October 16, 2015

When the Rules No Longer Apply

Consider this absurd scenario: You’re a high school athletics director and you’ve just learned that the school district canceled all the traditional sports programs.  No football, soccer, basketball, baseball, etc. The district is replacing them with a series of team competitions that may be a traditional sport or a hybrid sport. You’ll know beforehand the time and place for each competition, but not the actual competition. How do you plan for each competition if you don’t know what it is?

This sounds crazy, but businesses often face similar scenarios when a new aggressive startup company successfully launches a new “disruptive” product or service or figures out a better way to make or deliver an existing product or service. Disruptive technologies and services make it hard to predict and plan. And yet, businesses like India’s software giant, Tata Consultancy Services, learn to adapt and thrive in such environments.

Sizing up an environment is necessary for strategic thinking. “Strategy is, in essence, problem solving, and the best approach depends upon the specific problem at hand,” Martin Reeves, Knut Haanaes, and Janmejaya Sinha wrote in their new book, Your Strategy Needs a Strategy: How to Choose and Execute the Right Approach.  But “your environment dictates your approach to strategy. You need to assess the environment and then match and apply the appropriate approach,” they added.
Assessing the environment based on control (i.e., malleability) and certainty (i.e., unpredictability) reveals five possible environmental scenarios a business could experience during the course of its life:
  • There’s the classical environment in which you can predict what will happen tomorrow but not change it. If you’re an automaker, for example, you know you can increase profits by cutting production costs or making cars that set them apart from your competitors. But you can’t control what your competitors do. You can predict, but you can’t control the environment.
  • In an adaptive environment, you can’t predict what will happen or change it if you could. For example, information technology products are changing constantly, and if you’re an electronics manufacturer, your best bet is to constantly experiment with new ideas, rapidly capitalizing on your successes and learning from your failures.
  • You can predict what will happen if you’re the first to come out with a new product or service, and in the process, change the environment by creating a new market or disrupting an existing one (i.e., visionary environment). Look at Uber and its business model rewriting the rules for livery service.
  • Sometimes you can’t predict how a new or existing product or service will play out in the market, but you can change the environment in such a way to guarantee its success. One way to do this is to put in place people, facilities, and technology needed to make, sell, and support the product or service, a strategy that often involves collaborating with key stakeholders (i.e., shaping environment). That’s how Denmark’s Novo Nordisk built its Chinese insulin operation in the 1990s.
  • If your environment starts to change, you’re going to need time to figure out how it’s changing. The uncertainty and declining sales could be harsh, requiring you to “conserve and free up resources to ensure [the business’s] viability” (i.e., harsh environment).
Public policy analysts could learn much from Your Strategy Needs a Strategy, even though the authors wrote it mainly for business strategists. For fiscal analysts trying to project tax revenues, the book suggests how environmental changes affect sales, capital investments, and other decisions that ultimately affect revenue flows. For economic development policy analysts, the book provides a framework for analyzing the challenges facing a state’s key industry sectors.