Strategy usually begins with an assessment of your industry. Your choice of strategic style should begin there as well. Although many industry factors will play into the strategy you actually formulate, you can narrow down your options by considering just two critical factors: predictability (How far into the future and how accurately can you confidently forecast demand, corporate performance, competitive dynamics, and market expectations?) and malleability (To what extent can you or your competitors influence those factors?).
Put these two variables into a matrix, and four broad strategic styles—which we label classical, adaptive, shaping, and visionary—emerge. (See the exhibit “The Right Strategic Style for Your Environment.”) Each style is associated with distinct planning practices and is best suited to one environment. Too often strategists conflate predictability and malleability—thinking that any environment that can be shaped is unpredictable—and thus divide the world of strategic possibilities into only two parts (predictable and immutable or unpredictable and mutable), whereas they ought to consider all four. So it did not surprise us to find that companies that match their strategic style to their environment perform significantly better than those that don’t. In our analysis, the three-year total shareholder returns of companies in our survey that use the right style were 4% to 8% higher, on average, than the returns of those that do not.
Let’s look at each style in turn.
Classical. When you operate in an industry whose environment is predictable but hard for your company to change, a classical strategic style has the best chance of success. This is the style familiar to most managers and business school graduates—five forces, blue ocean, and growth-share matrix analyses are all manifestations of it. A company sets a goal, targeting the most favorable market position it can attain by capitalizing on its particular capabilities and resources, and then tries to build and fortify that position through orderly, successive rounds of planning, using quantitative predictive methods that allow it to project well into the future. Once such plans are set, they tend to stay in place for several years. Classical strategic planning can work well as a stand-alone function because it requires special analytic and quantitative skills, and things move slowly enough to allow for information to pass between departments.
Oil company strategists, like those in many other mature industries, effectively employ the classical style. At a major oil company such as ExxonMobil or Shell, for instance, highly trained analysts in the corporate strategic-planning office spend their days developing detailed perspectives on the long-term economic factors relating to demand and the technological factors relating to supply. These analyses allow them to devise upstream oil-extraction plans that may stretch 10 years into the future and downstream production-capacity plans up to five years out. It could hardly be otherwise, given the time needed to find and exploit new sources of oil, to build production facilities, and to keep them running at optimum capacity. These plans, in turn, inform multiyear financial forecasts, which determine annual targets that are focused on honing the efficiencies required to maintain and bolster the company’s market position and performance. Only in the face of something extraordinary—an extended Gulf war; a series of major oil refinery shutdowns—would plans be seriously revisited more frequently than once a year.
Adaptive. The classical approach works for oil companies because their strategists operate in an environment in which the most attractive positions and the most rewarded capabilities today will, in all likelihood, remain the same tomorrow. But that has never been true for some industries, and, as has been noted before in these pages (“Adaptability: The New Competitive Advantage,” by Martin Reeves and Mike Deimler, HBR July–August 2011), it’s becoming less and less true where global competition, technological innovation, social feedback loops, and economic uncertainty combine to make the environment radically and persistently unpredictable. In such an environment, a carefully crafted classical strategy may become obsolete within months or even weeks.
Companies in this situation need a more adaptive approach, whereby they can constantly refine goals and tactics and shift, acquire, or divest resources smoothly and promptly. In such a fast-moving, reactive environment, when predictions are likely to be wrong and long-term plans are essentially useless, the goal cannot be to optimize efficiency; rather, it must be to engineer flexibility. Accordingly, planning cycles may shrink to less than a year or even become continual. Plans take the form not of carefully specified blueprints but of rough hypotheses based on the best available data. In testing them out, strategy must be tightly linked with or embedded in operations, to best capture change signals and minimize information loss and time lags.
Specialty fashion retailing is a good example of this. Tastes change quickly. Brands become hot (or not) overnight. No amount of data or planning will grant fashion executives the luxury of knowing far in advance what to make. So their best bet is to set up their organizations to continually produce, roll out, and test a variety of products as quickly as they can, constantly adapting production in the light of new learning.
The Spanish retailer Zara uses the adaptive approach. Zara does not rely heavily on a formal planning process; rather, its strategic style is baked into its flexible supply chain. It maintains strong ties with its 1,400 external suppliers, which work closely with its designers and marketers. As a result, Zara can design, manufacture, and ship a garment to its stores in as little as two to three weeks, rather than the industry average of four to six months. This allows the company to experiment with a wide variety of looks and make small bets with small batches of potentially popular styles. If they prove a hit, Zara can ramp up production quickly. If they don’t, not much is lost in markdowns. (On average, Zara marks down only 15% of its inventory, whereas the figure for competitors can be as high as 50%.) So it need not predict or make bets on which fashions will capture its customers’ imaginations and wallets from month to month. Instead it can respond quickly to information from its retail stores, constantly experiment with various off erings, and smoothly adjust to events as they play out.
