Globalization, new technologies, and greater transparency have combined to upend the business environment and give many CEOs a deep sense of unease. Just look at the numbers. Since 1980 the volatility of business operating margins, largely static since the 1950s, has more than doubled, as has the size of the gap between winners (companies with high operating margins) and losers (those with low ones).
Market leadership is even more precarious. The percentage of companies falling out of the top three rankings in their industry increased from 2% in 1960 to 14% in 2008. What’s more, market leadership is proving to be an increasingly dubious prize: The once strong correlation between profitability and industry share is now almost nonexistent in some sectors. According to our calculation, the probability that the market share leader is also the profitability leader declined from 34% in 1950 to just 7% in 2007. And it has become virtually impossible for some executives even to clearly identify in what industry and with which companies they’re competing.
All this uncertainty poses a tremendous challenge for strategy making. That’s because traditional approaches to strategy—though often seen as the answer to change and uncertainty—actually assume a relatively stable and predictable world.
Think about it. The goal of most strategies is to build an enduring (and implicitly static) competitive advantage by establishing clever market positioning (dominant scale or an attractive niche) or assembling the right capabilities and competencies for making or delivering an offering (doing what the company does well). Companies undertake periodic strategy reviews and set direction and organizational structure on the basis of an analysis of their industry and some forecast of how it will evolve.
But given the new level of uncertainty, many companies are starting to ask:
How can we apply frameworks that are based on scale or position when we can go from market leader one year to follower the next?
When it’s unclear where one industry ends and another begins, how do we even measure position?
When the environment is so unpredictable, how can we apply the traditional forecasting and analysis that are at the heart of strategic planning?
When we’re overwhelmed with changing information, how can our managers pick up the right signals to understand and harness change?
When change is so rapid, how can a one-year—or, worse, five-year—planning cycle stay relevant?