Changing Strategies – and Approaches to Strategies – to Stay Ahead

Media274As I was reading the September 2012 issue of the Harvard Business Review, I came across the article, “Your Strategy Needs a Strategy,” written by Martin Reeves, Claire Love, and Philipp Tillmanns. The authors argue that not only are there different business strategies, there are different types of business strategies. Which one is appropriate for your business depends on what type of business you are in.

The authors’ definitions of the types of business strategies provided an interesting perspective. As a strategy consultant, I appreciate the recognition that not all industries should use the same approach to set a course for their businesses. However, it hit me that the authors’ classification of industries is fluid; an industry which has historically fallen into one category may shift into another as global events unfold. Specifically, I caution some industries for which the authors recommend a “Classical Approach” to strategy to take a second look.

 

Predictability vs. Malleability

Reeves et. al. use a 2 x 2 matrix (apparently mandatory in all HBR articles) to divide industries into four quadrants. The axes of the Strategy Types matrix are “predictability” and “malleability.”

The authors emphasize that by “predictability,” they do not simply mean whether or not there are significant uncertainties which drive value in your industry. Rather, they essentially ask the question, “How much does the industry itself change over a fairly short time horizon (say, five years)?”

 

As an example, an oil and gas company has enormous uncertainties around the future price of its products, future production rates from its various assets, the costs associated with fabricating and installing development facilities, etc. But Reeves et. al. consider the oil and gas industry to be fairly predictable because the basic nature of the business hasn’t really changed much in decades:

· We drill holes into the earth;

· We produce hydrocarbons;

· We transport them;

· We refine them; and

· We sell them.

The technology has improved over the years, and the formation of OPEC back in the 1970s was a game-changer, but someone from ten years ago would have no trouble recognizing the basic processes associated with the oil and gas industry. It’s predictable. Contrast this with the consumer electronics industry, which has seen revolutionary new products hit the market, create new markets, destroy old markets and companies, and completely change how we live our lives. And it seems to do this every few years. The consumer electronics industry is definitely an industry with an unpredictable environment.

The second axis, malleability, refers to the degree to which a company can change its environment (regardless of environmental predictability). Even the mighty ExxonMobil cannot significantly alter the global market for oil and gas, nor can it single-handedly revolutionize how companies explore for and produce hydrocarbons. By contrast, Apple has turned the consumer electronics industry upside-down several times in just the past ten years or so. The oil and gas industry is not malleable; the consumer electronics industry is.

Strategy Types Defined

Reeves et. al. put forward four different types of strategies for the four different quadrants of their matrix:

Classical Approach: In a high-predictability/low-malleability industry (e.g., oil and gas, commercial banking, power generation), a Classical approach to strategy is most appropriate. You set goals, examine Porter’s Five Forces, do a SWOT analysis, throw in some probabilistic economic modeling to gain non-intuitive insights, and then you choose a strategy which you believe to have a good chance of achieving your objectives. These strategies tend to be inward-focused.

Adaptive Approach: In a low-predictability/low-malleability industry (e.g., biotechnology, transportation infrastructure, specialty fashion retailing), one cannot foresee the future with any clarity and one cannot change the industry environment. Any long-term growth strategy is likely to become obsolete within months. The best one can do is to react quickly; therefore, an Adaptive strategy works best. Flexibility is the watchword of the day. You pilot different products and/or services, and position your company to be able to ramp up the successful ones and kill the failures quickly. Rules of conduct work better than master plans. In this arena, an external focus is important.

Shaping Approach: If predictability is low but malleability is high (e.g., consumer electronics, health care technology, internet services), a Shaping strategy is effective. The direction of the entire industry can be altered by a single innovation; you want to be the company that comes up with that innovation and shapes the environment to its own advantage. Here, the interaction between your company’s actions and the environment (competitors, consumers, etc.) is important, so some variation of game theory or agent-based modeling may provide helpful insights.

Visionary Approach: Finally, if the industry is high-predictability/high-malleability (e.g., insurance, food products, aerospace & defense), a Visionary strategy is likely to be most effective. This is similar to the Classical approach in the sense that the future is unlikely to be radically different from the past, but with an added dimension around how best to modify the industry environment to your advantage. Game theory might be handy here, too. Reeves et. al. call this the “Build it and they will come” approach to strategy.

Hop on the Not-So-Crazy Train

At this point you may be asking, “Why is this guy explaining to me an article I can read on my own?“ Please bear with me.

Another article was published in the July 2012 edition of the Journal of Petroleum Technology (JPT) entitled, “On the Precipice of a New Energy Source?”, written by Steve Jacobs, David Nagel, and myself. In the article, we discuss the latest developments in the field of Low Energy Nuclear Reactions (LENR), and the impact that this technology may have on energy industries – most notably, power generation and oil and gas production.

Most people are unfamiliar with LENR, but that will probably change in the coming years (possibly months). MIT, SRI, Boeing, the U.S. Navy, Toyota, Mitsubishi, and NASA are just a few of the companies and institutions which are actively researching this technology, and a number of start-up companies have already been formed to create consumer products based on LENR.

So what is it? For those of you old enough to have been reading newspapers back in the eighties, it is essentially cold fusion.

Now before you close this blog and go back to reading something more realistic (like Elvis sightings), you should know that in the wake of the scientific community’s inability to recreate the results generated by Pons and Fleischmann at the University of Utah back in 1989, cold fusion research never really went away – it just went underground.

Repeatabilityis still a bit of an issue, but as of this writing, dozens of independent groups and organizations have run literally hundreds of successful LENR experiments – i.e., ones in which more energy is generated than is input. Energy outputs can be in the range of ten to twenty times the input energy. My co-authors just got back from a cold fusion conference in Korea in which a live LENR demonstration was held, generating temperatures of well over 200 degrees Celsius.

As you might imagine, our JPT article has been met with skepticism bordering on derision, especially from our energy industry brethren. That’s only natural – after all, this is pretty wild stuff we’re talking about. LENR would mean energy generated from cheap, plentiful resources with no greenhouse gas emissions and no radioactive by-products. It seems too good to be true.But far too many individuals and institutions of impeccable integrity have testified to the results for this to be a conspiracy or hoax. The phenomenon is real. The primary challenges remaining concern engineering, not physics. These challenges might ultimately prove to be insurmountable, but it would be foolish to assume that that will be the case. Even if LENR never does live up to its promise, the pressures to find clean, non-greenhouse-gas-emitting sources of energy are only going to grow with time. If LENR doesn’t provide an answer, something else will.

Redefine Your Strategic Type to Push Progress

So how does this tie back to the HBR article on strategy types? Several of the industries in the “Classical Strategy” quadrant – most notably power generation, and possibly oil & gas – should probably be using Adaptive strategies (appropriate when predictability and malleability are both low). They should be testing new technologies and positioning themselves to thrive in the unfamiliar new world of energy production from strange new sources, even if we cannot currently predict what that world will look like. A more aggressive company might even go for a Shaping strategy, taking the lead in developing these new technologies and molding the new energy markets to their own advantage. Those companies with the foresight to position themselves to take advantage of the coming changes will be the ultimate winners; those who cling to what has worked in the past will not.

As we point out in the JPT article: the whaling industry thought the status quo would last forever, too.

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