Commitment and flexibility exist in inverse proportion to each other: the greater the commitment you make, the less flexibility remains. This tension is one of the core challenges of strategy. Indeed, strategy can be expressed as making the right trade-offs over time between commitment and flexibility.
Making such trade-offs effectively requires an understanding of which decisions involve commitment. Inside any large company, hundreds of people make thousands of decisions each year. Only a few are strategic: those that involve commitment through hard-to-reverse investments in long-lasting, company-specific assets. Commitment is the only path to sustainable competitive advantage.
In a world of uncertainty, strategy is about not just where and how to compete but also when. Committing too early can be a leap in the dark. Being too late is also dangerous, either because opportunities are perishable or rivals can seize advantage while your company stands on the sidelines. Flexibility is the essential ingredient that allows companies to make commitments when the risk/return trade-off seems most advantageous.
A market-beating strategy will focus on just a few crucial, high-commitment choices to be made now, while leaving flexibility for other such choices to be made over time. In practice, this approach means building your strategy as a portfolio comprising three things: big bets, or committed positions aimed at gaining significant competitive advantage; no-regrets moves, which will pay off whatever happens; and real options, or actions that involve relatively low costs now but can be elevated to a higher level of commitment as changing conditions warrant. You can build underpriced options into a strategy by, for example, modularizing major capital projects or maintaining the flexibility to switch between different inputs.
Making such trade-offs effectively requires an understanding of which decisions involve commitment. Inside any large company, hundreds of people make thousands of decisions each year. Only a few are strategic: those that involve commitment through hard-to-reverse investments in long-lasting, company-specific assets. Commitment is the only path to sustainable competitive advantage.
In a world of uncertainty, strategy is about not just where and how to compete but also when. Committing too early can be a leap in the dark. Being too late is also dangerous, either because opportunities are perishable or rivals can seize advantage while your company stands on the sidelines. Flexibility is the essential ingredient that allows companies to make commitments when the risk/return trade-off seems most advantageous.
A market-beating strategy will focus on just a few crucial, high-commitment choices to be made now, while leaving flexibility for other such choices to be made over time. In practice, this approach means building your strategy as a portfolio comprising three things: big bets, or committed positions aimed at gaining significant competitive advantage; no-regrets moves, which will pay off whatever happens; and real options, or actions that involve relatively low costs now but can be elevated to a higher level of commitment as changing conditions warrant. You can build underpriced options into a strategy by, for example, modularizing major capital projects or maintaining the flexibility to switch between different inputs.
One point that resonated with me was designing a strategy portfolio that incorporates big bets, no regrets and real options.
The more education we receive, the more we recognize the many inherent risks to our choices. McKinsey's suggestion allows us to manage risk without being crippled by the potential dangers we identify as consequences of our actions. Whether negotiating a business deal, a raise, a house, or a new job, knowing our options and managing our own risk portfolio allow us to craft a combination of commitment and flexibility that will yield success.
For more of McKinsey's tips on Testing Your Strategy, click here.
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