Strategic options: a new tool for managing
in turbulent environments
Michael E. Raynor
Michael E. Raynor is based
at Deloitte Consulting LLP,
Boston, Massachusetts,
USA. He can be reached at
mraynor@deloitte.com
DOI 10.1108/17515630810850082
Introduction: an unresolved tension
In his seminal 1970 work Future Shock, Alvin Toffler (1970)[1] concluded that millions of
people were about to be overwhelmed by change. Central agents of future shock were
corporations. In Toffler’s view, corporations had become a mechanism of change in their own
right: shuffling people from all levels of the hierarchy around the country or the globe,
demanding that people continuously learn, unlearn, and relearn an ever-broadening scope
of ever faster-changing domain expertise, and so on. Implicit in this view was that
corporations were adept at coping with change – or at least, better able to cope with change
than were individuals.
Whether or not people have in fact been subject to the ravages of future shock as Toffler
predicted, I will suggest that companies would appear to be less change-able than they’d
like to be: the data suggest strongly that firms are less likely now to maintain a profitable
position of market dominance than at any time in the last 30 years (Wiggins and Ruefli, 2005;
Slywotsky, 2004; Huyett and Viguerie, 2005).
Part of the problem is the challenge of change itself: even with a clear and desirable future
state in mind it can be enormously difficult for large, complex organizations to reinvent
themselves (Beer and Nohria, 2000). A still more vexing element is the unpredictable nature
of what an organization will have to change to in order to remain competitive. Predictable
change at least allows the possibility of meaningful preparation, but how is one to cope with
the challenge of change when even the need for it, never mind its nature, is impossible to
foretell?
The difficulties of coping with change that is significant, unpredictable, and rapid has been
folded into the concept of ‘‘turbulent’’ competitive environments, and a number of
frameworks have been developed over the years to help organizations cope with
competitive turbulence, including ‘‘logical incrementalism,’’ ‘‘sense and respond,’’
‘‘emergent strategy’’ and ‘‘improvisation,’’ each of which holds out the promise of
enabling organizations to shift their strategic footing as circumstances require[2].
These putative solutions have powerful case evidence behind them, but are subject to at
least the following shortcoming: any adaptive solution to environmental turbulence
necessarily compromises the competitiveness of a company adopting it. In other words,
adaptation is, at best, a recipe for survival, not continued dominance.
The reason is the inescapable power of commitment as a mechanism of success. The most
profitable strategies tend to be those that are difficult for competitors to imitate.
Unfortunately, strategies that can be changed quickly – in the interests of responding to
environmental turbulence – can typically be copied quickly (if not by other established firms,
then by start-ups), and that undermines their potential to generate supernormal profits. One
of the most powerful barriers to rapid imitation is building a strategy around long-term
VOL. 9 NO. 1 2008, pp. 21-29, Q Emerald Group Publishing Limited, ISSN 1751-5637 j BUSINESS STRATEGY SERIES j PAGE 21
 commitments, but by definition, commitments cannot be changed quickly (Ghemawat,
1991).
And so companies seeking to cope with environmental turbulence by quickly adapting to
change are forced to choose between adapting in order to survive (at the price of any
chance at greatness), or sticking to their guns in the hope finding themselves fortuitously
positioned for success (and accepting the possibility of failure).

