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  • 1. HBR.ORG September 2012reprinT R1209ESpotlight on StrategyYour StrategyNeeds a Strategyby Martin Reeves, Claire Love,and Philipp Tillmanns
  • 2. by Martin Reeves, Claire Love, and Philipp TillmannsArtwork Nuala O’DonovanRadiolaria, Grid Yellow Centre, 2011Porcelain, stained, unglazed, 36 x 24 x 36 cmSpotlightYourStrategyNeeds aStrategyThe oil industry holds relatively few sur-prises for strategists. Things change, ofcourse, sometimes dramatically, but inrelatively predictable ways. Plannersknow, for instance, that global supplywill rise and fall as geopolitical forces play out andnew resources are discovered and exploited. Theyknow that demand will rise and fall with incomes,GDPs, weather conditions, and the like. Becausethese factors are outside companies’ and their com-petitors’ control and barriers to entry are so high, noone is really in a position to change the game much.A company carefully marshals its unique capabilitiesandresourcestostakeoutanddefenditscompetitiveposition in this fairly stable firmament.The internet software industry would be a night-mare for an oil industry strategist. Innovations andnew companies pop up frequently, seemingly outof nowhere, and the pace at which companies canbuild—or lose—volume and market share is head-spinning. A major player like Microsoft or Google orFacebook can, without much warning, introducesome new platform or standard that fundamen-tally alters the basis of competition. In this environ-ment, competitive advantage comes from readingand responding to signals faster than your rivals do,adapting quickly to change, or capitalizing on tech-nological leadership to influence how demand andcompetition evolve.Clearly, the kinds of strategies that would work inthe oil industry have practically no hope of workingin the far less predictable and far less settled arenaof internet software. And the skill sets that oil andsoftware strategists need are worlds apart as well,because they operate on different time scales, usedifferent tools, and have very different relationshipsCopyright © 2012 Harvard Business School Publishing Corporation. All rights reserved.2 Harvard Business Review September 2012Spotlight on StrategyPhotography:SylvainDeleuThis article is made available to you with compliments of FM Global Insurance.Further posting, copying, or distributing is copyright infringement. To order more copies go to or call 800-988-0886.
  • 3. For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.orgThis article is made available to you with compliments of FM Global Insurance.Further posting, copying, or distributing is copyright infringement. To order more copies go to or call 800-988-0886.
  • 4. Spotlight on Strategydo what we have found that the most successful arealready doing—deploying their unique capabilitiesand resources to better capture the opportunitiesavailable to them.Finding the Right Strategic StyleStrategy usually begins with an assessment of yourindustry. Your choice of strategic style should beginthere as well. Although many industry factors willplayintothestrategyyouactuallyformulate,youcannarrow down your options by considering just twocritical factors: predictability (How far into the futureand how accurately can you confidently forecast de-mand, corporate performance, competitive dynam-ics, and market expectations?) and malleability (Towhat extent can you or your competitors influencethose factors?).Put these two variables into a matrix, and fourbroadstrategicstyles—whichwelabelclassical,adap-tive,shaping,andvisionary—emerge.(Seetheexhibit“The Right Strategic Style for Your Environment.”)Each style is associated with distinct planning prac-ticesandisbestsuitedtooneenvironment.Toooftenstrategists conflate predictability and malleability—thinking that any environment that can be shaped isunpredictable—and thus divide the world of strate-gic possibilities into only two parts (predictable andimmutable or unpredictable and mutable), whereasthey ought to consider all four. So it did not surpriseus to find that companies that match their strategicstyle to their environment perform significantly bet-ter than those that don’t. In our analysis, the three-year total shareholder returns of companies in oursurvey 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 industrywhose environment is predictable but hard for yourcompany to change, a classical strategic style has thebest chance of success. This is the style familiar tomost managers and business school graduates—fiveforces,blueocean,andgrowth-sharematrixanalysesare 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 andresources, and then tries to build and fortify that po-sitionthroughorderly,successiveroundsofplanning,usingquantitativepredictivemethodsthatallowittoproject well into the future. Once such plans are set,they tend to stay in place for several years. Classicalstrategic planning can work well as a stand-alonewith the people on the front lines who implementtheir plans. Companies operating in such dissimilarcompetitive environments should be planning, de-veloping, and