managing amid uncertainty dtt
TRANSCRIPT
Deloitte Research
A study by Deloitte Consulting and Deloitte & Touche
Managing AmidUNCERTAINTY
New thinking on how to win in a volatile world
20
What is the best way to cope with an
unpredictable economic cycle? That
depends – on the length and depth of
recessions and the strength and breadth of
recovery. The problem is that these critical
variables are unknown and unknowable.
What is needed is a new way to manage
that embraces uncertainty rather than
largely ignoring it.
Introduction ................................................................... 2
The Futility of Forecasting ................................................ 2
Applying Strategic Flexibility ............................................ 4
Conclusion .................................................................... 12
End Notes ...................................................................... 13
About Deloitte Research ................................................. 14
About Deloitte Consulting and Deloitte & Touche .............. 15
CONTENTS
2
The Futility of Forecasting
As the last decade drew to a close, prominent economists were
claiming the “end of the business cycle” and permanent economic
growth.1 After a decade of expansion in the US, such optimism
appeared justified. As late as July 2000, consensus forecasts
envisioned 3.2% growth for the US economy in 2001.2 As 2000
wore on, these forecasts grew ever more pessimistic, with some
calling for recession in perhaps the second or third quarter of 2001,
but recovery was typically predicted for late 2001. By the last
quarter of 2001, the US National Bureau of Economic Research
had decided that the economy had actually been in recession since
March 2001. As of late 2001, recovery was predicted for mid-2002,
with the proviso that the threat of continued terrorism could be
contained. So much for the end of the business cycle.
This phenomenon of constantly revised and ever-inaccurate
forecasts is hardly new. But despite the dismal track record, we
can’t shake loose our desire to forecast – primarily because
strategy-building seems to demand it. Companies must ramp up
or mothball production capacity, launch or shelve marketing
initiatives, expand or contract their sales forces, and accelerate or
idle their product development pipelines. Most executives seek
to base these decisions on projections of what lies over the
horizon.
Such foresight has always been beyond reach, and the futility
of prediction has long been an open secret. Faced with the
watershed events of September 11, 2001, many are now voicing
that skepticism and have become convinced that forecasting the
future is a fruitless endeavor. The Economist recently noted that,
“economic forecasting, always speculative, is now close to
impossible”. This abandonment of our always tenuous predictive
powers has even permeated corporate budgeting cycles. Dick
Kovacevich, CEO of Wells Fargo & Co., said it well to his board:
“Whatever budget we come up with is almost meaningless.” 3
Introduction
Traditional approaches to strategic planning rely for their success
on accurate predictions of the future. But the nature of the
uncertainty that imbues almost every aspect of today’s business
environment has made prediction and even forecasting essentially
useless. And since many significant but unforeseen threats and
opportunities crop up faster than firms can respond to them,
neither can executives rely on “agility” as a mechanism for coping
with uncertainty. Consequently, today’s competitive environment
demands a new approach to strategic planning. This report
presents just such a framework – Strategic Flexibility.
Strategic Flexibility builds upon the established practices of
scenario-based planning and strategy formulation, but combines
them with insights drawn from the emerging field of real options
to create something entirely new. The result is an approach to
strategic planning and strategy implementation that is absolutely
indispensable to today’s global enterprises.
And so although it is true that uncertainty permeates our lives,
this fact need not paralyze informed action. Companies that are
stategically flexible not only cope with uncertainty, but also exploit
it.
Delo
itte
Res e
arc h
– M
anag
ing A
mid
Unce
rtaint
y
3
What this suggests is that when strategies have failed – from
international expansion plans to growth initiatives – they have
done so not necessarily because they were bad strategies, but in
all likelihood because in implementing those strategies managers
ran afoul of unanticipated events, such as slower-than-expected
trade liberalization or economies thrown into recession. It is not
our strategic thinking that fails us, per se, but our continued reliance
on our inability to predict the future.
Under these conditions, the risks involved in building strategy
on inevitably inaccurate predictions stand out in sharp relief.
For example, consider two firms formulating their strategies
in the teeth of a recession. The first firm – call it Optimist Inc. –
predicates its strategy on a short, shallow recession and so
minimizes its restructuring efforts, invests as heavily as possible in
new product development, and keeps advertising spending
relatively high. This is a strategy of staying visible to consumers,
ready to satisfy their soon-to-be-rekindled demand, and creating
shareholder value through growth.
