Strategy has to evolve as the world changes.
Early in the last century industries and markets were relatively stable. (We will use the word ‘industry’ to mean the set of competitive companies providing a category of products. ‘Market’ means the set of buyers of the category.) But over the last few decades the environment external to the organization has been changing, and some companies have been more successful in keeping pace by adapting their internal environment and their strategies.
Successful companies have found a market need they can serve, and they compete effectively for customers and generate a profit. The formula for success is based on certain conditions in the company, the industry, the market and the external environment. When conditions change, the whole system can be thrown out of whack and often that is difficult to see and to adapt to quickly.
Over the last few decades we have seen many historically successful companies fail. Circumstances changed and they couldn’t adapt, like; Kodak, Blockbuster, Circuit City, Borders, Nokia, and unfortunately the list goes on.
Here’s a simplified view of how strategy has evolved over the last several decades (this combines the historical analyses of several studies):
1. Markets and industries were generally stable or slow-changing, and the recipe for success was to choose a good industry and try to keep from increasing rivalry among competitors. The internal environment was generally ignored.
2. Increasing competition lead to organizations looking for ways to earn better profits than the competition, and this meant looking internally at what the organization could do differently. Two concepts took hold.
a) One was the idea of the organization being essentially a bundle of resources – which were the right resources to collect and leverage for competitive advantage.
b) The other concept was based on a study that showed companies with greater market share had accumulated more experience and were thus more efficient, which lowered their costs and allowed them to capture a greater margin, or lower prices. Strategy became recipes for growing market share.
3. With globalization and new technologies companies encountered even more competition – from similar organizations around the globe and from non-traditional competitors entering from adjacent industries. Strategy became about how to build and protect competitive advantage. The company had choices beyond growing market share. The internal environment had to be planned and built to support that strategy choice. The expectation was that strategy did not change much once that competitive advantage was established.
4. With accelerating change and complexity, the latest thinking is about strategy as adaptive. Currently, we are seeing change in the external environment coming faster and faster. Certain types of change can neutralize a competitive advantage, make it no longer relevant. That is what happened to several of the recent failures. Blockbuster saw entertainment shift from VCR/DVD rentals with revenues mostly from late fees to subscription models with no late fees and video on demand.
Strategy as adaptive
This latest trend in strategy thinking advocates shifting from creating and protecting competitive advantage to achieving competitive survival. This means strategy has to adapt rapidly to changes in the external environment. Creating the internal environment is about building so-called dynamic capabilities, the ability to adapt.
An adaptable approach to creating strategy is a departure from a traditional waterfall approach. With a waterfall approach, strategy is set at the top levels of the organization, and it cascades down from the enterprise to business unit to product lines in successively more detailed strategies. This approach is slow, but it has served companies well during times of slow, predictable change.
When the environment is changing, the signs of change are usually seen first by those closest to the market, not senior management. A top-down approach to strategy will be slow to identify and react to change. Competitors more attuned to the market and able to respond rapidly will have an advantage.
Traditional methods of strategy don’t work well in a rapidly changing environment. What is your company doing to adapt to unpredictable change?
Note: This post was originally published in July 2015 and has been updated.