Strategy is a competitive game, always evolving in response to competition. But the scale of changes in the technological, social and natural environment is such that business strategy will have to be qualitatively reinvented for new circumstances. This article discusses six factors driving these changes: 1) dynamism, 2) uncertainty, 3) contingency, 4) connectedness, 5) contextuality, and 6) cognition.
In the 1970s, corporate strategy was widely seen as the management of an investment portfolio, in which the firm allocated capital to different business units as efficiently as possible. Part of the idea was that corporate executives were in a better position than financial investors to make informed decisions about allocating capital between business opportunities. And given the scarcity of capital markets, they had to carefully balance the businesses that generated cash with those that consumed it.
But from the 1980s, as capital markets became more efficient at financing start-up companies, corporate strategy came to be seen as “value management”, in which the work of business leaders business was less about acting as a proxy investor and more about extracting maximum value from the business in hand. In this worldview, investing in new businesses was tied to the concept of synergies – in terms of real assets and capabilities – between companies and it was the responsibility of the head office to maximize synergies in its portfolio of companies and to apply the right style of supervision, from the non-interventionist owner to the independent manager.
But the business environment has continued to evolve and places new and different demands on business strategists. Six factors are behind these changes
Competitive advantages no longer last as long as they once did, as evidenced by the acceleration in the rate of competitive decay, which measures how quickly market and operational returns regress towards the mean, has accelerated markedly in recent years. . Concretely, the result is that the churn rate of companies on lists such as Fortune 500 has increased significantly.
A consequence of this is that active business portfolio management is again important: companies must ensure that their business portfolios are continuously rebalanced in order to maintain growth expectations. A second consequence is that new businesses have to be created at a higher rate, which forces large companies to behave more like entrepreneurs in some part of their activity and to develop the skills and structures necessary to do so. A third consequence is that turnaround or transformation has become a predominant and strategic capability to repair or renew businesses that have experienced competitive disruptions, reached maturity, or fallen into decline.
Due to the technological revolution and other factors, business plans have become less predictable. This is set to continue with new waves of technological disruptions such as AI sweeping through the corporate economy. Furthermore, it seems likely that climate-based technologies and business models will have at least as great an effect.
The consequence for business strategy is a whole new logic of scale advantage. In yesterday’s more stable environment, scale provided an advantage by creating efficiencies, but in environments with high rates of change, scale can potentially help businesses manage risk through better access to information, maintain operational and financial buffers, and conduct rapid experimentation. These capabilities combine to create a new type of dynamic advantage: resilience, which provides long-term performance during uncertain times.
As indicated, on average, the business environment has become more dynamic and uncertain. But if we look at the disaggregated picture of companies and industries, the variety of competitive environments that companies – and units within companies – also face has also increased. Depending on how uncertain, malleable or tough each is, companies must take very different approaches to strategizing, each with their own distinct processes and tools. These approaches include: classical strategy (in which companies compete on scale and position), adaptive strategy (they compete on their ability to learn), vision-driven strategy (they compete on imagination, creativity and innovation), strategy shaping (they compete on their ability to collaborate with partners), or turnaround (they compete on their ability to renew a business). Therefore, business strategy must cultivate the capabilities to apply and balance these diverse frameworks, choosing the right strategic approach for each business and creating a common platform to operationalize them.
Only 10 years ago, the list of the world’s largest companies was dominated by banks and oil companies. The same list is today dominated by orchestrators of digital ecosystems like Amazon, who create an offer in collaboration with hundreds or thousands of other companies. This profoundly changes the role of corporate strategy since the diversity of offerings and capabilities that contribute to a company’s value creation can now reside beyond corporate boundaries. The goal of corporate strategy becomes to create a privileged position within a privileged ecosystem, blurring the line between corporate strategy and business strategy. More broadly, strategy has become more open to external influence and collaboration, even for off-platform companies.
For much of the past 50 years, business success has been determined by a relatively small set of variables: customer, product, competitor and investor. However, the sheer size of the corporate footprint, the size of individual companies and growing concerns about societal and planetary externalities no longer allow managers to take such a simplified view: companies must now demonstrate their purpose, contribution social responsibility, their reliability and their respect for the environment. responsibility. This not only involves questions of intent, measurement, compliance and communication, but also increasingly questions of competitive advantage. A business strategy must now create credibility, social contribution and generate benefits by creatively dealing with new social and ecological constraints, as well as taking into account traditional variables.
Until recently, business strategy was largely based on human analysis and decision making. But machine learning has now reached a level of sophistication that rivals or exceeds the capabilities of human experts for an increasing range of tasks. This has profound implications for business strategy. Initially, the cognitive advantage of companies becomes a potential axis of competition. This is determined not only by its ability to effectively deploy AI in every business, but also to shift the focus of human minds to more advantaged areas like ethics, empathy, and creativity. Likewise, companies will compete to design and orchestrate new types of “bionic” organizations that synergistically combine human and machine cognition.
Strategy is a competitive game, always evolving in response to competition. But the scale of changes in the technological, social and natural environment is such that business strategy will have to be qualitatively reinvented for new circumstances.