Contrast this with a second firm – Pessimist Co. – that foresees
a Japan-style recession consisting of a decade or more of sluggish
growth in the overall economy, marked by slow or shrinking
international trade and lower productivity. This sort of forecast
demands much more severe cost cutting efforts and a focus on
free cash flow in order to reward shareholders.
If each of these firms pursues its prediction-based strategy,
one of them is going to be caught out. In the event of a relatively
short recession, Optimist Inc. will be well positioned for renewed
expansion, while Pessimist Co. will incur large opportunity costs
in forgone growth, potentially be shut out of future markets
altogether, and consequently forced into bankruptcy or sold to its
faster-growing competitors.
Conversely, should the recession prove long or especially
painful, Pessimist Co. will have guessed right. Optimist Inc., however,
will no longer be seen as having implemented a bold growth
strategy. Instead, it will have been profligate with scarce resources
that should have, in hindsight, been husbanded more carefully.
Such a tale is not merely a Kipling-esque just-so story; there
are real-life examples of companies relying on opposite
assumptions when preparing for the future. For example, Airbus,
the European aircraft maker, decided to bet that the downturn
will be short, declining to lay off any workers at all so as not to
jeopardize its ability to respond to the upturn. In contrast, its US-
based rival Boeing announced plans to lay off tens of thousands
of workers based on its view that demand for jetliners will remain
depressed for a long time to come.4
In either case, someone wins and someone loses. But the
winner is not the better strategist, or even the better predictor.
The winner is simply lucky.
There has to be a better way.
4
ANTICIPATEANTICIPATE
Each of these shapes constitutes not a prediction of how the
economy will recover – for that would simply replace conventional
strategy’s single inaccurate prediction with four inaccurate ones.
Rather, each one is a form of boundary marker, and collectively
the scenarios serve to limn the future, rather than predict it.
In other words, a set of scenarios marks out a “possibility space”,
with detailed scenarios serving as buoys in uncertain and
potentially turbulent waters. Carving out this possibility space
serves both to broaden our horizons, allowing us to think creatively
and expansively about what might happen, while at the same time
defining a finite set of possible futures within which a company
might have to operate.
FIGURE 1. THE STRATEGIC FLEXIBILITY FRAMEWORK
SOURCE: DELOITTE CONSULTING ANALYSIS
FORMULATE
ACCUMULATE
ANTICIPATE FORMULATE
ACCUMULATE
ANTICIPATE
■ Identify drivers of change
■ Define the range of possiblefutures
■ Develop scenarios
■ Develop an optimal strategy foreach scenario
■ Compare optimal strategies todefine “core” and “contingent”elements
■ Acquire those elements needed toimplement the core strategies
■ Take options on elementsneeded for contingent strategies
OPERATEOPERATE
■ Execute the core strategy
■ Monitor the environment
■ Exercise or abandon options asappropriate
Applying Strategic Flexibility
A premise of our approach to coping with the current
environment is that it is futile to try to position oneself for any
specific set of conditions that might be ahead. The odds of getting
it right are too low, and the costs of getting it wrong are too high.
Strategic Flexibility responds to this challenge with a
four-phase approach that overcomes the paradox of traditional
strategy models by abandoning entirely the need to predict the
future, yet still positioning firms to respond to threats or capitalize
on opportunities they are likely to encounter (see Figure 1. The
Strategic Flexibility Framework).
Consider each of the four phases in turn.
Strategic flexibility begins by developing a set of scenarios that
bound future possibilities along dimensions of particular interest.
In the case of positioning oneself to cope with the business cycle,
it can be useful to think of scenarios for recovery in terms of the
four stereotypical “shapes” that the cycle of recession and recovery
typically has – a V, U, W, or L (see Figure 2. Scenarios for Recovery)
FORMULATEFORMULATE
With these scenarios in place, the next step is to create an optimal
strategy for each scenario using the conventional tools of strategy
formulation. In the case of our four scenarios for economic recovery,
most executives would probably make short work of developing
an optimal strategy for a given recovery profile. Told with certainty
that a recession will last eight months with no quarterly economic
Delo
itte
Res e
arc h
– M
anag
ing A
mid
Unce
rtaint
y
5
ACCUMULATEACCUMULATE
FIGURE 2. BUSINESS CYCLE SCENARIOS
SOURCE: DELOITTE RESEARCH
The “V”Three to nine months of economic slowdown.Rapid return to pre-recession growth rates.
