Art of Managing-Hedging Your Bets Might Be Harmful to Your Firm's Health

“Most people, including experienced executives, don’t like to make choices because it means giving up options. There is a clear temptation to hedge bets, to try to do everything, to attempt to keep all doors open at once by refusing to pick from among existing options or to work to create a better answer”. From Leading with Intellectual Integrity at Strategy+Business by by A.G. Lafley and Roger Martin, with Jennifer Riel

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The essence of strategy is choosing what not to do, yet as Lafley, Martin and Riel describe, the notion of giving up options or closing off familiar paths is uncomfortable for us. It’s our drive to eliminate this discomfort by keeping our options open and flexible that might just be limiting our success or even setting the stage for failure.

Organizations striving to achieve what strategist and author Geoffrey Moore describes as “Escape Velocity” from the hold of their proud and successful histories, struggle with the hedging issue a great deal. Even though the writing is on the proverbial wall, the pull of the past coupled with the dominant logic and know-how of the enterprise make decisions to move into adjacent spaces seem extraordinarily daunting and filled with risk. Executives for what they believe are good reasons, move to hedge their investments by continuing to place a disproportionate amount of available capital into the legacy business, just in case the new vector doesn’t work out as planned. This act of hedging in the name of managing risk creates the very real risk of choking off the new vector before it gains critical mass.

Moore reminds us that this problem is compounded when new or adjacent market development is evaluated with the same measures as the legacy business. The metrics naturally make the case for the importance of the old and the inherent weakness and riskiness of the new.

A slightly different twist on the hedging dilemma is suggested by Jim Collins in “How the Mighty Fall” as firms enjoying success begin to believe that the management formula that worked once might work again…and again and again, as they move from Collins’ suggested stage 1 of Hubris Born of Success to his stage 2, The Undisciplined Pursuit of More. This creation of “more “is typically an outgrowth of politics…different executives competing for investment dollars and power, and it reflects an overall lack of strategic filtering and discipline at the highest levels.

Yet another manifestation of the hedging dilemma is a corporate version of the portfolio game played by VC and other investment firms who understand that only 1 out of X investments in different firms will hit a home run, and they’re never quite sure which one it will be. Executives playing this dangerous game are shirking their responsibilities to stakeholders and engaging in the corporate equivalent of Russian Roulette.

3 Thought-Starter Ideas to Help Navigate the Hedging Dilemma:

1. Seek an Outside Perspective. The risks of groupthink, excessive conservatism, not invented here or politics run rampant (or some combination of the above) are all very real when assessing next steps for your firm. Take the time to bring in some objective outside minds and voices to look at and challenge your assumptions about your investments, projected returns, risks, timing and other key factors. Make certain to bring in individuals competent and confident enough to stand up to you and your team.

2. Reconsider How You Evaluate the Performance of New Initiatives. Moore’s “Escape Velocity” offers some great wisdom on this issue. A $ in revenue or profit captured in a new venture is worth considerably more than the same $ in a legacy business. While the accountants might not agree, your internal view to performance for new initiatives should be activity and progress oriented until the initiative matures sufficiently to make traditional measures and comparisons meaningful. Don’t discount how difficult it is to actually get people on board with this important task.

3. Sleep is Optional and Ask Questions Until it Hurts. Translation: spend considerable time on the hard issues of succeeding at new. This is one of those phases in your career and corporate life when a good night’s sleep should be hard to find. Frankly, I want you staring at the ceiling for awhile and then challenging your team members on many issues, including these three important questions:

Are we investing fast enough in our new vector?
Are we diluting our effectiveness by investing in too many new vectors, hoping one will stick?
Are we hedging by giving a new vector lip-service while continuing to push the preponderance of our money and energy into the legacy business?

The Bottom-Line for Now:

This is a big topic wrapped in a small post. Use it as a thought-starter with your team to challenge the assumptions that underlie your attempts to build and grow your business. Whether the dilemma manifests itself as the undisciplined pursuit of more or the unnatural fear of achieving escape velocity, it’s a sticky strategic issue that you must navigate for the sake of your firm and your team.

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