Strategy as Options on the Future

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“It is a great piece of skill to know how to guide your luck even while waiting for it.” — Baltasar Gracián (1601–1658)

In 1984, The Economist asked sixteen people — four finance ministers, four chairman of multinational companies, four Oxford University economics students, and four London dustmen (or garbage collectors) — to generate ten-year forecasts. They were the kinds of forecasts that underpin many long-term, strategic plans: the average growth rate in Organization for Economic Cooperation and Development countries over ten years, the average inflation rate in OECD countries, the exchange rate between pound sterling and the U.S. dollar, the price of oil, and the year when Singapore’s GDP per capita would overtake Australia’s (double Singapore’s at the time). In 1994, The Economist checked the sixteen people’s forecasts against what had actually happened.

On average, the forecasts were more than 60 percent too high or too low. The average forecasted price of oil, for example, was $40 compared with an actual price of just $17. All the respondents said Singapore’s GDP per capita would never overtake Australia’s, but that had actually happened in 1993. The most accurate forecasters were the London dustmen and the chairmen of multinational companies (a tie for first place); the finance ministers came in last. But the performance of every group was quite abysmal. The unpalatable fact is that no one can predict the long-term economic and market environment with any real accuracy.

Yet many strategic plans are meticulously constructed on these foundations of sand, perched on top of forecasts that, in all probability, will prove to be hopelessly off the mark. Consider how many companies approach strategic planning: The numbers in the long-term plan are dominated by a sales forecast that is produced by product and customer type or region (often a projection of around five years); the companies then allocate the investment to business units consistent with achieving the long-term sales forecast. Then they compute the implied costs and profits, and the process iterates until they produce an acceptable “long-term plan.” The plans often include erudite SWOT analysis (strengths, weaknesses, opportunities, and threats) or other market and trend analyses, but the decisions are made on the basis of forecast sales, investments, and costs.1 The forecasts are often heavily influenced by straight-line projections with forecasts of sales growth of existing products in existing markets.

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1. These techniques are well described in: R.M. Grant, Contemporary Strategy Analysis, second edition (Oxford: Blackwell Business, 1995).

2. See I. Dierickx and and K. Cool, “Asset Stock Accumulation and Sustainability of Competitive Advantage,” Management Science, volume 35, December 1989, pp. 1504–1514.

3. R. Wrubel, “The Ghost of Andy Carnegie?,” Financial World, volume 1, September 1992, p. 50.

4. P. Lasserre and C. Butler, “The Inchcape Group (A): The End of an Era” (Fontainebleau, France: INSEAD, case 04/93-317, 1993); and

C. Kennedy, “Can Two Hongs Get It Right?,” Director, February 1996, pp. 34–40.

5. See, for example:

M. Lubatkin and S. Chetterjee, “Extending Modern Portfolio Theory to the Domain of Corporate Strategy: Does it Apply?,” Academy of Management Journal, volume 37, September 1994, pp 109–36.

6. A. DeMeyer, “E*Trade, Charles Schwab, and Yahoo!: The Transformation of On-line Brokerage” (Fontainebleau, France: INSEAD, case 05/98-4757, 1998).

7. P.J.H. Schoemaker, “Strategy, Complexity, and Economic Rent,” Management Science, volume 36, October 1990, pp. 31–43.

8. D. Leonard-Barton, Wellsprings of Knowledge (Boston: Harvard Business School Press, 1995).

9. P.J. Williamson and D. Clyde-Smith, “The Acer Group: Building an Asian Multinational (Fontainebleau, France: INSEAD, case 01/98-4712, 1998).

10. “Laptops from Lapland,” The Economist, 6 September 1997, pp. 89–90.

11. J. Naisbitt, Megatrends (New York: Simon & Schuster, 1984).

12. See, for example:

C.A.R. McNulty, “Scenario Development for Corporate Planning,” Futures, April 1977; or

A. de Geus, “Planning as Learning,” Harvard Business Review, volume 66, March–April 1988, pp. 70–74.

13. G. Hamel and C.K. Prahalad, Competing for the Future (Boston: Harvard Business School Press, 1994), p. 145.

14. The subject of valuing real options is a large topic in its own right. There is insufficient space to cover it here. For relevant techniques and methods, see, for example:

M. Amram and N. Kulatilaka, Real Options: Managing Strategic Investment in an Uncertain World (Boston: Harvard Business School Press, 1999).


The author would like to thank José F.P. dos Santos, Constantinos Markides, and the anonymous referees for their helpful comments on an earlier draft. Remaining errors are, of course, the responsibility of the author.

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