ECONOMICGROWTH
0%
TIME
ECONOMICGROWTH
0%
TIME
ECONOMICGROWTH
0%
TIME
ECONOMICGROWTH
0%
TIME
The “L”Several years of economic decline.Unsure and slow return to modest growth rates.
The “U”Twelve to eighteen months of economic decline.Gradual return to acceptable growth rates.
The “W”A “double dip” recession lasting one to three years.Tentative return to long-run average growth rates.
contraction more severe than negative 0.5%, and a rapid
resumption of persistent 3.5% growth, the appropriate response
is clear: to the extent possible, ignore the recession.
This strategy formulation effort must be undertaken for each
of the other scenarios as well. Various combinations of business-
as-usual, cost-cutting, and a measured return to expansion
constitute appropriate responses to each of the four possible
recovery profiles presented in Figure 2.
So far, all this accomplishes is to multiply the work of the
strategist: instead of developing one strategy, she must now
develop several. However, the power of this approach emerges in
an analysis of the commonalities and differences between these
optimal strategies.
Specifically, those initiatives suggested by all of the optimal
strategies constitute the organization’s core strategy – a strategy
that can be pursued confident in the knowledge that it will be a
useful response to whatever future emerges. Initiatives specific to
a particular optimal strategy are called contingent strategies.
Examples of core strategies might include investment in
customer relationship management capabilities, adopting
shareholder-focused performance metrics, and investing in
training and human resources development. On the contingent
side, massive layoffs can make sense in the event of an extended
economic contraction, while investments in foreign markets,
new product development, and expanding capacity through
acquisition are each keyed to specific types of economic
expansion.
Firms have historically been forced to pick their best guess of what
the future will hold and respond by implementing a single strategy
keyed to the demands of that set of assumptions. However, given
the fundamental impossibility of predicting, this approach will
inevitability lead to potentially bitter regret (see Figure 3. The
Benefit of Hindsight Is Regret).
6
Deloitte Research Studies
Strategic Flexibility in the Communications Industry: Coping
with uncertainty in a world of billion-dollar bets.
Strategic Flexibility in the Financial Services Industry: Creating
competitive advantage out of competitive turbulence.
Strategic Flexibility in the Energy Sector: Competing in a decade
of uncertainty, 2000-2010.
Strategic Flexibility in Life Sciences: From discovering the
unknown to exploiting the uncertain (forthcoming).
Strategic Flexibility in the Media Industry: Reel options in the
pursuit of digital convergence (forthcoming).
Deloitte Research has been developing the concept of strategic flexibility for over two years. Through a series of
industry-specific research reports and other publications, Deloitte Research professionals, in collaboration with
their Deloitte Consulting and Deloitte & Touche colleagues, have created a body of work that articulates the four
phase strategic flexibility framework and demonstrates its usefulness in a wide range of applications.
Many of the items below are available from Deloitte Research at www.dc.com/research or upon request at
Other Publications
“Real Options in Real Organizations” Creating and exercising
real options through corporate diversification. Chapter 2 in
Innovation and Strategy, Operating Flexibility, and Foreign
Investment: New Developments and Applications in Real Options.
L. Trigeorgis (ed.) Oxford University Press, 2002.
“Real Options and Restructuring the Communications
Industry” Telecom Investor, December 2001.
“Lead from the Center” How to manage divisions dynamically.
Harvard Business Review, May 2001.
“Tracking Stocks and the Acquisition of Real Options” Journal
of Applied Corporate Finance, Summer 2000.
“Hidden in Plain Sight” Hybrid diversification, economic
performance, and real options in corporate strategy, in Winning
Strategies in a Deconstructing World, J. Wiley & Sons, 2000.
6
Delo
itte
Res e
arc h
– M
anag
ing A
mid
Unce
rtaint
y
7
Developing a complement of core and contingent strategies
provides insights into the resources a company has and those it
absolutely needs, might or might not need, and doesn't need. This
in turn highlights some obvious guidelines for action (see Figure
4. A Framework for Accumulating Resources). These existing
resources not applicable to any future scenario should be disposed
of, while those that are needed for any scenarios should be kept
and maintained. Investments needed for only some possible future
should be scaled back to a level commensurate with the
probability of actually needing them.
