Adaptive Advantage

Turbulence and unpredictability dominate today’s business environment.  Volatility in financial markets and the disruption of business models are but two examples.  Faced with greater uncertainty and a faster pace of change, traditional top-down approaches to strategic planning fall short.

Increasingly, managers need to complement traditional planning with experimentation.  Yet most companies rightly view experimentation as costly, time-consuming, and risky.  However, some highly adaptive companies are using an array of new approaches to achieve superior economics of experimentation.  By generating, testing, and scaling up ideas faster and with less expense and risk, they have achieved a “simulation advantage” over their rivals.  This Perspective outlines how experimentation can be profitably applied to strategy—and shares how companies are already reaping the benefits. read

The increasing interdependence between business and society presents an opportunity for companies to develop “social advantage” by aligning the business and social dimensions of their strategies to create more sustainable, valued, and expansive business models. Creating social advantage goes beyond financial metrics to renewing depletable resources and goodwill, meeting and capitalizing on consumers’ ecological needs, and developing new markets around alternative and renewable resources. This Perspective cites three examples of companies that have succeeded in building social advantage. read

A company’s ability to adapt to incessant change is embodied in the way people make decisions and behave in the workplace. There is no adaptive strategy without an adaptive organization. Classical approaches to managing scale under stable conditions are too rigid for the rapid learning and change required in turbulent environments. Yet management paradigms die hard, especially when they have been the basis for historical success and offer the comforting illusion that a company can perfectly foresee and control its destiny. read

Signal advantage—the ability to rapidly capture, interpret, and act upon signals gleaned from rich and dynamic data—is essential today, when key business variables are volatile and difficult to forecast. Companies must act quickly on the right signals to modulate their operations, reinvent business models, and even reshape the information landscapes of their industries. This Perspective discusses how companies that are acquiring signal advantage are rethinking their approach to information and shifting from knowing and optimizing to learning and adapting. read

Traditional strategy becomes limited when variables are constantly shifting. Organizations with an adaptive advantage achieve superior outcomes by continuously reshaping the enterprise through a process of managed evolution. Readiness, responsiveness, and resilience are necessary for surviving turbulence, but a recursive approach—in which better strategies evolve iteratively in response to change—is essential for sustainable advantage. Choosing the best style of adaptive strategy depends on the rate and predictability of change in the industry and the degree of change it necessitates for the enterprise. read

As traditional strategies of position and capability become less durable, they must be supplemented with adaptive advantages, which include advantages in signals, systems, social value, simulation, and people empowerment. Organizations with adaptive advantage recognize the unpredictability of today’s environment and the limits of deductive analysis. They seek a favorable context in which new approaches to new problems can continuously emerge. Adaptive advantages thus enable them to unite reflection with execution and balance deduction with experimentation. read

Faced with a persistent economic slowdown, companies need to get beyond a bunker mentality. While a focus on short-term survival is important, executives must balance it with clear thinking on how to seize advantage now to emerge stronger in the recovery. A study of nature reveals four broad strategies for thriving in the face of adversity—and underscores the importance of resilience to long-term leadership. What can companies do to ensure survival, capture advantage, and foster resilience? read

Any one of us—and any one of our organizations—could be forgiven for behaving at the moment like a bear confronting winter. I don’t mean behaving “bearishly,” as investors do. No, I mean behaving literally like a bear—which is to say, shutting down the system. Hibernating. Certainly feels like the wise course just now. And haven’t we learned that nature is a sage guide to strategy?

Yes, but. First: History shows that the great winners in downturns are not those businesses that shrink production capacity, downsize the labor force and conserve cash until the economy picks up again. The winners are the ones that try to expand sales—the ones that grow. Second: Well, the bear isn’t the only creature in nature. Nature suggests many adaptive responses to a harsh or changing environment.

Survival is first. But leaders must also ask themselves how they will gain advantage coming out of the downturn.

Not that the bear’s response to economic winter is all wrong. Hibernation can be an effective strategy, if certain assumptions hold. (Length of winter; adequate fat; return of normal world in spring.) Unfortunately, it’s already becoming clear that—this time—those assumptions are unlikely to hold up.

Martin Reeves, "Natures Rules", Sloan Managment Review, March 2009