what is strategic management?

Spotlight

YOUR STRATEGY NEEDS A STRATEGY The oil industry holds relatively few sur-prises for strategists. Things change, of course, sometimes dramatically, but in relatively predictable ways. Planners know, for instance, that global supply will rise and fall as geopolitical forces play out and new resources are discovered and exploited. They know that demand will rise and fall with incomes, GDPs, weather conditions, and the like. Because these factors are outside companies’ and their com- petitors’ control and barriers to entry are so high, no one is really in a position to change the game much. A company carefully marshals its unique capabilities and resources to stake out and defend its competitive position in this fairly stable !rmament.

The internet software industry would be a night- mare for an oil industry strategist. Innovations and new companies pop up frequently, seemingly out

of nowhere, and the pace at which companies can build—or lose—volume and market share is head- spinning. A major player like Microsoft or Google or Facebook can, without much warning, introduce some new platform or standard that fundamen- tally alters the basis of competition. In this environ- ment, competitive advantage comes from reading and responding to signals faster than your rivals do, adapting quickly to change, or capitalizing on tech- nological leadership to in”uence how demand and competition evolve.

Clearly, the kinds of strategies that would work in the oil industry have practically no hope of working in the far less predictable and far less settled arena of internet software. And the skill sets that oil and software strategists need are worlds apart as well, because they operate on di#erent time scales, use di#erent tools, and have very di#erent relationships

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SPOTLIGHT ON STRATEGY

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SPOTLIGHT ON STRATEGY

do what we have found that the most successful are already doing—deploying their unique capabilities and resources to better capture the opportunities available to them.

Finding the Right Strategic Style 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 con!dently forecast de- mand, corporate performance, competitive dynam- ics, and market expectations?) and malleability (To what extent can you or your competitors in”uence those factors?).

Put these two variables into a matrix, and four broad strategic styles—which we label classical, adap- tive, shaping, and visionary—emerge. (See the exhibit

“The Right Strategic Style for Your Environment.”) Each style is associated with distinct planning prac- tices and is best suited to one environment. Too often strategists con”ate predictability and malleability— thinking that any environment that can be shaped is unpredictable—and thus divide the world of strate- gic 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 !nd that companies that match their strategic style to their environment perform signi!cantly bet- ter 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—!ve forces, blue ocean, and growth-share matrix analyses are all manifestations of it. A company sets a goal, tar- geting the most favorable market position it can at- tain by capitalizing on its particular capabilities and resources, and then tries to build and fortify that po- sition 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

with the people on the front lines who implement their plans. Companies operating in such dissimilar competitive environments should be planning, de- veloping, and deploying their strategies in markedly di#erent ways. But all too often, our research shows, they are not.

That is not for want of trying. Responses from a re- cent BCG survey of 120 companies around the world in 10 major industry sectors show that executives are well aware of the need to match their strategy- making processes to the specific demands of their competitive environments. Still, the survey found, in practice many rely instead on approaches that are better suited to predictable, stable environments, even when their own environments are known to be highly volatile or mutable.

What’s stopping these executives from making strategy in a way that !ts their situation? We believe they lack a systematic way to go about it—a strategy for making strategy. Here we present a simple frame- work that divides strategy planning into four styles according to how predictable your environment is and how much power you have to change it. Using this framework, corporate leaders can match their strategic style to the particular conditions of their in- dustry, business function, or geographic market.

How you set your strategy constrains the kind of strategy you develop. With a clear understanding of the strategic styles available and the conditions un- der which each is appropriate, more companies can

When the Cold Winds Blow There are circumstances in which none of our strategic styles will work well: when access to capital or other critical re- sources is severely restricted, by either a sharp economic downturn or some other cataclysmic event. Such a harsh environment threatens the very viability of a company and demands a fifth strategic style—survival.

As its name implies, a survival strategy requires a company to focus defensively—reducing costs, preserving capital, trim- ming business portfolios. It is a short-term strategy, intended to clear the way for the company to live another day. But it does not lead to any long-term growth strategy. Companies in survival mode should therefore look ahead, readying them- selves to assess the conditions of the new environment and to adopt an appropriate growth strategy once the crisis ends.

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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, e#ectively employ the classical style. At a major oil company such as ExxonMobil or Shell, for instance, highly trained analysts in the corporate strategic-planning o$ce spend their days developing detailed perspectives on the long-term economic factors relating to demand and the tech- nological factors relating to supply. These analyses allow them to devise upstream oil-extraction plans that may stretch 10 years into the future and down- stream production-capacity plans up to !ve years out. It could hardly be otherwise, given the time needed to !nd and exploit new sources of oil, to build pro- duction facilities, and to keep them running at opti- mum capacity. These plans, in turn, inform multiyear !nancial forecasts, which determine annual targets that are focused on honing the e$ciencies required to maintain and bolster the company’s market posi- tion and performance. Only in the face of something extraordinary—an extended Gulf war; a series of ma- jor oil re!nery shutdowns—would plans be seriously revisited more frequently than once a year.