Companies that adapt their strategy to their competitive environment will perform better than those who don't. However, a recent article from Harvard Business Review shows that too many companies use approaches appropriate only to predictable environments, even when their environment is highly volatile.
As an illustration, let's compare two industries that couldn't be further apart in terms of strategic style: the oil industry and the internet software industry. The former industry holds relatively few surprises for strategists. Things change of course, but in relatively predictable ways. In the software industry, innovations and new companies pop up frequently, and the pace at which companies can build or lose market share is headspinning. It is clear that companies in such dissimilar competitive environments should be planning, developing and deploying their strategies in different ways.
So how do you know which strategy to use? The authors of the Harvard Business Review article distinguish between four styles of strategic planning according to how predictable your environment is (predictability) and how much power you have to change it (malleability).
When you operate in an industry whose environment is predictable but hard for your company to change, a classical strategic style has the best chance of success. A company sets a goal, targeting the most favorable market position, and then tries to strengthen that position through successive rounds of planning. Oil company strategists, like those in many other mature industries, effectively employ the classical style.
Some industries, for example the technology industry, are not predictable at all and are becoming less and less so, as they are coping with global competition, technological innovation and economic uncertainty. Companies in this situation need a more adaptive approach, whereby they constantly refine goals and tactics and shift, acquire, or divest resources smoothly and promptly. In such a fast-moving, reactive environment, when predictions are likely to be wrong and long-term plans are essentially useless, the ultimate goal is not to optimize efficiency; rather, it must be to engineer flexibility.
In volatile industries, some companies try to shape the unpredictable environment to their own advantage before someone else does. Like an adaptive strategy, a shaping strategy embraces short planning cycles, flexibility and experiment. But unlike adapters, shapers focus beyond the boundaries of their own company, by defining attractive new markets, standards, technology platforms, and business practices. Facebook is a textbook example, as it overtook MySpace in just a few years and opened its social networking platform to outside developers in 2007.
Sometimes, not only does a company have the power to shape the future, but it's possible to know that future and to predict the path to realizing it. Think about what Edison did for electricity and what Ratan Tata is trying to do with the ultra-affordable Nano automobile. These are the big bets, the build-it- and-they-will-come strategies.
Avoiding the traps
Research shows that although three out of four executives understand the need for different strategic styles in different circumstances, they only apply two strategic styles-classic and visionary-suited to predictable environments. That means only one in four is prepared to adapt to unforeseeable events or to seize an opportunity to shape an industry to his or her company's advantage. Understanding how different the various approaches are and in which environment each best applies can go a long way toward correcting mismatches between strategic style and business environment. But as strategists think through the implications of the framework, they need to avoid three traps.
- Misplaced confidence: You can't choose the right strategic style unless you accurately judge how predictable and malleable your environment is. However, executives tend to overestimate both predictability and malleability.
- Unexamined habits: Many executives recognize the importance of building the adaptive capabilities required to address unpredictable environments. However, they don't feel sufficiently competent in them. In part that's because many executives learned only the classical style, through experience or at business school.
In practice, many companies value accuracy over speed of decisions, even when they are well aware that their environment is fast-moving and unpredictable. As a result, a lot of time is being wasted making untenable predictions when a faster, more iterative, and more experimental approach would be more effective.
- Culture mismatches. A company culture that prizes efficiency and the elimination of variation can undermine the opportunity to experiment, which is essential for an adaptive strategy. Failure is a natural outcome of experimentation, so adaptive and shaping strategies fare poorly in cultures that punish it.
It takes a good understanding of the four strategic styles to avoid these different traps. Companies put a great deal of energy into making predictions year after year, but they should also check to see if the predictions they made in the prior year actually panned out. We suggest regularly reviewing the accuracy of forecasts and also objectively gauging predictability by tracking how often and to what extent companies in your industry change relative position in terms of revenue, profitability, and other performance measures.
Operating in Many Modes
Matching your company's strategic style to the predictability and malleability of your industry will align overall strategy with the broad economic conditions. But the story does not end here. A company moving into a different stage of its life cycle may well require a shift in strategic style. Environments for start-ups tend to be malleable, calling for visionary or shaping strategies. In a company's growth and maturity phases, when the environment is less malleable, adaptive or classical styles are often best.
Once you have correctly analyzed your environment, and you have identified which strategic styles should be used, you will need to monitor your environment and be prepared to adjust as conditions change over time. Clearly that's no easy task. But we believe that companies that continually match their strategic styles to their situation will enjoy a tremendous advantage over those that don't.