deploying their strategies in markedlydifferent ways. But all too often, our research shows,they are not.Thatisnotforwantoftrying.Responsesfromare-cent BCG survey of 120 companies around the worldin 10 major industry sectors show that executivesare well aware of the need to match their strategy-making processes to the specific demands of theircompetitive environments. Still, the survey found,in practice many rely instead on approaches that arebetter suited to predictable, stable environments,even when their own environments are known to behighly volatile or mutable.What’s stopping these executives from makingstrategy in a way that fits their situation? We believethey lack a systematic way to go about it—a strategyfor making strategy. Here we present a simple frame-work that divides strategy planning into four stylesaccording to how predictable your environment isand how much power you have to change it. Usingthis framework, corporate leaders can match theirstrategic style to the particular conditions of their in-dustry, business function, or geographic market.How you set your strategy constrains the kind ofstrategy you develop. With a clear understanding ofthe strategic styles available and the conditions un-der which each is appropriate, more companies canWhen the Cold Winds BlowThere are circumstances in which none of our strategic styleswill work well: when access to capital or other critical re-sources is severely restricted, by either a sharp economicdownturn or some other cataclysmic event. Such a harshenvironment threatens the very viability of a company anddemands a fifth strategic style—survival.As its name implies, a survival strategy requires a companyto focus defensively—reducing costs, preserving capital, trim-ming business portfolios. It is a short-term strategy, intendedto clear the way for the company to live another day. But itdoes not lead to any long-term growth strategy. Companiesin survival mode should therefore look ahead, readying them-selves to assess the conditions of the new environment andto adopt an appropriate growth strategy once the crisis ends.4 Harvard Business Review September 2012This article is made available to you with compliments of FM Global Insurance.Further posting, copying, or distributing is copyright infringement. To order more copies go to or call 800-988-0886.
  • 5. function because it requires special analytic andquantitativeskills,andthingsmoveslowlyenoughtoallow for information to pass between departments.Oil company strategists, like those in many othermature industries, effectively employ the classicalstyle. At a major oil company such as ExxonMobilor Shell, for instance, highly trained analysts in thecorporate strategic-planning office spend their daysdeveloping detailed perspectives on the long-termeconomic factors relating to demand and the tech-nological factors relating to supply. These analysesallow them to devise upstream oil-extraction plansthat may stretch 10 years into the future and down-streamproduction-capacityplansuptofiveyearsout.It could hardly be otherwise, given the time neededto find and exploit new sources of oil, to build pro-duction facilities, and to keep them running at opti-mumcapacity.Theseplans,inturn,informmultiyearfinancial forecasts, which determine annual targetsthat are focused on honing the efficiencies requiredto maintain and bolster the company’s market posi-tion and performance. Only in the face of somethingextraordinary—an extended Gulf war; a series of ma-jor oil refinery shutdowns—would plans be seriouslyrevisited more frequently than once a year.Adaptive. The classical approach works for oilcompanies because their strategists operate in anenvironment in which the most attractive positionsand the most rewarded capabilities today will, in alllikelihood, remain the same tomorrow. But that hasneverbeentrueforsomeindustries,and,ashasbeennoted before in these pages (“Adaptability: The NewCompetitive Advantage,” by Martin Reeves and MikeDeimler, HBR July–August 2011), it’s becoming lessand less true where global competition, technologi-cal innovation, social feedback loops, and economicuncertainty combine to make the environment radi-cally and persistently unpredictable. In such an en-vironment, a carefully crafted classical strategy maybecome obsolete within months or even weeks.Companies in this situation need a more adaptiveapproach, whereby they can constantly refine goalsand tactics and shift, acquire, or divest resourcessmoothly and promptly. In such a fast-moving, reac-tive environment, when predictions are likely to bewrong and long-term plans are essentially useless,the goal cannot be to optimize efficiency; rather, itmust be to engineer flexibility. Accordingly, planningcycles may shrink to less than a year or even becomecontinual. Plans take the form not of carefully speci-fied blueprints but of rough hypotheses based onthe best available data. In testing them out, strategymust be tightly linked with or embedded in opera-tions, to best capture change signals and minimizeinformation loss and time lags.Specialty fashion retailing is a good example