Human Resources
In the human resources field, one of the challenges of recessionary
economies is how to cut costs by laying off people without
destroying the value that has been built up in a firm’s human
capital. After all, there are few organizations that wouldn’t claim
proudly that their most valuable asset is their people; but there is
no denying that one of the most significant quick-hit cost cutting
measures for many firms is in headcount reduction.
To cope with this contradiction, Cisco Systems has found a
way to create real options on its long-term-valuable, yet short-
term-expensive, human assets.
Faced with the need to cut costs by reducing its salary
expense, in April 2001, Cisco offered 80 employees a unique
opportunity: rather than be dismissed outright, they could work
for non-profit organizations as part of a new program the company
initiated called the Cisco Community Fellowship Program.
Participants in the program agree to work for one year as a full-
time employee of the non-profit organization while being paid
by Cisco just one-third of their pay but keeping their benefits and
stock plans. They also retained access to Cisco’s training, continuing
education, and e-learning. At the end of the year, the employees
will receive an additional two months salary at the one-third rate
and will be considered internal candidates for any jobs that
become available.
Those resources that the firm does not hold and that are
irrelevant to any possible future should be avoided, and those
relevant to all possible future should be accquired. But what about
resources the company doesn't have but needs in case certain
threats and opportunities emerge as depicted in its scenarios, but
not otherwise? The fundamental challenge that the Strategic
Flexibility framework solves is how to prepare for multiple
possible futures – each of which requires different responses –
simultaneously. This is done through the creative application
of real options. Real options are small-scale investments in
capabilities a firm might need which confer the right, but not the
obligation, to invest more money in the future in order to fully
deploy that capability. The power of this approach is evident in
the activities of some leading companies in different functional
areas.
SOURCE: DELOITTE RESEARCH
Sell
None All Some
Resourcesthe firm
has
Keep andmaintain
Scale back
AvoidResourcesthe firmdoesn’t
have
Acquire Take realoptions
These are elements ofthe “core” strategy
These are elements of“contingent” strategies
FIGURE 4. A FRAMEWORK FOR ACCUMULATING RESOURCES
RELEVANT TO WHICH SCENARIOS
FIGURE 3. THE BENEFIT OF HINDSIGHT IS REGRET
SOURCE: DELOITTE RESEARCH
ACTION
Sell off the widget division
Lay off 5,000 workers
Restrict new investments
HINDSIGHT
The upturn started the day wesold it and now it’s makingmoney for the buyer
We should have laid off 10,000since the recession had anothertwo years to run
Could’ve bought Acme Inc. for asong and positioned ourselvesfor the gadget mania
8
This approach clearly has costs for Cisco – it is paying people
who are not working for the company. However, if the economy
recovers in the next twelve months to a point that Cisco wants
them back, they can be rehired. If the economy remains sluggish,
and their services are not required, Cisco can then decide to either
let them go or, perhaps, renew the agreement.
In other words, the one-third salary that Cisco pays creates an
option on the services of these employees – an option that will
come into the money in the event that the recession is short and
these employees’ services are required within one year. Since a
short recession is certainly a possibility, this option on potentially
valuable human resources has allowed Cisco to accumulate the
contingent resources associated with a particular scenario while
simultaneously cutting costs in order to respond to the exigencies
of the current environment.
Marketing
Bell Canada, the dominant local and long distance
telecommunications services provider in Canada, is one division
among many in the portfolio of BCE Inc. Other operating units in
the BCE family include Bell Mobility, a wireless network services
provider, Sympatico, an internet service provider and internet
portal, and Expressvu, the nation’s largest satellite television service
provider, to name only three.
BCE’s strategy is explicitly convergence-driven. That is, the firm
is aiming to develop and deploy a number of new services that
either bundle existing services or create entirely new ones by
combining the offerings of its various operating units.
A critical element of successfully executing this convergence
strategy is an integrated customer service management capability,
customer service representatives and call centers are simply too
expensive to replicate across all of BCE’s stand-alone and
convergence-based product and service offerings.
Consequently, within Bell Canada, the beginnings of such a
capability are under development. The initiative, called
OneContact, is intended to deploy customized Siebel customer
relationship management (CRM) software to specially-trained
customer service representatives (CSRs) so that inquiries from any
of BCE’s 8 million customers concerning any of its vast array of
products can all be addressed through a single customer service
infrastructure.
