Your Strategy Needs a Strategy

Synopsis

We live in a business world that is in constant flux. But when you learn and understand the five strategy archetypes and how to execute them, you will master your journey through this turbulent land of opportunity.

In Your Strategy Needs a Strategy , authors Martin Reeves, Knut Haanæs, and Janmejaya Sinha explain how to navigate these various approaches and avoid common pitfalls.

With a solid foundation of the five archetypal approaches, create a "pyramid" of strategy application. Combine multiple approaches and top the process off with solid leadership.

Top 20 insights

1. A classical strategy approach, i.e., "be the biggest," should be deployed in relatively stable and predictable markets with established competition. Homogenous business models are more likely to experience modest growth rates and few surprises or disruption. Most traditional businesses fall under this category but beware of the assumption that it applies to yours.
2. The turbulence of business return on sales has more than doubled since 1950, which has forced classical industries to re-think their approach. Analysis by BCG Strategy found that the top three market-share leaders' probability of also being the top three profitability leaders declined from 35% in 1955 to just 7% in 2013.
3. An author-created survey found that nearly 90% of firms intended to employ a classical approach of detailed forecasts, and 80% translate those into long-term plans. Classical shouldn't mean mechanical or overly complex, however. Use familiar tools to achieve new, uncomfortable, and surprising insights.
4. Emphasize scale if your business is among the top three in your industry. If not, focus on differentiation, especially if your targeted niche segment is sizeable. Products or services must be distinct and valuable to succeed. DHL invested $10 billion to enter the U.S. express freight business but struggled to compete until it focused on international delivery.
5. If you choose a classical strategy, you still need to adapt to slow but significant changes. Electrical utilities have deviated little over the last century but have begun to diversify into alternative energy sources. UPS employed a classical strategy in 1907 then adapted to e-commerce when it invested billions per year on IT systems.
6. Businesses should apply the adaptive strategy, i.e., "be fast," only when it operates in an environment that is both hard to predict and hard to shape. Examples include software, fashion, and any product that relies on minerals or resources, such as semiconductors.
7. Adaptive business models yield more consistent performance if you continually invest a portion of resources into the exploration of new options or adaptation. A simulation of 30 adaptive strategies executed within a turbulent environment showed more frequent but smaller drops in profit compared to a classical strategy.
8. Continually refresh your data on external change and have the analytic capabilities to uncover hidden patterns. Progressive Insurance uses its Snapshot program to track and analyze driver patterns, which creates real-time risk profiles for each customer. CEO Glenn Renwick called Snapshot one of the most important things he'd seen in his career.
9. An adaptive strategy can only succeed if you refuse to get comfortable. This attitude underpins company culture. Netflix has an internal reference guide to "Freedom and Responsibility" that says employees follow processes exceptionally well, but it strips a company of its ability to adapt quickly. Netflix tries to eliminate rules whenever possible.
10. The visionary strategy approach, i.e., "be first," should only be deployed when creating or recreating an industry. This strategy must be timed precisely to succeed, however. Megatrends that emerge, new technology, or consumer dissatisfaction with the status quo trigger the pivotal moment to act.
11. Visionary approaches are commonly associated with start-ups, but established firms should familiarize themselves with this approach -- if anything, to understand how companies can disrupt or help your industry. Genomic analysis firm 23andMe made DNA breakdowns available to the public. This data has become valuable not just to customers but to pharmaceuticals and hospitals.
12. Of companies that intended to employ a visionary strategy, 95% still used a classic development approach that included detailed forecasts. There are four steps to a visionary strategy: detect an opportunity, create a clear vision of what you want to achieve, "sketch" a plan that can be changed, and get people excited about it.
13. Don't confuse detailed plans with clear direction. Expect to adjust a visionary strategy as you go. Ninety percent of entrepreneurs fail. If you do manage to become the first, you may not be for long. Once you establish your business, you may need to adopt other approaches to sustain a competitive advantage.
14. You can deploy a shaping strategy when an opportunity arises to write or rewrite an industry's rules at a time of evolution. This approach works best in highly fragmented, young, and dynamic industries, freshly disrupted industries, or new markets. Win this strategy through co-development of the market and industry with multiple players.
15. Shaping strategies focus on the ecosystem's mutual value proposition. Apple focuses its efforts on the development of the App Store ecosystem to attract developers and users rather than hyper-focus on a particular app. Ask yourself what part you play in your business ecosystem and how you can collaborate with other players to create value for everyone involved.
16. A shaping strategy typically requires that you build a platform on which your desired ecosystem can grow. Examples include a digital marketplace, supply chain orchestrator, or digital distribution channel. The strategy is to manage the platform by controlling a few key variables, adding incentives, and making it unattractive for rivals to compete.
17. Adopt a renewal strategy when your industry or company displays low or limited growth, company funds are on the decline, your firm has suffered an internal or external shock, or your situation poses a viability risk for you. This strategy is also appropriate when your industry or company has restricted access to capital.
18. Painful cutbacks are not enough to survive in a turbulent business environment. Instead, think long-term by adopting a three-step renewal approach. First, economize to stay afloat, then pivot to a strategy of innovation so that the company can remain competitive or even visionary in your field. Lastly, use that innovation to facilitate growth.
19. Large companies that operate in multiple business environments can benefit from an ambidextrous approach to strategy. Lockheed Martin has used a separation approach as far back as 1943. Handle this approach in four ways: Separation of strategies between subunits or functions, switch between approaches, self-organize, or rely on an external ecosystem.
20. Global connectedness requires leaders to be more vigilant to changes than ever. Crises are no longer limited to one industry or region. Analysis revealed that roughly 53 out of 70 industries studied are so turbulent that businesses progress through various life cycles in half the time compared to 60 years ago.