Corporate strategy and strategic uncertainty

It is increasingly possible to resolve the tension between adaptability and commitment
thanks to recent advances in the theory and practice of corporate strategy. Specifically, by
using the structure of the portfolio of operating companies (OpCos) to hedge the strategic
uncertainties faced by the OpCos themselves, it is possible to capture most of the benefits of
commitment without sacrificing the ability to adapt.
For example, in the computer operating system business, Microsoft is committed to
competing effectively within the structure of the existing industry. This commitment takes the
form of extending and improving its Windows franchise through, for example, the multi-year
and multi-billion dollar commitment to the development of the Vista operating system.
However, there is always significant strategic uncertainty surrounding what will be the most
popular future platforms for computing, and this in turn casts doubt on the wisdom of
committing to extending an essentially PC-based software business. For example, game
consoles might well become ascendant, making the PC less relevant, or at least less central,
to success in the operating system industry.
If the people developing Vista had to worry about that strategic variable, it would be
impossible to focus all their efforts on Vista for the PC. The Xbox initiative reduces the
strategic risk faced by the Windows platform: should the ability to operate across multiple
computing platforms become valuable to a provider of operating systems, Microsoft will be
well positioned to succeed, even though its individual divisions have all focused their own
success rather than thinking about how what they are doing might someday benefit one of
their sister businesses.
Xbox has its own growth option value, for it creates the right, but not the obligation, for
Microsoft to invest further in a business that can grow and be successful on its own. This is
not, however, the only value it creates for Microsoft. It also has strategic option value
because the Xbox business could allow Microsoft to respond should it become necessary to
broaden the OS business beyond the PC platform. Under those conditions Windows would
return the favor to Xbox as well. Each business is committed to its own competitive strategy,
yet because each exists within the same portfolio, each enjoys strategic options it would not
otherwise have.
It is worth underlining several aspects of strategic options that are different from established
frameworks for coping with uncertainty. First, note that the diversification required to create
strategic options bears little resemblance to ‘‘mutual fund’’-like conglomerates or traditional
holding companies. In Microsoft’s case, the necessary product market diversification is
clearly centered on digital information and media. The OS business is the core of the
portfolio, and other businesses can be seen as creating strategic options for that business,
even as they generate growth option value in their own rights. As a group, these are not
businesses with deliberately negatively correlated cash flows. Rather, they are businesses
that are viable individually, but are also potentially complementary to one another.

‘‘ One of the most powerful barriers to rapid imitation is

building a strategy around long-term commitments, but by
definition, commitments cannot be changed quickly. ’’

j j
PAGE 22 BUSINESS STRATEGY SERIES VOL. 9 NO. 1 2008
Second, creating strategic options expands the role of the corporate office beyond the
capture of synergies or the administration of effective control systems – the limits of
established thinking about corporate strategy. Where competitive strategy lives at the OpCo
level and is focused on the nature of the commitments required to create and capture value,
corporate strategy includes strategic options and is focused on the identification and
management of strategic uncertainty. The cash that the Xbox business generates does little
to hedge whatever risk the OS business faces, should it prove to have made inappropriate
strategic commitments. Rather, it is the option that the Xbox business creates for the OS unit
to change its strategy from PC-centric to a more multi-pronged approach, one including
game consoles, that creates value. Even if Microsoft never needs to exercise this strategic
option, Xbox creates value for it by reducing the strategic risk facing the company’s largest
business. And Xbox is part of the portfolio because of choices made at the corporate level.
In other words, the corporate office is creating value by identifying and managing the
strategic risk created by the strategic commitments made at the OpCo level. It does this by
creating strategic options for each OpCo through the mix of OpCos in the portfolio, not
through intervention at the OpCo level.
Third, strategic options capture the power of commitment while creating strategic
adaptability by changing the underlying mechanism of strategic change. The traditional
approach is to focus on the seemingly impossible (or at least, demonstrably very difficult)
and look for ways for existing OpCos to prepare for an uncertain future while simultaneously
competing in the present. This is essentially an ‘‘evolutionary’’ approach in which the
organization that needs changing has to change itself, essentially from within. Instead,
strategic options allow a form of organizational ‘‘gene therapy’’: the genetic material needed
by one division to cope with the challenges it faces is cultivated in another business unit, and
when competitive turbulence demands strategic change, it can be effected far more rapidly
than would otherwise be the case.

Making strategic commitments vs creating strategic options

The Microsoft story offers compelling anecdotal evidence of the kind of portfolio structure
required to create strategic options. But why must creating strategic options be separated
from making and managing strategic commitments? To see why, consider the experience of
the newspaper industry in industrialized countries as it has struggled to develop viable
responses to the strategic uncertainty created by the electronic publishing technologies
over the last 30 years. The industry seems to have groped its way toward a workable solution
based on strategic options, but it has been a long and expensive learning process[3].
In the early 1990s, a ‘‘proto-Internet’’ of sorts had emerged, and there was a second attempt
to develop electronic publishing as a viable communications medium. It took the form of
bulletin board services and proprietary network infrastructure accessed over personal
computers. Newspaper groups approached the internet and various online services such as
AOL and Compuserve in a careful, tentative way. The objective, reasonably enough, was to
learn, and escalate investment only as it became clear what sorts of strategies and business
models were going to work.
It was felt at the time that these early experiments would have the best chance of success if
they were tied to the established newspaper operations. This allowed the fledgling new
media ventures to leverage powerful brands and other valuable resources. This meant that
most of the new initiatives were housed under the same organizational roof as the existing
franchise, and were under the control of the same operating managers.
This had some perverse consequences, most notably that online publishing efforts were
evaluated almost exclusively in terms of their ability to improve, or at least compare favorably
with, successful and yet-to-be-threatened traditional newspaper operations. As a result, the
managers responsible for successful established newspapers and highly uncertain new
media ventures were reluctant to do anything too dramatic with the newspapers for fear of
undermining their sound financial results, and were unwilling to do anything distinctive or
significant with the new medium thanks to the uncertainty surrounding how best to proceed.