But reaching that goal is cannot be done in one giant leap.5
Not only is such an undertaking extremely challenging
operationally, but the uncertainties surrounding the extent of the
capabilities needed are enormous. There are issues with the
technology to be sorted out, such as how difficult will it be to
integrate the customer databases of BCE’s different divisions. There
are marketplace questions to be answered: what product bundles
will work; which convergence services will succeed and need
supporting, and which customer segments will benefit from an
integrated customer service capability? And there are
organizational issues to sort out: who will be responsible for
managing the implementation of such an aggressive
transformation; and how will the new customer service
infrastructure coordinate with the rapidly changing suite of
services being developed in the operating divisions?
Bell Canada’s solution to these problems is to launch
OneContact as a pilot project aimed at cross-selling to Bell Mobility
services existing Bell Canada customers. For an initial investment
of C$10 million, the company has demonstrated that it can “light
up the screens” with a customized, cross-divisional CRM system
that combines customer information from the two operating units.
Rolled out to a carefully targeted group of 100,000 customers, the
new capability is designed to increase and accelerate Bell Mobility’s
penetration of the Canadian wireless market.
Designing the initial rollout in this way maximizes the chances
of success. Mobile phone service is a well-established offering with
good growth potential: mobile phone penetration in Canada is
about 35%, and is expected to exceed 50% within the next three
to five years. Furthermore, as wireline and wireless phone services
become increasingly interchangeable in the minds of consumers,
convergence between these two divisions is the likeliest to prove
viable in the short term. Consequently, an integrated Bell Canada/
Bell Mobility CRM capability is likeliest to prove worthwhile.
Delo
itte
Res e
arc h
– M
anag
ing A
mid
Unce
rtaint
y
9
Research and Development
The automobile industry has long struggled with the notion of
what comes after the internal combustion engine (ICE). Electric
cars seem the answer - but how to power them? Batteries seemed
promising for a while, no longer. Lacking acceleration and range,
and requiring a completely new infrastructure to recharge them,
the batterypowered vehicle will likely remain confined to golf
greens.
Another alternative is the fuel cell. Combining hydrogen and
oxygen and adding a little energy results in water and electric
current. These devices seemed much more intriguing, promising
to overcome the key limitations of batteries. Consequently,
General Motors and many other automakers began working
furiously, both on their own and in conjunction with smaller
companies focused on fuel cell technology, to develop the fuel
cell-driven car.
Such devices are still a long way from viable, however. Fuel
cells remain too big, too heavy, and too expensive as viable power
sources of automobiles. It will take many billions of dollars more
and many years to advance the technology to the point that the
ICE is endangered.
Faced with a recessionary economy, budgets for such long
term and expensive research can come under particular pressure.
General Motors, though, has hit upon an innovative solution. The
fuel cell technology developed so far is a long way from powering
your car - but the refridgerator-size units are well up to the task
of keeping the lights on in your home or small office building.7
Entering what the utilities industry calls “distributed
generation technology” seems on the face of it to be
diversification away from their core automotive business, and
the one would think that the last thing any company can tolerate
is taking their eye off the ball during a tough market. But this
move actually serves two purposes. First, it enables GM to begin
to earn a return on its significant investment in fuel cell
technology, which is not only good for shareholders, but will also
allow the firm to maintain and sustain the human capital it has
At the same time, this pilot provides valuable learning
opportunities, and constitutes a real option on expanding both the
scale of the current integrated OneContact offering – that is, rolling
it out to more customers – and the scope – that is, including the
services of other services from other BCE divisions.
The result is that BCE has remained conservative in making
potentially large investments in expanding its CRM capabilities, but
is targeting its investment dollars in such a way that they are creating
options on expanding their projects in the event of increasing market
enthusiasm.
Operations
FleetBoston Financial and Morgan Stanley created Clareon in
mid-2001, a joint venture with the mandate to develop
internet-based payments systems that lower processing costsfor
high-value transactions.6
Clareon’s primary service offering, Paymode, targets financial
institutions’ cash management customers. Upon completing a
transaction, the seller generates an invoice on the internet and sends
it to the buyer. The invoice is approved by the buyer, who then sends
payment and remittance information to Clareon, which then debits
and credits the appropriate accounts.
FleetBoston intends to offer PayMode to its 500,000 cash
management customers, and the business is expected to generate
revenues of in excess of US$1 billion. With that much at stake, it is
critical to have a fully functional service from day one.
To that end, FleetBoston is piloting PayMode on its own internal
billing processes. This approach is especially creative, for it allows
FleetBoston to explore an important costcutting opportunity while
simultaneously creating an option on a revenue enhancing initiative.