Summary

The world has never been so connected. While an ever-changing global economy creates opportunities that were once impossible, it has never been more difficult to pick a business strategy. Good news – you probably have more options than you think.

The five business strategy archetypes

Imagine strategies as paint on an artist's palette. Apply each "color" to different parts of your business, from geographies to industries and functions. Strategies can also be mixed and matched to fit various stages of a firm's life cycle or an environment that each part of the business faces.

Classical

Be big

The classical approach to business is the most common method taught in business school and used by long-standing industry giants. Simply put, your goal is to become the biggest and the best.

Mars, Inc. is an exemplar of classical strategy. As the most significant player in the chocolate industry and a major player in others like pet food and chewing gum, scale drives all facets of its strategy. It can focus on growth because the industry is established and predictable.

Paul Michael, President of Mars, Inc., says that he develops plans with a one-year and long-term horizon. He focuses on what they can control directly, such as costs and profitability. Mars is already a household name and has been for decades, so the goal is not recognition so much as driving category growth.

If we revisit the artist analogy, think of the classical strategy as a still-life painting. You aren't inventing the image. You can rely on the unwavering subject before you. As a result, employing a classical strategy does not require a great deal of agility. Analyze your industry to determine market attractiveness, the basis of competition, and your own firm's position, then execute step-by-step until your "masterpiece" is complete.

How to know if a classical strategy is right for you:

• Your company is in a predictable, non-malleable environment.
• Your business is in an industry similar to utility, automobile, oil and gas
• Key indicators include low growth, high concentration, mature industry, and stable regulation

How to know if a classical strategy is successful:

• You will achieve scale and grow market share.

Essential trap to avoid:

• Overapplication: don't assume that a classical strategy is always appropriate just because your company has used it forever or because it's the traditional choice of your industry.

Size offers protection. Suppose you are buying your way into a classical marketplace but do not have the scale to compete effectively; focus on a niche within the market. For example, Huawei first gained a position in China's rural telecommunication sector and used it to gain size and momentum before entering the competitive urban market.