j j
VOL. 9 NO. 1 2008 BUSINESS STRATEGY SERIES PAGE 23
 ‘‘ Missing the opportunity to learn quickly and cheaply in the
early 1990s would rapidly come to haunt the industry, for by
the mid-1990s the internet was exploding and many in the
newspaper business were convinced that the sky was
falling. ’’

These investments did not result in significant financial loses, but neither was notable
success its legacy. Despite ample financial resources, managers were unwilling to create
the bold vision the new media required and eschewed the commitment and determination
that define successful start-ups. Consequently, major newspaper groups universally found
themselves with mediocre, sub-scale online/offline hybrids that delivered neither big wins
nor big defeats.
Missing the opportunity to learn quickly and cheaply in the early 1990s would rapidly come
to haunt the industry, for by the mid-1990s the internet was exploding and many in the
newspaper business were convinced that the sky was falling. By 1998, reputable consulting
firms were predicting that newspapers would lose almost $5 billion in classified advertising
revenue by 2003. Experiences with the early internet demonstrated that leaving it up to the
operating managers was unlikely to work, and so this time around the corporate offices at
several groups stepped in and ran the show. Because of the clear and present danger the
internet was seen to pose, financial investment was going to be supported by the necessary
strategic courage.
In the event, the strategic commitments chosen by corporate proved almost uniformly
misguided. It wasn’t a newspaper that capitalized on search, it was Google. It wasn’t a
newspaper that figured out how to make money off free classifieds, it was Craigslist. It wasn’t
a newspaper that first exploited the power of user-generated content, it was bloggers.
Curiously, neither the predictions of the demise of readership and classified advertising
revenue were particularly on the mark. Both continue to erode, to be sure, but at nothing like
the rates first anticipated.
It would be a mistake to fault the content of the centralized decision-making at these
newspaper companies. It is, after all, very difficult to guess right when faced with strategic
discontinuities of this type. After all, for every Google there are ten Alta Vistas. The sad fact is
that neither in-the-trenches managers nor big-thinkers from corporate were able to rise to the
challenge of the strategic discontinuities posed by electronic publishing. Operating
managers pursued tepid, uninspired strategies, essentially relegating themselves to
mediocrity; they did not commit. When corporate called the shots, the result was aggressive
initiatives that involved plenty of commitment, but which were based on what turned out to be
invalid assumptions – in other words, the companies were exposed to more severe failure
precisely because they did commit.
The proximate causes of these failures are polar opposites – not committing vs. committing
in the face of uncertainty. But the ultimate cause is the same. Whether bottom-up – that is,
driven by operating managers – or top-down – that is, driven by corporate executives –
those making the strategic commitments were simultaneously attempting to cope with the
strategic uncertainty. Lacking a way to segregate the management of the strategic
uncertainty that was motivating action in the first place, the result was either timidity or
temerity – either mediocrity or a disturbingly high probability of failure.

