Managing Director & Senior Partner, Director of the BCG Henderson Institute
The turbulence of today’s business environment—volatility in market positions, unpredictability of competitive outcomes, and a widening gap in performance between winners and losers—makes classical strategic planning increasingly limiting. To keep pace with incessant change, companies need a more adaptive and dynamic approach to strategy. In “Adaptive Advantage,” we described an approach that involves iterative experimentation through a process comprising variation, selection, and amplification, with modulation at its center.
Companies adapt to rapid changes in competitive markets by introducing variation into their products and internal routines. They select the most promising variations through stage gates, portfolio management, pilots, or full-scale tests. And they amplify and embed their successes through resource allocation, internal or external competition, and specialization. These activities are fine-tuned through modulation—the locus of strategic intent in the process—in response to the environment, corporate goals, and outcomes.
The choices a company makes in modulating variation, selection, and amplification are at the heart of adaptive strategy and its organizational implications. They affect organizational structure, governance, external relations, innovation, marketing strategy, and culture, to name but a few elements. The mechanisms of modulation are fundamentally organizational in nature: they are embodied in the way people make decisions and behave in the workplace. There is no adaptive strategy without an adaptive organization. Hence the critical importance of people advantage.
Large organizations need to be especially aware of the challenges they are likely to encounter in developing adaptive capabilities. Classical approaches to managing scale—delegation and specialization—can be highly efficient under stable conditions, but the hierarchical structures they produce are too rigid for the rapid learning and change required in turbulent environments.
A narrow focus on leanness, too, can impede adaptability. Under pressure from competition and capital markets, some large companies have squeezed out not only inefficiency but also the diversity and variation needed to adapt to rapid change. What’s more, once adaptive capabilities in highly structured and specialized organizations have atrophied, they can be challenging to re-create. (See Exhibit 1.)
In addition, the cultures of large organizations—often internally oriented and with an intolerance of failure, an obsession with efficiency, and a bias toward consensus and obedience—can be ill suited to adaptability. And their management paradigms die hard, especially when they have been the basis for historical success, are integrated into training programs, and offer the comforting illusion that a company can perfectly foresee and control its destiny.
Nevertheless, some companies—even large, established ones—have discovered a way to overcome the barriers to adaptability. These organizations display five key attributes:
Netflix, a U.S. video-rental company, embodies many of these characteristics. It is unique in the way it has codified a very explicit set of adaptive management beliefs and principles. Here are two examples from its “Reference Guide to Our Freedom and Responsibility Culture”:
Even large industrial players can become more adaptive, as Cisco Systems demonstrates. Early on, Cisco relied on a hierarchical customer-centric organizational model to become a leader in the market for network switches and routers. However, as the company’s core market matured, CEO John Chambers created a novel management structure of cross-functional councils and boards to facilitate a move into 30 adjacent and diverse markets (ranging from health care to sports), as well as into developing countries. Cisco transformed itself from a company in which a few people made all the decisions to one with a decentralized, externally focused council structure. Employees are allowed to form boards even without a formal leader, thereby increasing agility and exploration. The company built a culture that is more amenable to risk taking and more accepting of failure. As a result, it successfully met Chambers’s aggressive target of generating 25 percent of revenues from new markets by 2010.
We believe that an increasing number of companies will find themselves requiring adaptive strategies and organizations. But how they achieve them will depend upon the nature of their business environment. In “Adaptive Advantage,” we explained that the appropriate adaptive strategy is determined by two characteristics of the business environment: the degree of turbulence and the degree of required change.
In that earlier Perspective, we also introduced four styles of adaptive strategy—sprinter, experimenter, migrator, and voyager. Each has its own organizational approach and is appropriate to different combinations of turbulence and required change. (See Exhibit 2.)
Traditionally, strategists have regarded organization and strategy as quite distinct, or they have viewed organization as merely a consequence of strategy. We have seen, however, that achieving adaptive advantage critically depends on having the right organization in place to solve the challenges posed by a dynamic environment. Strategy has therefore become intimately connected with organization, and the companies that succeed will be those that understand and seize a people advantage.