Adaptive

Be fast

Employ an adaptive strategy when forecasts are no longer reliable enough to create accurate and durable plans. Since the 1980s, turbulence and uncertainty strike businesses more frequently and intensely and persist longer. For this reason, industries more associated with a classical approach may need to consider an adaptive strategy instead.

Fashion is the perfect example of an adaptive strategy. Like its competitors at the time, Spanish fashion retailer Zara had to guess which styles would be popular and hope for the best. This strategy resulted in a few wins — but also the need to discount half their stock each year. Zara holding company Inditex pivoted to an adaptive strategy and reacted to what customers were buying instead of trying to predict future trends.

The firm shortened its supply chain, purchased only tiny batches and constantly experimented in real-time. Up to half of Zara's clothes are designed and manufactured mid-season. Production costs are higher, but Zara's profit margins were double the industry average in 2010.

How to know if an adaptive strategy is right for you:

• Your company is an unpredictable, non-malleable environment
• Your business is in an industry like semiconductors, textile retail, software
• Key indicators include volatile growth, limited concentration, young industry, significant technological change

How to know if an adaptive strategy is successful:

• You will see cycle time and new product viability index.

Essential trap to avoid:

• Planning the unplannable: Many firms cling to the top-down classical approach even as the market changes around them. Leaders should define an area of focus, rough direction, or aspiration, but strategies must remain emergent and dynamic.

Frequently, the data you need to adapt quickly is right under your nose. Convenience store chain 7-11 utilized its point-of-sale system in Japan to create useful pools of information such as customer demographics, time of day, and even the weather. The company used this information to test hypotheses about how these variables drove sales in real-time and how store variables adjusted to accommodate their unique customer bases.

Visionary

Be first

Ready to change the world? Then the visionary approach might be for you. Employ this strategy when your industry is ripe for disruption or can be re-shaped by an individual firm. It can also be appropriate if your industry displays high-growth potential but suffers from unsatisfied customers and few regulations.

Visionary strategies are exciting but easier said than done. It's a unique mix between a fixed goal and a flexible mindset. You'll need to deeply understand emerging trends or connect the dots between converging trends to steer into them at the right moment.

1. Identify an opportunity
2. Formulate your vision
3. Sketch the plan (keep it loose!)
4. Communicate your vision broadly to attract stakeholders

Before Amazon, UPS recognized the future potential of e-commerce and invested heavily -- $1 billion per year – on IT systems to handle future transactions. This new infrastructure paved the way for Jeff Bezos to launch the first online bookstore.

How to know if a visionary strategy is right for you:

• Your environment is predictable, yet malleable.
• You work in new industries or disrupted ones, i.e., the rise of the sharing economy (like Airbnb and Uber)
• Key indicators include high growth potential, no direct competition, limited regulation

How to know if a visionary strategy is successful:

• You will be first to market and achieve new user customer satisfaction

Essential trap to avoid:

• Wrong Vision: It can be easy to obsess over a passing trend or an idea that doesn't offer a legitimate opportunity.

The visionary approach is only appropriate for so long in a company's life cycle. After all, a great idea usually spawns great competitors. Once you've done your job changing the industry forever, it's time to change your strategy depending on the current environment.

Shaping

Be the orchestrator

When an industry is new or recently disrupted, dynamic, and highly fragmented, the time could be suitable for shaping business strategy. Barriers to entry are often low, products are new to regulators, and the future is bright but uncertain.

Disruptive innovations like social networks or smartphones can thrust a previously stable, non-malleable industry into a new phase of unpredictability.

The Alibaba Group began with a B2B portal in 1999 to connect Chinese manufacturers with foreign customers. Its consumer variant, Taobao, launched just as internet browsers became more commonplace in the household and broadband replaced dial-up connections. Alibaba handled larger transaction volumes than Amazon and eBay combined by 2013 and accounted for over half of all Chinese parcel mail.