If internal deployment proves effective at cutting FleetBoston’s
costs, the bank will have removed some of the uncertainty
concerning the usefulness of the technology to its cash management
customers. In other words, it will have demonstrated that the option
on PayMode is “in the money,” and so the incremental investment
needed to introduce PayMode as a competitive service offering is
justified.
10
OPERATEOPERATE
environment, passing information up and down a traditional
hierarchy introduces time lags in decision making that doom a
company to miss fleeting opportunities.
Devolving authority in this way is arguably the right approach
if the objective is to create an organization that is nimble – as
opposed to flexible. Nimble organizations attempt to respond to
the environment around them by changing just as fast as it does.
However, in a wide variety of industries – from the financial services
business to telecommunications, high tech manufacturing, media,
utilities, and pharmaceuticals, among others – responding in real
time as uncertainties are resolved is frequently not a viable
alternative.
The investment lead times are too long, the implementation
challenges too significant, and the market opportunities too
fleeting. The answer for these industries is to become flexible
through the kind of advance preparation that makes it possible to
change quickly by calling upon capabilities that the firm has
developed to cope with the demands of a variety of scenarios.
In the case of Cisco, for example, the firm positioned itself to
respond quickly in the event of rapid growth following a short
recession by taking a real option on its valuable human capital.
This is a smart move, because it can take a great deal of time –
indeed, perhaps many years – for new employees to equal the
productivity of long-time members of the organization. But
recovery can arrive in a matter of just weeks.
When an organization accumulates resources through these
types of real options, decentralized decision-making processes are
generally inadequate. Making such investments requires a
long-term perspective and horizon-scanning capabilities that are
typically a strength of a company’s most senior executives. Thus,
creating flexibility in the Accumulate phase by acquiring the
appropriate real options is uniquely the purview of the corporate
office.
developed over the years. Second, and perhaps much more
valuable, is the real option this move creates on developing fuel
cell powered automobiles. Using the distributed generation
market as a proving ground for its fuel cell technology and
manufacturing techniques, GM will gain invaluable information
about the long-term viability of fuel cells as powerplants for
automobiles.
What GM learns from these initial, and potentially profitable,
forays into non-automotive applications of fuel cell technology
will put the firm in a much better position to determine how
aggressively to pursue fuel cell automobile engines in the future.
If the knowledge gained suggests that fuel cells are a viable
alternative to the ICE – that is, if the option appears to be coming
into the money – then GM can exercise the option by devoting
more research to extending the technology to the car market.
Alternatively, the firm can sell off its distributed generation
business - that is, abandon the option - and begin as the search
for a successor to the gasoline engine.
The organizational implications of mobilizing a company around
strategic flexibility are enormous.8 Whereas the challenges of
traditional strategy implementation have concerned aligning the
behaviors of many people with a single, clear vision of the future,
companies must now enable people to cope with uncertainty –
and the resulting multi-track approach of core and contingent
strategies. Making this shift poses a number of unique challenges
to traditional thinking on the role of managers,, and especially the
corporate office of diversified firms.
Conventional wisdom holds that, in the face of turbulence,
decisionmaking and strategy formulation must be pushed down
to the lowest levels possible in an organization, based on the belief
that uncertain environments are characterized by rapid change
and, consequently, windows of opportunity are narrow. In this
Delo
itte
Res e
arc h
– M
anag
ing A
mid
Unce
rtaint
y
11
Additionally, the Operate phase demands a much more active
corporate office than is typically required for implementing
traditional strategic plans. Companies can only realize the value
of the flexibility they have created through their real options
portfolio if they exercise or abandon them appropriately, and
deciding when and how to do this calls for forceful leadership from
the top.
For example, despite radically different personal styles, Sumner
Redstone at Viacom (the communications giant and parent
company of CBS) and Martin Sorrell at WPP (the world ‘s largest
and most diversified corporate communications firm and parent
company of Ogilvy & Mather) do not appear to focus on process
issues or leadership succession the way such legendary managers
as Jack Welch at General Electric or Larry Bossidy at the former
AlliedSignal are reported to have done. Rather, they are deeply
involved in determining and driving when and how once
autonomous and independent divisions should begin to
cooperate in order to capture the value of synergies in the face of
changing competitive pressures.
