Fortunately, succumbing to overexploitation is far from inevitable. For incumbents in any industry ripe for disruption, we offer five steps.
1. Understand how change impacts each part of your business. The Strategy Palette is a useful tool in this regard. (See Exhibit 3.) Auto industry incumbents, like those in many industries, have until recently faced a classical environment, which is stable and predictable, and where scale is an advantage. The auto industry now faces increasing unpredictability from changes in technology, consumer trends, and regulations. The same forces also create greater malleability and the opportunity to shape industry evolution by influencing technology, customer preferences, and regulatory standards, often through collaboration with other players.
2. Choose the right approaches to strategy and execution. Having understood the strategic environments in which they operate, firms must employ the appropriate approach to strategy and execution for each. The classical approach, built on analysis and planning, works well in stable environments, which are highly predictable. But unpredictable or malleable environments require very different approaches and capabilities.
For example, auto incumbents may find that the classical approach is still appropriate for their core businesses. But new businesses such as autonomous and alternative-fuel vehicles may require adaptive, visionary, or shaping approaches.
3. Build an adaptive capability. Firms in unpredictable environments would be ill advised to set a strategic direction based on an unreliable “forecast.” Instead, they need to substitute experimentation for prediction in order to place and manage bets on the future.
A portfolio of experiments lets companies quickly test and refine new products and business models and thus adjust rapidly to changing market conditions. Success with such adaptive experimentation requires switching from the classical mindset of “be big” to the adaptive imperative to “be fast.”
To do that, companies must get better at exploiting change signals to inform bets and challenge long-held assumptions to uncover blind spots. Adaptive enterprises monitor experiments using metrics suited to the “be fast” approach, such as time to market, cost per experiment, and experimental yield. Firms must also capture and exploit lessons from both successes and failures.
Telenor, the Norwegian telecom company, is a classical incumbent that built an adaptive capability. As the industry evolved from traditional voice to data and Internet, scale advantage diminished. Telenor responded with adaptive experimentation, shortening its planning cycle and focusing on innovation and speed to market. It successfully navigated the industry transition, launching several successful data-oriented offerings.
4. Build a shaping capability. Incumbents can avoid being a victim of change by using their reach and influence to become instead an orchestrator of change. Orchestrators coordinate a diverse ecosystem of players that share their capabilities, distribute risk, and accelerate market development.
Orchestration requires a shift in mindset for incumbents, from exclusivity to openness and from control to flexibility. To build a healthy network capable of adapting to change, orchestrators should reach beyond industry bounds to find new partners that can make unique contributions. They must also create mutual trust and allow the free flow of ideas and information. This requires creating win-win opportunities for participants and focusing on holistic metrics such as the growth or profitability of the entire network.
We already see signs of this new mindset in the auto industry. For example, Toyota followed Tesla’s lead by opening its hydrogen fuel cell patents, sacrificing complete control over IP in order to bring more participants into its ecosystem. And Ford recently communicated the need for nontraditional partners, such as Google. As Don Butler, Ford’s executive director of connected vehicles and services, said, “We compete but in other senses we are partners. It’s something we have to become accustomed to.”
5. Create the organizational context for ambidexterity. The ability to exploit the present while exploring the future calls for an organizational context that supports both old and new businesses and allows for adjustment as conditions change.
Firms should consider separating exploratory business units from exploitative core activities and giving them differentiated “performance contracts” with tailored goals, metrics, and incentives. A good example is BMW’s Project i, which manufactures plug-in electric vehicles as a sub-brand of BMW. As its chief, Ulrich Kranz, describes, “I had the freedom to assemble a team the way I wanted. The project was not tied to one of the company’s brands so it could tackle any problem. We were allowed to completely break away from the existing structures.”
In especially fast-changing or uncertain situations, firms should avoid rigid structural solutions and instead encourage free information flow among employees and with customers and competitors. Alibaba is a textbook example: it deals with industry turbulence using self-steering teams. When a team member sees a new opportunity, he or she can initiate a co-creation process, in which employees develop new business ideas directly with customers. This fluidity allows the business to continually match its approach to a changing market.
The road ahead presents both tremendous opportunities and real dangers for incumbents. In the many industries facing disruption from creative and nimble players, incumbents can survive if they become truly ambidextrous. That capability will help them not only fend off attacks in the near term but also position themselves for future growth and success.
For further discussion of Telenor, based on interviews with former CEO Jon Fredrik Baksaas and other sources, see Your Strategy Needs a Strategy: How to Choose and Execute the Right Approach, Harvard Business Review Press, 2015.
Arjun Kharpal, “We Need to Think Like a Software Company: Ford,” CNBC, November 2015.
Eric Loveday, “How and Why the BMW Project i Team Grew from 7 Individuals in 2007 to Several Hundred Today,” Inside EVs, May 2013.
See Martin Reeves, Ming Zeng, and Amin Venjara, “The Self-Tuning Enterprise,” Harvard Business Review, June 2015.