How to know if a shaping strategy is right for you:

• Your environment is unpredictable and malleable
• Your industry could be software or smartphone apps
• Key indicators include fragmentation, no dominant player or platform, shapeable regulation

How to know if a visionary strategy is successful:

• You achieve ecosystem growth and profitability and new product viability index

Essential traps to avoid:

• Over-managed ecosystem: Control key elements like profitability and scale, but avoid dominating your ecosystem, lest it reduces variety and dynamism.

Implement a shaping strategy at all company levels, from culture to leadership and beyond. The point is to be the catalyst for innovation both inside and outside of your firm. Google holds developer conferences regularly to provide training feedback and encourages collaboration.

Renewal

Be viable

When an established business finds itself in a harsh environment, it should consider a renewal strategy. This temporary solution allows a firm to react, economize, and – when things calm down – focus on growth once again.

American Express survived the 2008 recession with the mantra, "Stay liquid, profitable, and invest selectively to grow the business." Then-CEO Ken Chenault said that although he launched a swift and aggressive restructuring program, he still had to be thoughtful and be governed by both short- and long-term considerations for the firm.

Chenault encouraged the company not to "hunker in the bunker" but rather "survive and grow." Businesses undergoing renewal should focus on emerging better than ever.

A successful renewal strategy requires a two-step approach:

1. Economize: restore financial viability and close performance gaps
2. Pivot to growth: define a new strategic phase of transformation and reassess the current strategy approach

How to know if a renewal strategy is right for you:

• Your environment is harsh
• Your industry is in a similar position to financial institutions in the 2008-2009 crisis
• Key indicators include low growth, decline, and crisis; restricted financing, negative cash flows

How to know if a renewal strategy is successful:

• If you achieve cost savings and an increase in cash flow.

Essential traps to avoid:

• Cost-cutting without a second phase: Don't "burn the furniture" by continually cutting costs instead of looking to the future. Many firms declare victory after phase one but fail to develop a second phase of innovation and growth.

Leadership is critical to a renewal strategy. Initially, these leaders will have to make the tough decisions while offering hope through clear, optimistic messaging about the long-term plan. While everyone is busy saving the company, leaders must picture the end game and jump-start innovation to facilitate growth.

Bonus strategy: ambidextrous

Be flexible

Ambidexterity is not a "color" on our symbolic palette, but rather a technique for mixing those colors to achieve the desired result.

Global businesses operate in multiple business environments that cannot operate with a "one size fits all" strategy. As a result, each unique geography, market, and product requires a different strategy or combination.

PepsiCo pursues a classical scale and positioning approach but mixes strategies depending on the situation. The company employs an adaptive strategy that responds to shifts in consumer behavior. Products and services test in one country before rolling out on a global scale.

As former PepsiCo CEO Indra Nooyi said, any large company must both run and reinvent the business in each business it operates inside.

Ambidextrous strategy is challenging to implement because it requires a combination of measures that can be diametrically opposed. Research by The Boston Consulting Group (BCG) found that, between 1960-2011, less than two percent of U.S. firms managed to outperform during both stable and turbulent periods simultaneously.

The four approaches to ambidexterity:

1. Separation: Deliberately manage which approach to strategy belongs in each subunit; division, function, etc.
2. Switching: Manage a shared pool of resources and switch between approaches over time or mix them as needed.
3. Self-organization: Each unit chooses which strategic approach to implement.
4. External ecosystem: Different approaches are sourced externally through an ecosystem of players that self-organize.

Essential traps to avoid:

• As with the adaptive strategy, beware of planning for the unplannable. Avoid being too rigid in your approach.

Be open to discovery. Apple uses several approaches depending on its function. The Apple Store is a shaping approach; the iPhone was and continues to be visionary while shaping the manufacturers' ecosystem. The company adapts to changing needs and those it anticipates, too, while scaling the company to remain a global leader.