Abandoning options requires just as much, if not more,
direction from the corporate office. An investment’s option value
lies primarily in the flexibility to avoid making money-losing
investments. No one would ever exercise a financial option that
was out of the money, and the same should apply to real options
as well. The problem is that organizational politics frequently
intervenes and specific projects end up remaining funded long
after any reasonable hope of turning a profit has evaporated.
For example, in the case of Cisco’s flexible approach to human
resources, it may be difficult to decide not to hire back the 80
people who took part in its Community Fellowship program – for
to incur the expense of keeping them on partial salary for a year
only to lay them off anyway might suggest that the program itself
was a failure. Few managers would want such a failure associated
with their efforts.
To view an unexercised option as a failure, however, is to
overlook the benefits of hedging strategic risk. As with insurance
policies, just because it might turn out that they are not needed
does not mean that they are a bad idea. If Cisco ends up not hiring
these people back because the recession turns out to be longer
than anticipated, one can only criticize the company in hindsight.
When the decision was made in mid-2000, it was an innovative
and bold move that created valuable flexibility for the company.
Cisco had no way of knowing what its human resource
requirements would be in the future – but it knew it had to reduce
its salary expenses immediately. The fellowship program achieved
both ends, allowing the company to compete more effectively in
the present while still positioning it to compete in a range of
possible futures – the very essence of strategic flexibility.
12
Conclusion
About the duration of the recession we have this to say: “the
shorter the better”. Beyond this, we have no further insight.
However, organizations that use this time of economic
contraction and uncertainty to prepare themselves to respond to
the future as it presents itself will, on average, deliver substantially
more value to their shareholders than organizations that bet on a
single outcome.
Of course, flexibility comes at a cost; the organization that
executes a strategy premised on a prediction of the future that
turns out to be right will always do better than an organization
that has invested in flexibility. Each will be equally well-positioned
for a given set of circumstances, but the inflexible company will
have done so at the cost of bearing considerably greater risk along
the way.
Counting on “prediction-based” approach to succeed
consistently is hardly advisable, however: it amounts to betting
shareholders’ money on management’s clairvoyance. One need
only remind oneself that Las Vegas was not built on the backs of
the winners to see the folly of this as a foundation of strategic
planning.
Consequently, the combination of scenario, based planning
and a calibrated commitment to contingent strategies through
real options – that is, Strategic Flexibility – offers a powerful tool
for an organization to be able to act in the face of uncertainty.
In the words of Peter Drucker, “prediction is not a worthwhile
activity.” But neither is inactivity. Strategic Flexibility allows one to
abandon prediction and accept uncertainty without being
paralyzed by it, and instead act forcefully and purposefully
confident in the knowledge that a firm’s strategy has prepared it
for whatever lies ahead.
Delo
itte
Res e
arc h
– M
anag
ing A
mid
Unce
rtaint
y
13
End Notes1 Weber, Steven (1997), "The End of the Business Cycle”, Foreign
Affairs.2 “Recession - What Recession?”, Investor’s Chronicle, July 14, 2000.3 “Uncertainty Inc.”, The Wall Street Journal, October 16, 2001.4 “Cease Fire: Companies That Keep Workers in Hard Times Can
Win,“ Forbes, November 26, 2001.5 For more on overcoming the challenges of implementing CRM,
see “How to Eat the CRM Elephant,” Deloitte Consulting, 2001.6 Depaula, Matthew. “Payments: Busting a B-2-B Move”,
FutureBanker, June 18, 2001.7 “Stationary draw”, The Economist, August 9, 20018 See Raynor, M.E. and J. L. Bower (2001), “Lead from the Center:
How to manage divisions dynamically”, Harvard Business Review,May.
14
AuthorMICHAEL E. RAYNORTel: +1.416.874.3308
Email: [email protected]
Michael Raynor is a Director in Deloitte Research. His research focuses on corporate strategy. He has a doctorate from the Harvard
Business School, an MBA from the Ivey School of Business, and an undergraduate degree in Philosophy from Harvard University. He is
based in Toronto.
The author would like to express his thanks and appreciation for comments and advice from a number of colleagues, especially
Dwight Allen (Washington DC) and Gordon Coutts (Toronto).
About Deloitte ResearchDeloitte Research, a permanent thought leadership organization established by Deloitte & Touche and Deloitte Consulting, is dedicated
to providing ongoing research and insight into the critical global and industry-specific issues facing business today. Comprised of both
practitioners and dedicated research professionals from around the world, Deloitte Research combines industry experience with academic
rigor. Our research identifies and analyzes market forces and major strategic, organizational and technical issues that are changing the
dynamics of business. It focuses on leading-edge industry-specific issues and global trends, providing insight into new evolving challenges.
