The New Paradigm In Global Strategy Development

By M. Isi Eromosele

Most growth opportunities share a common feature: uncertainty. In today’s economy, strategic investments must be made without a pinpoint forecast of the future. Managing in the face of uncertainty is different. It requires two important skills: the ability to identify valuable opportunities and the ability to adapt to marketplace changes.

Managers must be able to capitalize on good outcomes of uncertainty; they must be adaptive and flexible. Is there a project in your company that went exactly as planned? Or were the best projects one that adapted to changing conditions?

Traditional valuation and strategic planning tools are not effective well in a world of uncertainty because they don’t fully capture the options or opportunities that managers have to respond to in unfolding events.

A better option is the real options approach that “sees” these opportunities and values them, creating an integrated strategy and valuation framework.

Valuing the New Growth Opportunities

Internet companies typify the current valuation dilemma, but the same issues are present in growth opportunities throughout high as well as low-tech industries.

Why are we having such a hard time valuing Internet companies? Because the traditional valuation tools used by Wall Street are from another era - they are based on accounting systems for manufacturing companies in stable industries and are focused on current and near-term cash flow.

The valuation problem for modern growth opportunities, Internet companies included is hugely different: How do you value an immature, fast growing company in a young industry with rapidly changing boundaries and business models?

In the Internet world, today’s successful strategy does not guarantee future profits; often the company must morph to the next thing. None of these features fit the traditional cash flow-based approach.

A successful Internet company recognizes that reaching maturity requires it to invest in a sequence of options. The final set of options leads to a mature company status and cash flow.

The next one back creates the opportunity to invest in the final set of options; the second one back creates the opportunity to invest and so on. Between now and maturity, the company’s value is driven by its ability to identify and execute the sequence of options.

Valuing an Internet company presents many of the same issues as valuing corporate growth opportunities, particularly in how strategy and valuation are intertwined. The real options approach helps to identify the most valuable strategies for a world of uncertainty.

The New Rules

In a fast-moving world of uncertainty, managers must be ready to respond. Here are 7 rules for finding the options in your strategic investments.

1. Make no assumptions: What is your market?

Technology and deregulation are rapidly blurring conventional industry definitions. Rethink your market boundaries and competitors through today’s customer-centric lens. Include sources of uncertainty and how industry players will respond.

2. You already have some answers: Use the insights from durable economics

A good part of the New Economy can be well understood using durable economic principles - concepts and frameworks that are well known, but often skipped over.

3.  Identify your options

Greater uncertainty creates the need for greater flexibility. Where are the options for future flexibility in your current projects? For example, your company expansion plan comes with an option to wait - you can start it now or later.  

4. Nurture your options

Nothing is free, including the options identified above. What will it take to keep these alive as viable investment opportunities? And sometimes, the value of the option is not worth it’s cost.

For example, continuing an R&D project creates the option to turn it into a commercial product. You don’t know if you will, but you might

5. Decision Making Options

Can you really cancel a project in your company? Can you make this decision objectively? Can you make it in time to limit losses? Flexibility cuts both ways - it captures upside potential and saves you from sinkholes.

6. Create options

On the first pass of an investment review, you can add significant value over conventional valuation approaches by identifying the options. On the second pass, you can get a similar step up in value by creating options. For example, create the option to change course, re-focus or even abandon a particular project.

7.  Too many options, too few resources:   You can’t do it all.

Options change the meaning of focus. Identifying, nurturing, and creating options takes substantial time and energy. Meanwhile your industry pace is picking up, technology is becoming more complex and it’s hard to hire key people in your core business area.

Hence you need to focus on your core capabilities, and all the associated options, partnering for the rest.

With standard approaches and tools, it’s going to feel like you’re on a lifeboat in a sea of chaos. Change your thinking. Explore how you can create value out of uncertainty, and how to remain a nimble competitor, always afloat, as the waves of change roll by.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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