j j
PAGE 24 BUSINESS STRATEGY SERIES VOL. 9 NO. 1 2008
By 1999, many leading newspaper groups had happened upon what is essentially a
strategic options-based approach to electronic media. It became clear that despite the
long-term threat of the internet, the sky wasn’t falling in on the industry quite as quickly as at
first feared. While there was then and remains a need to reinvent the traditional newspaper
throughout the developed world, the need is not immediate for two reasons: the cash flows
from the existing business are still very attractive, and precisely how it needs to be
reinvented remains unclear.
And so the internet divisions created with such vigor in the mid-1990s as part of a grand
strategy of defense and renewal were spun off and became separate business units. They
were given much freer rein to make their own strategic commitments – while the established
newspaper divisions was returned to the kind of strategic autonomy they had traditionally
enjoyed. This effectively left it to each division – internet and newspaper – to make the
choices it felt were necessary to be successful within the context of its industry. Strategic
commitment, in other words, was in the hands of operating management.
In this context, the value of an internet division in a publisher’s portfolio of businesses
becomes fundamentally strategic. Even a highly profitable internet division would not throw
off enough cash to vie with the newspaper operations for financial significance, even in the
medium term, and so it would be a mistake to see the internet efforts as a simple growth
option. Instead, the internet divisions became strategic options, that is, a sort of self-funding
experiment in which the internet business could develop the assets and capabilities that
newspaper business might eventually need in order to reinvent its strategy. When and as the
complementarity of the internet and newspapers finally became clear, the newspaper
business would be able to change its strategy by integrating with a successful internet
business, one that shared not only corporate ownership but also, in all likelihood, some of the
same corporate culture and some of the same underlying processes, and the commonality
would make the integration process less risky.
What makes the newspaper example especially instructive is that we recently begun to see
what it means to exercise the strategic options created in the late 1990s. From 1999-2005 or
so, the internet divisions were largely autonomous. Simultaneously, the newspapers did
what they had to in order to remain competitive and profitable by the rules of their game.
Each represented a strategic option for the other, and the commitments each made to its
own success actually reduced the strategic uncertainty of the overall portfolio.
Then, beginning in 2005 a few newspapers started integrating their online and offline
operations. Beginning with foreign correspondents, who valued online access from
international locations, followed by sports – a natural for user generated content – and then
for similar reasons political commentary, department after department has begun to create a
synthesis of old and new, resulting in a brand new strategy for newspapers, one that neither
old nor new could have created on its own, nor even together had they been forced to invent
it collaboratively. This is precisely the kind of ‘‘strategic gene therapy’’ that a strategic option
response to competitively turbulent environments makes possible. And it was a direct
consequence of effectively separating who was responsible for creating the strategic
options – the corporate office – from who was responsible for making strategic
commitments – the operating divisions (see Figure 1).

From strategic options to strategic flexibility

What remains to be described is a formal process for creating and managing strategic
options. We can begin to see the outlines of such a process in how Johnson & Johnson
(J&J), the US-based life sciences and healthcare company, has coped with the strategic
turbulence that has characterized its markets for decades.
J&J’s OpCos – of there are more than 250 – have clear and unambiguous responsibility for
their own performance. The executives who lead them are charged with making the strategic
commitments that they feel will deliver the performance required of them by J&J’s corporate
office. The result of this delegation and decentralization has been more than a century of

j j
VOL. 9 NO. 1 2008 BUSINESS STRATEGY SERIES PAGE 25
 Figure 1 Cascading uncertainties and commitments

performance that has outstripped broad market indices. By any measure, J&J is a paragon
of corporate performance.

But not even J&J gets a free lunch. The competitive intensity of the OpCos is possible only by
focusing their efforts on well-defined product markets (e.g. wound closure, skin care, or
colonoscopies) and time horizons (typically three to five years). Yet strategic uncertainties
almost always lie beyond those product market boundaries and medium-term time horizons.
OpCos that had responsibility for both making and delivering on strategic promises and
positioning themselves to deal with longer-term uncertainties would be neither on foot nor on
horseback. They would be unable to focus their attention, and as a result they would be
unlikely to deal well with either challenge.
In response to this challenge, J&J’s internal venture capital arm, Johnson & Johnson
Development Corporation (JJDC) has become the organ of the corporate office that creates
strategic options for the OpCos through its own seed investments. For example, in the
medical devices space the current competitive battles continue to be defined by the
technological sophistication of the devices themselves. However, material strategic
uncertainties surround the role of drug coatings and other forms of drug-device
combinations. To create its own strategic options in this space a devices-focused OpCo
would have to look beyond its existing product market and time horizon, which would
undermine its ability to deliver on the strategic commitments it has already made.

