfortunately, many organisations find it easier to be managerial than entrepreneurial. Managers may keep investing in continual improvement efforts that continually fail. They may also abandon investments in more radical innovation, even when there is more risk in moving slowly than moving too quickly.

Yet, according to research led by Sucheta Nadkarni at Cambridge Judge Business School, when new opportunities are appearing, and disappearing at high speed, you will often be rewarded for competitive aggressiveness. In such environments, strategic urgency helps you to adapt so that you get to the future in time.

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