By Don Creswell, SmartOrg
As I prepared to write this month’s ValuePoint, I took time over coffee to browse the morning New York Times Business Section. A lead article “In Microsoft’s Nokia Debacle, a View of an Industry’s Feet of Clay“, caught my attention. The author, James P. Stewart, wrote that Microsoft bought Nokia’s phone business just over a year ago for $9.5 billion. As the investment fizzled, the company has taken a write-off of $7.5 billion.
Microsoft was not alone in its pursuit of mobile-phone riches. Google sold Motorola Mobility to Lenovo last year and wrote off $378 million against its $12.5 billion acquisition. And, Stewart reports, Amazon wrote off $170 million last October, acknowledging that its Fire phone was a flop.
Three of the world’s foremost companies have written off some $8 billion on making bets in a market crowded with competition and dominated by two players, Apple and Samsung. Google had consolation in that its Android software, the foundation of Samsung’s line of phones, produced a great revenue stream.
Looking in the rear-view mirror: did Microsoft, Google and Amazon make poor strategic decisions? Or did they make good decisions but have bad outcomes? This is a question that is not possible to answer from an outsider’s viewpoint. But, one can speculate.
One of the fundamental principles of the management science of Decision Analysis is the distinction between decisions and outcomes. The distinction is set forth quite well in my colleagues’ book “Decision Analysis for the Professional” (Celona and McNamee).
“Good outcomes are what we desire, whereas good decisions are what we can do to maximize the likelihood of having good outcomes. Given the unavoidable uncertainty in the world, a good decision must sometimes result in a bad outcome.”
The three companies in question might very well have done all they could have to make the best decisions possible when they were facing considerable market and competitive uncertainty. On the other hand, like many companies they may have fallen into the all-too-common trap of failing to consider uncertainty (defined as “what we do not know or what we cannot with confidence predict about the future”). If so, there is a good reason to argue that they made a bad decision.
Insufficient understanding of uncertainty is a foremost reason for many product failures. Unless an organization has a process in place that enables dealing explicitly with the impact of uncertainty on attainment of future value, making quality decisions is subject to considerable pressure from corporate politics, personal preferences and organizational power.
In his article “That Which Cannot Be Known“, Norman Shultz addresses two issues regarding reactions to decisions under risk. One is called “Risky Shift,” the tendency for individuals in a group situation, to feel inclined to take more risks than they might otherwise take when alone. The result: risk escalation, which can result in poor, even disastrous decisions.
The other issue Shultz calls “Cautious Shift,” which is often seen in politics, says the author, where political candidates tend to move toward caution because, whether a particular risk is warranted or not, any risky decision can provide an easy opening for public criticism by one’s opposition. Being overly cautious means missing out on opportunities that reasonable risk-taking affords. Unreasonably cautious policies promise to be exceedingly expensive and/or extremely low on the cost/benefit scale.
Every decision about the future essentially involves taking risks against the unknown. Embracing uncertainty rather than denying its existence enables you to quantify what you don’t know. Armed with this knowledge, you can take whatever steps are necessary to mitigate downside risk, while taking advantage of judicious investments in upside opportunities. The mobile phone companies cited above might have followed completely different scenarios had they weighed the uncertainties around taking on two entrenched, dominant players. At a minimum, the companies might have made different upfront deals.
At SmartOrg, we have “seen these movies many times.” We have also witnessed significant success by our clients when they have dealt effectively with uncertainty around decisions where the impact would not be realized for years or decades.
The bottom line: the world is uncertain. You cannot predict the future. There will be winners and there will be losers no matter what you do. The good news is that you can improve your odds of winning by embracing uncertainty. And that is worth a lot of money.
For more than 15 years, SmartOrg software and consulting services have assisted many of the leading companies in the world make choices that drive profitable growth. Learn more about how we can help your company win in an uncertain world.