Strategy is a competitive game, which always evolves in response to competition. But the magnitude of the changes in the technological, social, and natural environment are such that corporate strategy will need to be qualitatively reinvented again for new circumstances. This article discusses six factors are driving these changes: 1) dynamism, 2) uncertainty, 3) contingency, 4) connectedness, 5) contextuality, and 6) cognition.
Back in the 1970s, corporate strategy was largely seen as akin to managing an investment portfolio, in which the corporation assigned capital to different business units as efficiently as possible. The idea was in part that corporate managers were better placed to make well-informed decisions about allocating capital across business opportunities than financial investors. And given thinner capital markets, they needed to carefully balance businesses that generated cash with businesses that consumed it.
But from the 1980s, as capital markets become more effective at financing early-stage businesses, corporate strategy came to be seen as “value management,” in which the job of corporate managers was less about acting as a proxy investor and more about extracting the maximum value from the businesses in hand. In this world-view, investment in new businesses was tied to the concept of synergies — in terms both of real assets and of capabilities — across businesses and it was the responsibility of the corporate center to maximize synergies across its portfolio of businesses and apply the right style of oversight, from hands-off owner through to hands-on manager.
But the business environment has continued to evolve, and it is placing new and different demands on corporate strategists. Six factors are driving these changes
Competitive advantages do not last as long as they are used to, as reflected in the acceleration of the competitive fade rate, which measures how quickly market and operational returns regress to the mean, has accelerated markedly in recently years. In practical terms, the result is that the churn rate of companies on lists like the Fortune 500 has increased remarkably.
One consequence of this is that active management of the business portfolio is again important: companies need to ensure that their business portfolios are continually rebalanced in order to maintain growth expectations. A second consequence is that new businesses need to be seeded at a higher rate, requiring large companies to behave more like entrepreneurs in part of their business, and to build the requisite skills and structures to ensure this. A third consequence is that turnaround or transformation has become a prevalent and strategic capability for fixing or renewing businesses which have experienced competitive disruption, reached maturity, or fallen into decline.
As a product of the technology revolution and other factors, business plans have become less predictable. This is expected to continue with further waves of technological disruption like AI washing 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 corporate strategy is an entirely new logic for scale advantage. In yesterday’s more stable environment, scale conferred advantage through creating efficiencies, but in environments with high rates of change, scale can potentially help companies manage risk through superior access to information, to maintain operational and financial buffers, and to conduct rapid experimentation. These capabilities combine to create a new dynamic type of advantage: resilience, which delivers long-term performance through uncertain periods.
As noted, on average the business environment has become more dynamic and uncertain. But if we look at the disaggregated picture across companies and industries, the variety of competitive environments that businesses — and units within firms — face has also increased. Depending on the uncertainty, malleability or harshness of each, corporations have to adopt very different approaches to strategy-making, each with its distinct processes and tools. These approaches include: classical strategy (in which firms compete on scale and position), adaptive strategy (they compete on their ability to learn), vision-driven strategy (they compete on imagination, creativity, and innovation), shaping strategy (they compete on their ability to collaborate with partners), or turnaround (they compete on their ability to renew a business). As a result, corporate strategy must cultivate capabilities to apply and balance these diverse frameworks, picking the right approach to strategy to each business and creating a common platform for operationalizing them.
Only 10 years ago, the list of the world’s largest companies was dominated by banks and oil companies. The same list today is dominated by digital ecosystem orchestrators like Amazon, which create an in collaboration with hundreds or thousands of other enterprises. This profoundly changes the role of corporate strategy since the diversity of offerings and capabilities that contribute to a firm’s value creation can now reside beyond the boundaries of the firm. The goal of corporate strategy becomes to create an advantaged position within an advantaged ecosystem, blurring the boundary between corporate and business strategy. More broadly, strategy has become more open to external influence and collaboration, even for non-platform businesses.
For a great part of the last 50 years, succeeding in business was determined by a relatively small set of variables: customer, product, competitor and investor. However, the sheer size of the footprint of business, the size of individual corporations, and concerns about social and planetary externalities no longer permit managers to adopt such a simplified view: corporation purposes now need to demonstrate, social contribution, trustworthiness, and ecological responsibility. This not only matters of intent, measurement, compliance and communication, but also involves issues of competitive advantage. A corporate strategy must now create credibility, social contribution, and generate advantage by dealing creatively with new social and ecological constraints, as well as deliver on the traditional variables.
Until recently business strategy was largely about human analysis and decision making. But machine learning has now reached a level of sophistication that rivals or exceeds human expert capabilities for an increasing scope of tasks. This has profound implications for corporate strategy. To begin with, the cognitive advantage of corporations becomes a potential axis of competition. This is determined not only by its ability to deploy AI in each business effectively, but also to shift the focus of human minds to more uniquely advantaged areas like ethics, empathy, and creativity. Similarly, companies will compete on designing and orchestrating new types of “bionic” organization that combine human and machine cognition synergistically.
Strategy is a competitive game, which always evolves in response to competition. But the magnitude of the changes in the technological, social, and natural environment are such that corporate strategy will need to be qualitatively reinvented again for new circumstances.