Here is an excerpt from another “classic” article featured online by The McKinsey Quarterly, published by McKinsey & Company, and written by Hugh Courtney. To read the complete article, check out the abundance of other free resources, obtain information about the firm, and sign up for email alerts, please click here.
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In extremely uncertain environments, shaping strategies may deliver higher returns, with lower risk, than they do in less uncertain times.
Shape or adapt? For years, executives have regarded the question as perhaps their most fundamental strategic choice. Is it better for a company’s competitive position to try to influence, or even determine, the outcome of crucial and currently uncertain elements of an industry’s structure and conduct? Or is the wiser course to scope out defensible positions within an industry’s existing structure and then to move with speed and agility to recognize and capture new opportunities when the market changes?
As globalization, digitization, and unfettered capital markets raise levels of uncertainty and rewrite definitions of opportunities and risks, this basic strategic choice has morphed into a more complex and high-stakes dilemma. The right strategic bets can return far higher payoffs, far more quickly; the wrong ones carry a much higher risk of systemic failure. Betting big today may fundamentally reshape a market on a global scale to the advantage of a company or quickly produce losses that can throw it into bankruptcy. A company may avoid foolhardy mistakes by waiting for uncertainty to diminish, or it may squander the chance to lay claim to first-mover advantages.
The truth is that no dominant solution exists. You might argue that any good strategy should attempt to shape and adapt by specifying actions designed to increase the probability of some outcomes while simultaneously preparing for others. That approach may work in some cases. Yet the actions a company must take to shape the market are often inconsistent with those needed to adapt. Consider Qualcomm. For the past few years, it has been trying to move the wireless-telephone industry toward its CDMA (Code Division Multiple Access) technology. CDMA, a technical standard that determines how information travels and communicates through a wireless network, is competing with other technologies to become the industry standard for next-generation mobile phones.
Qualcomm realizes that if it wants to shape the industry, it must build a coalition of supporters around the CDMA technology. This approach involves cutting deals with wireless companies to get them on board and convincing consumers that CDMA is superior. To win the standards battle, Qualcomm must be totally committed to the cause or at least look as though it were. If the company tried to hedge its bets by producing chips for a competing technology as well—something an adapter might do—it would undoubtedly undermine its shaping efforts. How could Qualcomm convince its potential partners that CDMA was superior if it simultaneously invested in competing standards?
As the story of Qualcomm illustrates, under uncertainty, shaping actions are often at odds with adapting ones. Shape or adapt is therefore a real choice for most companies most of the time. But how, amid rising uncertainty and ever-greater risks, can a company nail down the right strategic choice?
The different shapes of shapers and adapters
An essential starting point is understanding your alternatives. Shaping and adapting strategies may take many different forms. Shapers generally attempt to get ahead of uncertainty by driving industry change their way. Some, like Qualcomm, aim to increase the probability that a preferred technology or business process will become an industry standard. Others grapple with uncertainty by introducing fundamental product, service, or business-system innovations intended to redefine the basis of competition in an industry: think of the low-price, point-to-point air travel model of Southwest Airlines, Dell Computer’s direct-sales approach, or Netscape Communications’ breakthrough Internet browser, Navigator.
Other shapers try to restructure unstable industry environments by making bold mergers and acquisitions, as BP did in the oil industry, or by breaking up integrated companies, as AT&T did in 1996 by spinning off its equipment provider, Lucent Technologies. Other companies, such as McDonald’s in the 1990s, shape nascent markets by replicating business systems in new geographies. Still others focus on shaping the conduct of competitors; in the 1970s, for example, DuPont built its capacity in the titanium dioxide industry ahead of market demand, thus influencing its competitors’ expansion plans.
Adapters, by contrast, take the existing and future industry structure and conduct as given. When a market is stable, adapters try to define defensible positions within the industry’s existing structure. When high uncertainty prevails, they attempt to win through speed and agility in recognizing and capturing new opportunities as the market changes. They might quickly follow a potential shaper’s lead, as Compaq Computer did when it bet on Microsoft and Intel with early alliances in the 1980s. Other adapters hedge against future market uncertainty when they can identify a limited, discrete set of paths the market may follow. In the late 1980s, for example, software companies could hedge against uncertainty about which PC operating system would emerge as the industry standard by developing products for each of the contenders, notably DOS, Macintosh, Windows, Unix, and OS/2.
Still other adapters build their strategies around constant experimentation in products, services, and business systems. In the credit card industry, Capital One Financial conducted 27,000 tests of products, prices, features, packages, marketing channels, credit policies, account-management approaches, customer service methods, and collection and retention procedures in 1998. [Note: Capital One Financial Corporation, The Innovation Imperative, 1998 annual report, p. 4.] Finally, some adapters manage uncertainty by building flexible organizations designed to respond to changing market needs. Many professional-services firms, for example, focus on recruiting and developing people with general-management skills that will be valuable to clients regardless of how the market evolves.