Zara’s strategic style requires relationships among its planners, designers, manufacturers, and distributors that are entirely different from what a company like ExxonMobil needs. Nevertheless, Exxon’s strategists and Zara’s designers have one critical thing in common: They take their competitive environment as a given and aim to carve out the best place they can within it.
Shaping. Some environments, as internet software vendors well know, can’t be taken as given. For instance, in new or young high-growth industries where barriers to entry are low, innovation rates are high, demand is very hard to predict, and the relative positions of competitors are in flux, a company can often radically shift the course of industry development through some innovative move. A mature industry that’s similarly fragmented and not dominated by a few powerful incumbents, or is stagnant and ripe for disruption, is also likely to be similarly malleable.
In such an environment, a company employing a classical or even an adaptive strategy to find the best possible market position runs the risk of selling itself short, being overrun by events, and missing opportunities to control its own fate. It would do better to employ a strategy in which the goal is to shape the unpredictable environment to its own advantage before someone else does—so that it benefits no matter how things play out.
Like an adaptive strategy, a shaping strategy embraces short or continual planning cycles. Flexibility is paramount, little reliance is placed on elaborate prediction mechanisms, and the strategy is most commonly implemented as a portfolio of experiments. But unlike adapters, shapers focus beyond the boundaries of their own company, often by rallying a formidable ecosystem of customers, suppliers, and/or complementors to their cause by defining attractive new markets, standards, technology platforms, and business practices. They propagate these through marketing, lobbying, and savvy partnerships. In the early stages of the digital revolution, internet software companies frequently used shaping strategies to create new communities, standards, and platforms that became the foundations for new markets and businesses.
That’s essentially how Facebook overtook the incumbent MySpace in just a few years. One of Facebook’s savviest strategic moves was to open its social-networking platform to outside developers in 2007, thus attracting all manner of applications to its site. Facebook couldn’t hope to predict how big or successful any one of them would become. But it didn’t need to. By 2008 it had attracted 33,000 applications; by 2010 that number had risen to more than 550,000. So as the industry developed and more than two-thirds of the successful social-networking apps turned out to be games, it was not surprising that the most popular ones—created by Zynga, Playdom, and Playfish—were operating from, and enriching, Facebook’s site. What’s more, even if the social-networking landscape shifts dramatically as time goes on, chances are the most popular applications will still be on Facebook. That’s because by creating a flexible and popular platform, the company actively shaped the business environment to its own advantage rather than merely staking out a position in an existing market or reacting to changes, however quickly, after they’d occurred.
Visionary. Sometimes, not only does a company have the power to shape the future, but it’s possible to know that future and to predict the path to realizing it. Those times call for bold strategies—the kind entrepreneurs use to create entirely new markets (as Edison did for electricity and Martine Rothblatt did for XM satellite radio), or corporate leaders use to revitalize a company with a wholly new vision—as Ratan Tata is trying to do with the ultra-affordable Nano automobile. These are the big bets, the build-it-and- they-will-come strategies.
Like a shaping strategist, the visionary considers the environment not as a given but as something that can be molded to advantage. Even so, the visionary style has more in common with a classical than with an adaptive approach. Because the goal is clear, strategists can take deliberate steps to reach it without having to keep many options open. It’s more important for them to take the time and care they need to marshal resources, plan thoroughly, and implement correctly so that the vision doesn’t fall victim to poor execution. Visionary strategists must have the courage to stay the course and the will to commit the necessary resources.
Back in 1994, for example, it became clear to UPS that the rise of internet commerce was going to be a bonanza for delivery companies, because the one thing online retailers would always need was a way to get their offerings out of cyberspace and onto their customers’ doorsteps. This future may have been just as clear to the much younger and smaller FedEx, but UPS had the means—and the will—to make the necessary investments. That year it set up a cross-functional committee drawn from IT, sales, marketing, and finance to map out its path to becoming what the company later called “the enablers of global e-commerce.” The committee identified the ambitious initiatives that UPS would need to realize this vision, which involved investing some $1 billion a year to integrate its core package-tracking operations with those of web providers and make acquisitions to expand its global delivery capacity. By 2000 UPS’s multibillion-dollar bet had paid off: The company had snapped up a whopping 60% of the e-commerce delivery market.