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Subject 1. Summary

Deciding on the best strategy for a particular business begins with understanding the industry.

  • Predictability: the extent to which the future of the environment can be forecast, which depends on the degree of complexity and dynamic change.
  • Malleability: the extent to which the environment can be changed or shaped by the actions of companies individually or collectively.

How a company assesses its environment along each of the two dimensions will help determine the most appropriate strategic style. They define a choice matrix of four very distinct strategic styles: classical, adaptive, shaping, and visionary.

  • Classical strategy. Finding or building positions or leveraging unique resources works best in a stable, predictable environment that is not easily altered. A company sets a goal, targeting the most favorable market position, and then tries to strengthen that position through successive rounds of planning. Oil company strategists, like those in many other mature industries, effectively employ the classical style.

  • Adaptive strategy. When it is difficult to either predict the future or alter it, companies need an adaptive strategy to respond to whatever may happen. Companies 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 ultimate goal is not to optimize efficiency; rather, it must be to engineer flexibility.

  • Shaping strategy. When the future is unpredictable but malleable by some players, such companies can employ a shaping strategy. Like an adaptive strategy, a shaping strategy embraces short planning cycles, flexibility and experiment. But unlike adapters, shapers focus beyond the boundaries of their own company, by defining attractive new markets, standards, technology platforms, and business practices. Facebook is a textbook example, as it overtook MySpace in just a few years and opened its social networking platform to outside developers in 2007.

  • Visionary strategy. It is called for when a company can envision an attractive future end state and also has the ability to realize it. Think about what Edison did for electricity and what Ratan Tata is trying to do with the ultra-affordable Nano automobile. Often leveraged by entrepreneurs, a visionary strategy is characterized by a build it and they will come approach."

Avoiding the Traps

Research shows that although three out of four executives understand the need for different strategic styles in different circumstances, they only apply two strategic styles-classic and visionary-suited to predictable environments. That means only one in four is prepared to adapt to unforeseeable events or to seize an opportunity to shape an industry to his or her company's advantage. Understanding how different the various approaches are and in which environment each best applies can go a long way toward correcting mismatches between strategic style and business environment. But as strategists think through the implications of the framework, they need to avoid three traps.

  • Misplaced confidence. You can't choose the right strategic style unless you accurately judge how predictable and malleable your environment is. However, executives tend to overestimate both predictability and malleability.

  • Unexamined habits. Many executives recognize the importance of building the adaptive capabilities required to address unpredictable environments. However, they don't feel sufficiently competent in them. In part that's because many executives learned only the classical style, through experience or at business school.

    In practice, many companies value accuracy over speed of decisions, even when they are well aware that their environment is fast-moving and unpredictable. As a result, a lot of time is being wasted making untenable predictions when a faster, more iterative, and more experimental approach would be more effective.

  • Culture mismatches. A company culture that prizes efficiency and the elimination of variation can undermine the opportunity to experiment, which is essential for an adaptive strategy. Failure is a natural outcome of experimentation, so adaptive and shaping strategies fare poorly in cultures that punish it. It takes a good understanding of the four strategic styles to avoid these different traps. Companies put a great deal of energy into making predictions year after year, but they should also check to see if the predictions they made in the prior year actually panned out. We suggest regularly reviewing the accuracy of forecasts and also objectively gauging predictability by tracking how often and to what extent companies in your industry change relative position in terms of revenue, profitability, and other performance measures.

Operating in Many Modes

Matching your company's strategic style to the predictability and malleability of your industry will align overall strategy with the broad economic conditions. But the story does not end here. A company moving into a different stage of its life cycle may well require a shift in strategic style. Environments for start-ups tend to be malleable, calling for visionary or shaping strategies. In a company's growth and maturity phases, when the environment is less malleable, adaptive or classical styles are often best.

Once you have correctly analyzed your environment, and you have identified which strategic styles should be used, you will need to monitor your environment and be prepared to adjust as conditions change over time. Clearly that's no easy task. But we believe that companies that continually match their strategic styles to their situation will enjoy a tremendous advantage over those that don't.

Practice Question 1

In the paper industry, both the price of paper and the demand for paper are relatively predictable. A paper producer should adopt a(n):

A. classical strategy.
B. adapting strategy.
C. shaping strategy.

Correct Answer: A

The classical strategy works well for companies operating in predictable and immutable environments.

Practice Question 2

Some software companies operate by disrupting existing businesses with a new substitute. For example, innovative tax software has disrupted the tax advisory and preparations industry. The strategies they take are classified as:

A. adapting.
B. shaping.
C. visionary.

Correct Answer: C

Practice Question 3

One trap, misplaced confidence, should be avoided because it's found that there's a strong tendency for executives to:

I. overestimate their abilities to predict their business environments.
II. overestimate their abilities to change their business environments.

Correct Answer: I and II

Practice Question 4

Specialty retailers most likely employ ______ strategies.

A. classical strategy.
B. adapting strategy.
C. shaping strategy.

Correct Answer: B

Specialty retailers often find it difficult to predict demand for the many products in their portfolios. Tastes in fashions and brands can change quickly. Retails that employ adaptive strategies learn to test different product portfolios, identifying optimal patterns and then rapidly scaling the best models for their stores and product lines.

Practice Question 5

"Build it and they will come approach" is a character of ______ strategy.

A. adapting strategy.
B. shaping strategy.
C. visionary strategy

Correct Answer: C

If a company has the power to shape the future, and knows the future, it can take a visionary strategy.

Practice Question 6

?Which strategy works the best in immutable environments that are unpredictable?

A. adapting strategy.
B. shaping strategy.
C. classic strategy.

Correct Answer: A

Companies in this situation should constantly refine goals and tactics and shifts resources promptly.

Study notes from a previous year's CFA exam:

1. Summary