All organizations and all managers face uncertainties. The effects are to increase the degree of risk faced by strategic decision makers. Most techniques of strategic decision making under uncertainty (e.g. risk analyses) assume that the returns from a decision are arranged on a probability distribution conditional on the choices made. In general, decision makers are assumed to have a preference for alternatives which have higher expected values, but at the same time, they consider the riskiness of other alternatives.

Risk itself is a variable concept. In the consideration of alternatives, risk taking is correlated to the risk takers’ changing fortunes (March and Shapira 1999). For example, if risk is perceived to be life-threatening, then individuals, it seems, will either take highly risky decisions or will be traumatized to take very risk averse decisions and play safe.

We currently know these are the polarized choices decision makers may take, but we do not yet know enough to predict when and under what circumstances they will opt for high risk or will play safe.

Higher levels of organizational slack seem to encourage experimentation and innovation and encourage risk taking (probably because of a relaxation of controls). Lower levels of organizational slack (or when slack becomes negative) means tighter controls, and efforts to improve efficiencies and procedures encourage lower levels of risk taking.

Decision makers’ aspiration levels are also not fixed. Over time they will vary, often considerably, and therefore the degree of perceived risk will vary depending on where the aspiration level is fixed. This is because risk averse behaviour will be defined as being below the aspiration threshold and risky behaviour will be defined as being above it. Equally, individuals’ self-confidence changes over time. Past successes can breed confi- dence (and sometimes overconfidence) in taking risky decisions. Overconfidence can occur when decision makers wrongly assume they were wholly responsible for past successes (and do not attribute success to exogenous factors, such as errors by competitors or a munificent macroeconomy where resources are easily available).

Risk itself is subject to varying interpretations and definitions. Risk can be viewed as something totally exogenous to organizations and therefore out of managers’ control. Equally, risk can be seen as wholly endogenous. Even seemingly external events and threats (such as terrorist attacks) can be attributed ultimately to the actions, or inactions, of individuals and groups. From this perspective, all risk is argued to be ultimately man-made.

Typically, decision makers will face some level of uncertainty between these polarized views. There will always be earthquakes, flooding and volcanoes and there will always be man-made disasters.

A key question for strategists is how to manage risk and how to craft strategic decisions in the face of risk. Many empirical models of risk have been developed and some of the main ones have been mentioned in this chapter. The limitation of all these approaches is that they are essentially short term in their time horizons. In order to build in a time dynamic, scenario analysis can be beneficial to strategists, enabling them to plan future decisions based on a contingent view of what a plausible future (or set of futures) may be. This chapter describes in some detail one way of dealing with scenarios, both to develop strategies and to help make decisions in the face of uncertainties. Finally, the chapter returns to the level of analysis of the organization, since the ability to implement such strategies depends very much on the capacities and capabilities built into the organization’s infrastructure. In particular, we highlight the role of core competences, effective governance and ensuring the organization can undertake strategic change and continue to learn. Each of these topics is developed in the following chapters.

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