What JJDC has done is take up the challenge of identifying the salient strategic risks and
then seeking out and investing in technologies, research alliances, and even other operating
companies that serve to create the strategic options the OpCos require. A defining
characteristic of JJDC’s process is that it works closely with the OpCos to do this, and for an
easily overlooked reason: the long-term strategic risks an OpCo faces are a consequence of
the mid-term strategic commitments it faces. For instance, if a devices division were to
commit to drug-device combinations, that OpCo wouldn’t need a strategic option in that
space since they had already committed to it. Rather, it is only through an analysis of the
strategies the OpCos are committed to in a context of the future environmental uncertainties

j j
PAGE 26 BUSINESS STRATEGY SERIES VOL. 9 NO. 1 2008
 each OpCo faces that JJDC can determine what sorts of strategic options to create. JJDC
does this using the following four-phase framework:

1. Anticipate
The existence of strategic risk is a function of the unpredictability of the future. One cannot,
however, hedge every uncertainty – there is such a thing as too much insurance. However, it
is possible to bound the range of possible futures that one might face. This is done with
scenarios. By creating a manageable number of scenarios that best define the ‘‘possibility
space’’ over a relevant time horizon, one can create a framework for discussing the future
without having to stake future success on guessing right.

2. Formulate
With scenarios in place, it is possible to determine the strategies required to be successful
under these different conditions. In other words, there is an optimal strategy for each
scenario. Each optimal strategy can then be decomposed into its constituent elements – the
technologies, capabilities, or other assets required to implement the strategy. Elements that
are common to many of the optimal strategies are known as core elements, while those that
are common to only a few optimal strategies or perhaps unique to one optimal strategy are
called contingent elements.

3. Accumulate
Core elements can be pursued without reservation, for there is no strategic risk associated
with them; commitment is entirely appropriate because there is very little chance of having
‘‘guessed wrong.’’ It is the contingent elements that demand more creativity and require real
options thinking.
Combining scenarios with optimal strategies places boundaries on the range of assets and
capabilities an organization might need in order to be successful across a range of plausible
futures. Accepting the unpredictability of the future does not imply a complete inability to
place limits on what could conceivably happen.
Even with these limits in place, committing to all the resources required by every optimal
strategy is generally not feasible. By investing in the contingent elements in an option-like
manner a corporation can cover a far greater range of assets far more cost-effectively.

4. Operate
The accumulate phase results in a portfolio of options covering the contingent elements related
to specific optimal strategies described in the formulate phase. These optimal strategies are in
turn linked to the scenarios developed in the anticipate phase. The operate phase demands a
close monitoring of the environment, which allows the corporation to determine:
B which of its scenarios most accurately capture the most important elements of the future
that ‘‘arrives’’, which determines . . .
B which optimal strategy is most appropriate, which determines . . .
B which contingent elements are required, which determines . . .
B which options should be exercised and which should be abandoned.

‘‘ [. . .] department after department has begun to create a

synthesis of old and new, resulting in a brand new strategy for
newspapers, one that neither old nor new could have created
on its own, nor even together had they been forced to invent it
collaboratively. ’’

j j
VOL. 9 NO. 1 2008 BUSINESS STRATEGY SERIES PAGE 27
 Finally, since time’s arrow has no tip, the set of scenarios used as the foundation for building
a flexible strategy must be frequently reviewed and occasionally refreshed or renewed (see
Figure 2).
By integrating strategic options into this large conceptual context JJDC has created what it
calls the Strategic Flexibility framework, a deliberate oxymoron that captures the objective of
combining the commitments necessary for competitive success with the adaptability
necessary for long-term survival.

