By Martin Reeves
The pace of business change today is head-spinningly fast. Competitive environments are becoming more diverse and more dynamic.
One size of strategy no longer fits all situations. Leaders who want to win increasingly find it necessary to match their strategic approach to the specific environments they face. The challenge, then, is not that we lack powerful ways to approach strategy; it’s that we lack a robust way to select the right ones for the right circumstances.
The five-forces framework for strategy may be valid in one arena, blue ocean or open innovation in another. But each approach to strategy tends to be presented or perceived as a panacea. Business leaders and managers face a dilemma: How do they identify the most effective approach to business strategy and marshal the right thinking and behaviors to conceive and execute it?
In Your Strategy Needs a Strategy, my co-authors and I introduce the ‘strategy palette’, a tool that helps executives classify their competitive environments and identify the relevant approach to strategy and execution for each. We found five distinct strategic approaches defined by three environmental characteristics: unpredictability, malleability and harshness.
The Classical Approach
The classical approach to strategy – strategic planning – is familiar to most readers: It’s is the traditional analyze-plan-execute method, with a goal of achieving sustainable competitive advantage through scale or differentiation. In a stable environment, size, differentiation, or capabilities – being good at what you do – can be stable sources of competitive advantage. There are no penalties for changing only gradually, because the environment is predictable and develops only gradually, without major disruptions. Constant, small improvements in performance can accumulate into a significant and sustainable competitive advantage.
For firms following the classical approach, size becomes a self-reinforcing benefit. The larger a firm, the lower its costs compared with its competitors. As a company accumulates scale and experience, the lower costs can then fund price cuts that increase volumes, completing a virtuous circle.
The Adaptive Approach
The adaptive approach is about responding rapidly to changing market conditions by continuously experimenting, and then selecting and quickly scaling up whatever works. When the business environment is unpredictable and non-malleable and advantage may be short-lived, firms have to be ready to adapt quickly to succeed.
Strategy emerges from the continuous repetition of this cycle. By iterating more rapidly and effectively than rivals, adaptive firms outperform others. The classical notion of sustainable competitive advantage is replaced by the idea of serial temporary advantage.
An adaptive approach to strategy is appropriate when – and only when – your company is operating in an environment that is both hard to predict and hard to shape. The approach must be embedded in every aspect of the organization, with an eye to promoting the signal detection, experimentation, and selection by promoting external orientation, bottom-up initiative, and an agile and flexible organization.
The Visionary Approach
The visionary approach envisions and realizes new business possibilities. Although this approach is typically associated with small start-ups, large companies now also may need to be visionary to stay relevant in the face of frequent disruptions.
In some environments, a single firm can create or re-create an entire industry and, as a result of that power, create the future with some degree of predictability. Under those circumstances, a firm should employ a visionary approach.
Timing is critical. By being first, you have the advantages of superior size that come with being ahead of your rivals: you can set the industry standard, you can influence customer preferences, you can develop a superior cost position, and you can take the market in a direction that suits your company.
The Shaping Strategy
The shaping strategy is about partnering with other companies to reshape an entire industry through collaboration, often using a digital market platform.
Sometimes you may get the extraordinary opportunity to shape or reshape an industry at an early point in its development, when rules have not yet been written and there is an opportunity for the industry to become large, attractive, and favorable to you, the shaper. Such an opportunity both permits and requires you to collaborate with others because you cannot shape the industry alone – you need others to share the risk, supply complementary capabilities and resources, and build the market quickly. A shaping firm operates under a high degree of unpredictability, given the nascent state if industry evolution it faces and the participation of multiple stakeholders that it must influence but cannot control.
The Renewal Strategy
The renewal strategy is the option to choose when a business is in jeopardy and needs to conserve its resources to fund the journey back to viability and growth.
It renews the vitality and competitiveness of a firm when it is operating in a harsh environment. Such a challenge can be caused by a protracted mismatch between the firm’s approach to strategy and its environment or by an external or internal shock.
When the external circumstances are so difficult that your current way of doing business cannot be sustained, changing course to preserve and free up resources, and then later redirect toward growth, is the only way to not merely survive, but to eventually thrive again. A company must first notice and react to the deteriorating environment as early as possible. Then, the firm needs to economize to decisively address its immediate impediments to financial viability or evens its very survival. To do so, it focuses the business, cuts costs, and preserves capital while also freeing up resources to fund the next part of its renewal journey. Finally, the firm needs to pivot to one of the four approaches to strategy to ensure long-term growth and competitiveness, by resetting the strategic direction of the company in line with its environment and innovating strategically.
The strategies and roles you take on as a leader will depend on how complex and dynamic your business is. But the goal is always to mix, match and evolve your company’s capabilities and resources in response to the world changing around you. That is the ultimate leadership strategy.
Martin Reeves is senior partner at The Boston Consulting Group, and director of BCG’s Bruce Henderson Institute. He is co-author of “Your Strategy Needs a Strategy” (Harvard Business Review Press, June 2015)