Over 50 executives attended a recent IMD Discovery Event on approaches to strategy. Participants gained insights into how long-lasting companies thrive and renew themselves, often by balancing exploitation and exploration strategies. The event also touched on new business models in an era of technological disruption.
A common definition describes strategy as a tool or set of processes aimed at creating sustainable competitive advantage. The traditional approach to strategy involves analysis, planning and execution, but this is no longer sufficient. Driven by globalization, technology and the social feedback loops on social media, the business environment has changed drastically over the last 20 years. This has led to a massive proliferation of strategy frameworks – over 114 by 2012.1 The business life cycle is now twice as fast, the profitability of industry leaders is reduced by half, and the longevity of winners is much shorter. With large organizations operating in multiple markets and having multiple lines of business, each working in a specific environment and facing different conditions that change over time, strategy boils down to choosing the right approach to winning in the right part of the business at the right time.
The strategy palette
A useful way to present the diverse business environments and the optimal strategic approaches is through the strategy palette.2 It uses three dimensions: predictability (can we predict and plan it?), malleability (can we shape it?) and harshness (can we survive it?). The resulting five types of business environments differentiate the strategy approach best suited for each (Figure 1).
This is host to highly predictable industries with strong brands, high regulation and limited technology change, where winning means being big and efficient. A classical strategy – analyze, plan and execute – is the optimal choice for wining in this predictable environment. Typical examples of companies in this domain include Coca-Cola and Mars.
This is characterized by unpredictability and technological disruption. Due to high uncertainty, classical planning becomes inefficient and companies can win only by being flexible and experimentation-oriented. A good example is Zara, which is very adaptive, experiments a lot and produces in small batches.
Companies and entrepreneurs that operate in predictable industries yet focus on innovations, deploying a strategy that emphasizes visioning and implementation are typical of this setting. Leaders of such companies are visionaries who are not locked into current solutions, traditional ways of thinking. They “see patterns where others see noise.” IKEA is a visionary company that disrupted the industry and does everything to stay ahead.
Here, despite unpredictability, innovators create an ecosystem of many companies that collectively reshape the industry. “We can’t predict the future, but we can create the game” is the mentality that prevails in such companies, and their strategy is all about influencing, orchestrating and coevolving. Alibaba, Amazon and Apple, with their ecosystems of companies, are excellent examples of players in this space.
This is characterized by harsh conditions, when a company needs transformation. The strategy should aim not to create competitive advantage but to ensure the company’s survival, by restructuring to free up and redistribute resources. Only when the survival goal has been achieved should the company attempt to deploy another strategy. American Express and Carlsberg Group are good examples of companies that underwent major transformation – and then renewal – when weakening performance initially threatened their very existence.
Evidence from over 200 transformations shows that the majority of companies start transforming only in times of turbulence and underperformance. The first step is operational turnaround (cost cutting, reallocation of internal resources, etc), which lasts about six months until the company recovers and reaches industry-average performance. Yet most companies undergoing transformation cannot sustain the result in the long run, as they tend to stop after the first phase without picking a new strategic approach for innovation and growth.
Successful business renewal
Ongoing IMD research shows that out of the top 50 Fortune 500 companies in the 1970s, only 16 made it to the 2016 list, successfully renewing themselves. All of these companies:
- Balance exploration and exploitation well (see below), though differently.
- Remain market-focused and driven from the outside in, rather than becoming more introverted.
- Are not first movers, but are always early movers. If needed, they make large acquisitions.
- Embrace disruptions without falling into the success trap. Many have in fact disrupted themselves.
- Adopt a portfolio perspective to “owning” their market space. They constantly scan for new ideas, megatrends and key needs, and are not afraid to exit profitable businesses and markets if they will not serve long-term interests.
- Have a culture of building capabilities as they transform.
- Make efforts in the digital and – perhaps surprisingly – sustainability areas.
José Lopez stressed two additional factors contributing to a company’s long-term success: having a profound vision and purpose beyond mere numbers; and the ability to say no to things, in order to find the right opportunity. A crucial step in bringing the vision to reality is operationalizing, described by Lopez as “intending the unintended.” Without it, short-term goals and a narrow focus on numbers tend to overtake mid- and long-term goals. Nespresso, for example, took an intended decision (for technical and strategic reasons) not to sell its capsules in retail outlets, which led to the “unintended” consequence of its product becoming the reference in coffee.
When participants were asked to name successful companies, along with factors that would contribute to their survival over the next 20 years, an interesting list emerged (Table 1). It also triggered a discussion on how success is defined when Tesla was mentioned independently by two groups. Tesla has yet to make a profit, but the value of its future growth is huge.