Conclusion and recapitulation

Coping with strategic uncertainty is undoubtedly a critical factor in long-lived success. But
hoping merely to adapt to change as it arrives is both extraordinarily difficult and corrosive to
the commitment-intensive foundation of the most successful strategies. What is needed,
therefore, is a way to allow operating companies to make the commitments they must make
to succeed while insulating them from the risk created by those same commitments.
The concept of strategic options offers a way to combine commitment with adaptability. A
portfolio of operating companies can be structured such that each, in pursuing its own
individual success, generates the capabilities other elements of the portfolio might need
should key strategic uncertainties break a particular way. It is for this reason that Xbox, which
creates a window in the game console space for Microsoft’s operating system business, has
strategic option value for Microsoft: it is a business in its own right, but it is also a mechanism
for changing the strategy of the company’s largest franchise without diluting its focus on
success in the here and now.
Managing strategic options successfully demands a clear separation of responsibilities:
operating companies focus on making strategic commitments, while the corporate office
concerns itself with creating strategic options. In the case of newspapers, when operating
companies were charged with running a successful business and exploring electronic
publishing, new media efforts were squeezed out almost entirely, ceding critical first-mover
advantage to start-up efforts from companies like Google. When the corporate office took
the reins, it was unable to make the right commitments. The key was to create separate
divisions – one focused on old media, the other on new media – and then look for
opportunities to facilitate the integration of these divisions as the strategic context required.
This created both growth option value – since new media operations had the opportunity to
grow as stand-along operations – and strategic option value since it generated the insight
into the web needed to reinvigorate offline operations much more quickly and easily than
change efforts from within existing newspaper operations would have allowed.

Figure 2 Strategic flexibility

j j
PAGE 28 BUSINESS STRATEGY SERIES VOL. 9 NO. 1 2008
 Finally, by placing strategic options within a broader context of scenario-based planning and
portfolio management, Johnson & Johnson has created what it calls Strategic Flexibility. Its
operating companies are resolutely focused on their own success, but the commitments
required for that success necessarily expose them to strategic uncertainty. JJDC, the
company’s corporate venture capital arm, identifies the strategic risks created by those
Keywords: commitments and creates the strategic options needed to manage those risks. The result is
Corporate strategy, the best of both worlds: commitment-intensive strategies at the level of product-market
Uncertainty management, competition and bone fide strategic flexibility thanks to the deliberate embrace of
Economic growth uncertainty by the corporate office.

Notes
1. Also, in the nearly 40 years since Future Shock was published Toffler has elaborated and refined his
views on organizations considerably, seeing organizations as victims as much as agents of change.

2. The concepts mentioned are drawn from, among others: Quinn (1978); Bradley and Nolan (1998);
Ranandivé (1999); Mintzberg and Waters (1982); Brown and Eisenhardt (1998); and Crossan et al.
(1996).

3. The discussion of the newspaper industry’s experience with the internet challenge focuses on the
North American, European, and Japanese markets. In the rest of the world the newspaper business
has been growing energetically and hasn’t been forced to confront a challenge from online
alternatives – at least so far.

References
Beer, M. and Nohria, N. (2000), Breaking the Code of Change, Harvard Business School Press, Boston,
MA.

Bradley, S.P. and Nolan, R.L. (1998), Sense and Respond: Capturing Value in the Network Era, Harvard
Business School Press, Boston, MA.

Brown, S.L. and Eisenhardt, K.M. (1998), Competing on the Edge: Strategy as Structured Chaos,
Harvard Business School Press, Boston, MA.

Crossan, M., White, R.E., Lane, H.W. and Klus, L. (1996), ‘‘The improvising organization: where planning
meets opportunity’’, Organizational Dynamics, Spring.

Ghemawat, P. (1991), Commitment: The Dynamic of Strategy, The Free Press, New York, NY.

Huyett, W.I. and Viguerie, S.P. (2005), ‘‘Extreme competition’’, McKinsey Quarterly, No. 1.

Mintzberg, H. and Waters, J.A. (1982), ‘‘Tracking strategy in an entrepreneurial firm’’, Academy of
Management Journal, Vol. 25 No. 3.

Quinn, J.B. (1978), ‘‘Strategic change: logical incrementalism’’, Sloan Management Review, Fall,
pp. 7-21.

Ranandivé, V. (1999), The Power of Now, McGraw-Hill, New York, NY.

Slywotsky, A. (2004), ‘‘Exploring the strategic risk frontier’’, Strategy & Leadership, Vol. 32 No. 6.

Toffler, A. (1970), Future Shock, Random House, New York, NY.

Wiggins, R.R. and Ruefli, T. (2005), ‘‘Schumpeter’s ghost: is hypercompetition making the best of times
shorter?’’, Strategic Management Journal, Vol. 26 No. 10.

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com

Or visit our web site for further details: www.emeraldinsight.com/reprints

j j
VOL. 9 NO. 1 2008 BUSINESS STRATEGY SERIES PAGE 29