Adaptive strategy key to business sustainability

By Boston Consulting Group

In their approach to strategy, companies have sometimes emphasized scale and position and at other times capabilities and competencies. Despite theses shifts in focus, some basic beliefs about the nature of competition have remained unchanged.

Strategists have generally assumed that there is durable advantage in well-defined and largely stable industries comprising a few relatively homogeneous competitors. The practice of strategy has also retained some constant features: for the most part, it has remained deductive, predictive, episodic, and top down.

Yet sweeping forces in the business environment over the past decade?many of them complex and interrelated _ argue not just for a shift in focus among the primarily static elements of traditional strategy but also for a new way of acknowledging the dynamic qualities of competition.

We can distinguish three important dimensions of turbulence and change: volatility in market positions, unpredictability of outcomes, and the widening gap in performance between winners and losers. Most industries have experienced instability on at least one of these dimensions, but some ― such as technology-driven industries and commercial banking ― have been affected on all three. The hardest-hit industries are those that have been disproportionately affected by globalization, deregulation, digitalization, connectivity, deconstruction, and the shift from products to services.

We are not implying that classical strategy and strategic planning are no longer relevant. They still are. But they are providing increasingly limited in their ability to address these rapidly evolving trends, which have resulted in extremely fluid business systems.

We believe that companies can renew and sharpen their quest for sustainable competitive advantage by pursuing adaptive advantage. Organizations with adaptive advantage recognize the unpredictability of today’s environment and the limits of deductive analysis.

They seek to develop the most favorable organizational context in which new approaches to new problems can continually emerge. Adaptive advantage thus enables them to unite reflection with execution and to balance deduction with experimentation.

A Virgin Group is a good model

A good example of a company that has developed adaptive advantage at the level of the business portfolio is the Virgin Group, which boldly enters, scales up, and exits new businesses in diverse industries.

Virgin constantly launches offerings that challenge incumbents’ business models to deliver greater value to consumers. It usually partners with others for assets and talent, and its highest governance body is an investment committee rather than the more traditional operating committee.

Virgin creates and maintains dynamic advantage in a fluid environment by sowing a broad range of portfolio seeds, setting the conditions of success, orchestrating the assets and capabilities required, and continually applying strict criteria for exiting investments.

Most companies, and especially those in industries characterized by both unpredictability and a high rate of change, need a more adaptive and dynamic approach to strategy ― an approach that emphasizes iterative experimentation in order to overcome the limitations of deductive approaches and keep pace with incessant change.

With such an approach, organizations gain adaptive advantage: the ability to achieve superior outcomes in a turbulent environment by continuously reshaping the enterprise through a process of managed evolution. In this article, we explain how adaptive advantage can be harnessed in practice.

Elements of adaptive advantage

Three attributes are essential for survival in a changing environment: readiness, responsiveness, and resilience. They can be achieved by static measures such as improved forecasting, decentralized decision-making, and buffering with excess capacity, respectively. However, to gain a sustainable advantage in a turbulent environment, companies must employ a more dynamic, recursive approach in which better-fitting strategies continuously evolve in response to change.

Styles of Adaptive Strategy

There are many styles of adaptive strategy that can help companies achieve business sustainability during a turbulent environment. A company’s optimal choices are mainly a function of the environment ― especially the rate at which it is changing, the predictability of change, and the degree of change required. There are four broad styles of adaptive strategy.

The Sprinter: In environments with only a moderate degree of both turbulence and required change, companies can focus on rapidly optimizing and exploiting existing business models to track an increasingly volatile environment. The fashion retailer Zara, for example, focuses on building a fast feedback cycle between sales data from its stores and the design and manufacture of new products. This model allows the company to stay at the forefront of fashion trends without having to make big bets on where the trends are headed.

The Experimenter: In environments where turbulence is high but the degree of change required is low, companies whose business models are fundamentally sound must nevertheless modify their product mix or other low-level aspects of their business through a process of iterative experimentation. McDonald’s, for example, uses a structured process to design, test, and introduce menu items while keeping its overarching business model unchanged. This enables it to evolve along with customer preferences and still preserve the well-honed efficiency of the kitchen model at the core of its operations.

The Migrator: In environments with moderate turbulence and a high degree of required change, companies must deliberately migrate their obsolescent business models or domains toward more attractive ones using a targeted and deliberate process. Virgin, for instance, systematically manages a diverse portfolio of challenger businesses by rapidly scaling up potential winners and cleanly divesting or shutting down losers.

The Voyager: In environments with a high degree of both turbulence and required change, companies need to deploy an exploratory approach to the business model or system. This can involve “live” tests with a mixed portfolio of competing business models and strategies, some of which may even be mutually contradictory. Netflix, which has reinvented fundamental aspects of its business strategy and model several times in the extremely turbulent movie-rental business, is a good example of a voyager. It removed late fees (at one time a mainstay of industry profits) and is exploring video streaming on a variety of platforms, potentially cannibalizing its DVD-by-mail business in order to stay ahead of the competition. Netflix has succeeded in dominating and reshaping a chaotic industry in which less adaptive competitors have fared poorly.

Beginning the Journey

Adaptive advantage is a powerful concept for companies facing unstable environments. It involves not only different ways of operating but also very different ways of thinking about strategy. The first step in embracing adaptive advantage is therefore to create awareness of the challenges and opportunities presented by turbulence and unpredictability ― and the adaptive choices available.