With such a broad range of approaches, no wonder business strategists can’t agree on a dominant answer to the shape-or-adapt problem. In fact, even individual companies may not consistently choose one alternative across all issues, business lines, and times. Nor do the data support a one-size-fits-all answer. McKinsey research suggests that 86 percent of the biggest business winners from 1985 to 1995 followed predominantly market-shaping strategies. [Note: This research analyzed the 50 "stars" with the greatest sales, profit, and market capitalization growth during the sample period. The stars included not only some computer and retail giants (such as Best Buy, Microsoft, Oracle, Sun Microsystems, The Home Depot, and Wal-Mart) but also lesser-known industrial companies (M. S. Carriers), business-services firms (Omnicon), health care companies (Biomet), and financial-services firms (Advanta).] Yet the research clearly shows that adapters too can win big.
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To read the complete article, please click here.
Hugh Courtney is an associate principal in McKinsey’s Washington, DC, office. This article is adapted from his book, 20/20 Foresight: Crafting Strategy in an Uncertain World, Boston: Harvard Business School Press, 2001.
Additional and even more valuable revelations about “the principles that distinguish great organizations from good ones”
For as long as I can remember, Jim Collins has been a research-driven business thinker. In each of his prior books, he and his associates (usually Morten Hansen among them) share what was revealed during many years of research to learn the answer to an especially important question. For Built to Last, it was “Why are some companies able to achieve and sustain success through multiple generations of leaders, across decades and even centuries?”; in Good to Great, “Why do some companies make the leap from good to great… and others don’t?”; then in How the Mighty Fall, “How and why do some once great companies fall and other companies never give in to the same challenges, problems, and setbacks?”; and now in Great by Choice, “Why do some companies thrive in uncertainty, even chaos, and others do not?”
Collins, Hansen, and their colleagues conducted a nine-year study (2002-2011) and share what they learned. Here are the findings that caught my eye:
1. For reasons best revealed within the book’s narrative, in context, some companies and leaders thrive in chaos. Those on whom the book focuses have out-performed their industry’s index by at least 10 times and (key point) under the same extreme conditions with which others in the same industry must also contend.
2. Characterized as “10X” companies, those selected were paired in a “near-perfect match” — for purposes of both comparison and contrast – with companies during “eras of dynastic performance that ended in 2002, not the companies as they are today. It’s entirely possible that by the time you read these words, one or two of the companies on the list [i.e. Amgen, Biomet, Intel, Microsoft, Progressive Insurance, Southwest Airlines, and Stryker] has stumbled, falling from greatness.”
3. The research invalidates well-entrenched myths (see Pages 9-10) with regard to the 10X companies and their leaders. For example, “the evidence does not support the premise that 10X companies will necessarily be more innovative than their less successful comparisons [during the same timeframe]; and in some cases, the 10X cases were less innovative.”
4. Leaders of 10X companies display three core behaviors that, in combination, distinguish them from the leaders of less successful comparison companies. They also call to mind the behaviors of Level 5 leadership, examined in detail in Good to Great. Specifically, 10Xers exemplify fanatic discipline (“utterly relentless, monomaniacal, unbending in their focus on their quests”), empirical creativity (reliance on “direct observation, practical experimentation, and direct engagement with tangible evidence”), and productive paranoia (channeling their fear and worry into action, preparing, developing contingency plans, building buffers, and maintaining large margins of safety”).
5. In the Epilogue, Collins and his associates acknowledge their sense that “a dangerous disease” is infecting today’s culture, one that incorrectly suggests that greatness “owes more to circumstance, even luck, than to action and discipline.” Yes, they agree, good or bad luck plays a role for everyone, including 10Xers and Level Fivers. However, they offer an eloquent reassurance that many of us need to hear: “The greatest leaders we’ve studied throughout all our research cared as much about values as victory, as much about purpose as profit. As much about being useful as being successful. Their drive and stamina are ultimately internal, rising from where deep inside.”
Organizations do not make choices, their leaders do, and the fate of each of those organizations depends on the quality of the choices its leaders make, especially amidst uncertainty, chaos, and luck…three realities that even the best leaders can only manage rather than control. That is the challenge but also the opportunity to which the book’s title refers. The single most important difference between the 10X companies that Collins and Hansen discuss and those with which they are compared/contrasted is that those who lead them make better choices as they build and then sustain a culture within which everyone else does.