For more information about Deloitte Research please contact the Global Director, Ann Baxter, at 415.783.4952 or via email: [email protected].
Recent Deloitte Research Strategy and Operations Thought Leadership:■ Collaborative Knowledge Networks: Driving Workforce Performance Through Web-Enabled Communities
■ Digital Loyalty Networks: eDifferentiated Customer and Supply Chain Management
■ Mobilizing the Enterprise: Unlocking the Real Value of Wireless
■ Strategic Flexibility in the Communications Industry: Making Billion-Dollar Bets in a World of Uncertainty
■ Strategic Flexibility in the Energy Industry: Competing in a Decade of Uncertainty: 2000-2010
■ Strategic Flexibility in the Financial Services Industry: Creating Competitive Advantage Out of Competitive Turbulence
Please visit www.dc.com for the latest Deloitte Research thought leadership or contact us at Tel: +1.212.492.3791
or e-mail: [email protected].
Delo
itte
Res e
arc h
– M
anag
ing A
mid
Unce
rtaint
y
15
©2001 Deloitte Consulting and Deloitte & Touche LLP. All rights reserved.ISBN 1-892383-99-3
About Deloitte Consulting and Deloitte & ToucheDeloitte Consulting is one of the world’s leading e-Business consulting firms, providing services in all aspects of enterprise transformation,
from strategy and processes to information technology and human resources.
Deloitte & Touche, one of the nation’s leading professional services firms, provides assurance and advisory, tax, and management
consulting services through a network of over 30,000 people.
Deloitte Consulting and Deloitte & Touche are parts of Deloitte Touche Tohmatsu, one of the world’s leading professional services
firms, delivering world-class assurance and advisory, tax, and consulting services. More than 90,000 people in over 130 countries serve
nearly one-fifth of the world's largest companies as well as large national enterprises, public institutions, and successful fast-growing
companies. Our internationally experienced professionals deliver seamless, consistent services wherever our clients operate. Our mission
is to help our clients and our people excel.
16
For Further Information, Please Contact:
DELOITTE CONSULTING
DELOITTE & TOUCHE
AMERICASANDREW GARBER
Tel: 404.631.3570
Email: [email protected]
ASIA PACIFICTODD GENTON
Tel: 852.2852.6650
Email: [email protected]
EUROPEHANS-RUDOLF DICKE
Tel: 49.40.4609930
Email: [email protected]
GLOBALLARRY SCOTT
Tel: 416.601.5666
Email: [email protected]
STRATEGY AND OPERATIONS LEADERS
INDUSTRY LEADERS
FINANCIAL SERVICESJACK WITLIN
Tel: 312.374.3228
Email: [email protected]
PUBLIC SECTORDOUG TAYLOR
Tel: 713.890.6015
Email: [email protected]
HEALTH CARELARRY NEITERMAN
Tel: 617.850.2500
Email: [email protected]
COMMUNICATIONSJ. BRADFORD BRANCH
Tel: 49.211.6211.0401
Email: [email protected]
ENERGYDOUG LATTNER
Tel: 469.417.3015
Email: [email protected]
MANUFACTURINGCRAIG GIFFI
Tel: 216.830.6604
Email: [email protected]
CONSUMER BUSINESSED CAREY
Tel: 312.374.3048
Email: [email protected]
INDUSTRY LEADERS
FINANCIAL SERVICESBILL FREDA
Tel: 212.436.6762
Email: [email protected]
PUBLIC SECTORJEFF BREEN
Tel: 973.683.7130
Email: [email protected]
HEALTH CAREJOHN BIGALKE
Tel: 407.246.8235
Email: [email protected]
COMMUNICATIONSPHIL ASMUNDSON
Tel: 415.783.4929
Email: [email protected]
ENERGYGREG ALIFF
Tel: 973.683.7666
Email: [email protected]
MANUFACTURINGRICHARD GABRYS
Tel: 313.396.3251
Email: [email protected]
CONSUMER BUSINESSIRWIN COHEN
Tel: 212.492.4681
Email: [email protected]
Delo
itte
Res e
arc h
– M
anag
ing A
mid
Unce
rtaint
y
17
Deloitte Research
1633 Broadway
New York, New York 10019
USA