A Blog by Jonathan Low


Oct 29, 2012

Why Your Strategy Must Match Your Competitive Environment

The New York Stock Exchange and other securities markets are closed today due to an extreme weather event. Just over a year ago the global supply chain was disrupted by floods in Thailand while still dealing with the affects of the Japanese nuclear crisis brought on by an earthquake and tsunami.

The benefits of global commerce are based on scale, expertise, pricing flexibility and expanded markets, among others. The risk lies with dependence on a global supply chain vulnerable to disruptions caused by events that can not always be predicted and managed, let alone controlled by the businesses affected.

A company's competitors are also impacted by these forces, but that is small comfort when facing shortages, rerouting critical parts and people, attempting to close deals and secure financing while minding debt covenants and the other obligations of contemporary economic reality.

The implication, as the following article explains, is that designing a strategy requires, more than ever the recognition of convergent forces beyond the influence of most managers. Preparing a five year plan has become a futile exercise - perhaps even laughable - in an environment (writ large) containing so many more variables for which executives must account. The concept of disruptive innovation has been drilled into a generation of MBAs now, but it may not even be possible to design an algorithm that also takes into account disruptive weather, disruptive government policies, disruptive regional conflicts, disruptive personal indiscretions, disruptive journalistic inquiries, disruptive NGO interventions and their like.

There has been a dominant strain of management hubris which insists that no exogenous variable should distract or deter a good executive from meeting her goals. Accounting for threats and opportunities is supposed to be built into the system. They are simply one more set of challenges to identify, address and overcome.

But the reality has proven to be somewhat different. Markets have recognized that an historic belief in Managerial Infallibility is no longer relevant and can be dangerous. CEO turnover is high, boards have a welter of kibitzers looking over their shoulders and the markets themselves are trading on data legally obtained ahead of the tape.

In this environment, accepting reality and adapting to it may be the most effective strategy. Assuming that conditions permit internet access, a sustainable enterprise - and the ability to get to the office...JL

Martin Reeves comments in the Harvard Business Review:
How predictable are competitive conditions in your industry? How much power does your company have to shape its underlying competitive environment? These questions are critical to strategists, since clearly the kinds of strategies that work in predictable industries are likely to be worlds apart from those geared to shaping highly volatile environments. This should hardly surprise you. In our recent research, we've found that fully three-quarters of the executives we surveyed at 120 companies around the world in 10 major industry sectors were well aware of the need to match their strategies — and the process by which they create them — to the specific conditions of their competitive environment. And yet, our research also found far too many were employing strategies suited only for predictable and immutable industries.

It shows how accurately executives in various industries estimated how predictable and how malleable their industries are. Each dot is a response of an executive we surveyed from a particular company in a certain industry. The closer the dot is to the middle of the chart, the more accurate the estimate. Thus one executive from the consumer discretionary industry was spot on, right in the middle. But three IT executives who overestimated how unpredictable their industry is while also overestimating their companies' ability to change those conditions. You'll see a fair number of financial executives underestimating how unpredictable their industry is and also underestimating their ability to influence it.

The problem with this is obvious, of course: You can't begin to tailor your strategy to the conditions of your industry if you don't perceive them correctly.

What's more, as we've just done, many executives lump "predictable" and "malleable" together, and divide the universe of competitive environments very broadly into two parts, assuming that a predictable environment is one they can control and an unpredictable one is one they can't.

But in fact, our research shows that it's far more fruitful to think of those factors separately, and consider all four possibilities — that is, to consider not only strategies suited to predictable environments you can control but those geared to predictable environments that you can't influence. Similarly, it's important to distinguish between strategies suited to unpredictable environments you can't control and those that can capitalize on the possibilities of unpredictable environments your company is in a position to shape to its advantage.

These distinctions are so important because the four different strategic environments require four different styles of strategy execution. For companies operating in predictable and immutable environments, a classical strategy — the one everyone learned in business school — works well. When immutable environments are unpredictable, adaptive, experimental strategies work far better. Predictable environments that you have the power to change call for visionary strategies (the entrepreneurial if-we-build-it-they-will-come approach). And shaping strategies are best for unpredictable environments you have the power to control, as many Internet players do.

Our research on this point is unequivocal. We found that firms that match their style of strategy formulation to their environment achieve annual total shareholder return that is 4% to 8% higher.

That's why it's so alarming that in our survey we found fully six out of 10 companies either misperceived their environment, used the wrong style for their environment, or deployed strategy-development practices inconsistent with their intended style.

Where does that leave you?

To help you understand the style your firm deploys and the style most suited to your firm's environment we have developed a short, interactive survey. Comprising 23 questions, that you can complete in about five minutes, the survey is a great opportunity to test your strategic practices against our framework and to gain useful insight into the style most suited to your firm's competitive conditions. Aligning your strategy formulation practices to your environment can help you unlock real value.


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