ofthis. Tastes change quickly. Brands become hot (ornot) overnight. No amount of data or planning willgrant fashion executives the luxury of knowing far inadvance what to make. So their best bet is to set uptheir organizations to continually produce, roll out,and test a variety of products as quickly as they can,constantly adapting production in the light of newlearning.The Spanish retailer Zara uses the adaptive ap-proach. Zara does not rely heavily on a formal plan-ningprocess;rather,itsstrategicstyleisbakedintoitsflexible supply chain. It maintains strong ties with its1,400 external suppliers, which work closely with itsdesigners and marketers. As a result, Zara can design,manufacture, and ship a garment to its stores in as lit-tle as two to three weeks, rather than the industry av-erage of four to six months. This allows the companyto experiment with a wide variety of looks and makesmall bets with small batches of potentially popularstyles. If they prove a hit, Zara can ramp up produc-tion quickly. If they don’t, not much is lost in mark-downs. (On average, Zara marks down only 15% of itsinventory, whereas the figure for competitors can beas high as 50%.) So it need not predict or make betsIdea in BriefCompanies that correctly match their strategy-making processes to their competitive circumstancesperform better than those that don’t. But too manyuse approaches appropriate only to predictableenvironments—even in highly volatile situations.What executives in these cases need is a strategyfor setting strategy. The authors present a frameworkfor choosing one, which begins with two questions:How unpredictable is your environment? and Howmuch power do you or others have to change thatenvironment?The answers give rise to four broad strategic styles,each one particularly suited to a distinct environment.A classical strategy (the oneeveryone learned in businessschool) works well for companiesoperating in predictable andimmutable environments.An adaptive strategy is moreflexible and experimental andworks far better in immutable en-vironments that are unpredictable.A shaping strategy is best inunpredictable environments thatyou have the power to change.A visionary strategy (the build-it-and-they-will-come approach)is appropriate in predictableenvironments that you have thepower to change.For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.orgSeptember 2012 Harvard Business Review 5This article is made available to you with compliments of FM Global Insurance.Further posting, copying, or distributing is copyright infringement. To order more copies go to or call 800-988-0886.
  • 6. Spotlight on Strategyon which fashions will capture its customers’ imagi-nations and wallets from month to month. Insteadit can respond quickly to information from its retailstores, constantly experiment with various offerings,and smoothly adjust to events as they play out.Zara’sstrategicstylerequiresrelationshipsamongits planners, designers, manufacturers, and distribu-tors that are entirely different from what a companylike ExxonMobil needs. Nevertheless, Exxon’s strat-egists and Zara’s designers have one critical thing incommon: They take their competitive environmentas a given and aim to carve out the best place theycan within it.Shaping. Some environments, as internet soft-ware vendors well know, can’t be taken as given. Forinstance, in new or young high-growth industrieswhere barriers to entry are low, innovation rates arehigh,demandisveryhardtopredict,andtherelativeThe Right Strategic Style forYour EnvironmentOur research shows that approaches to strategy formulation fall into four buckets, according to howpredictable an industry’s environment is and how easily companies can change that environment.Source BCG AnalysisAdaptiveIf your industry is unpredictableand you can’t change itShapingIf your industry is unpredictablebut you can change itClassicalIf your industry is predictablebut you can’t change itVisionaryIf your industry is predictableand you can change itInternet Software &ServicesAirlinesAutomobilesBuildingProductsSpecialtyRetailOil, Gas &ConsumableFuelsMediaSoftwareBeveragesThrifts & Mortgage FinancePaper & ForestProductsTobaccoPharmaceuticalsReal EstateInvestment Trusts(REITs)ConsumerFinanceDiversifiedConsumer ServicesFood ProductsChemicalsPersonalProductsCapitalMarketsSemiconductors& SemiconductorEquipmentCommunicationsEquipmentCommercialBanksIT ServicesInsuranceHouseholdProductsDiversifiedTelecommunicationServicesHealth CareEquipment &SuppliesTextiles, Apparel& Luxury GoodsConstructionMaterialsComputers &PeripheralsAerospace &DefenseContainers& PackagingReal EstateManagement &DevelopmentElectricalEquipmentLeisureEquipment &ProductsCommercialServices &SuppliesIndustrialConglomeratesDistributorsMultilineRetailLife Sciences Tools& ServicesAir Freight &LogisticsWirelessTelecommunicationServicesGas UtilitiesHealth CareProviders &ServicesHouseholdDurablesHotels, Restaurants& LeisureMetals &MiningRoad & RailHealth CareTechnologyProfessionalServicesEnergy Equipment& ServicesElectricUtilitiesInternet &Catalog RetailMachineryConstruction &EngineeringElectronicEquipment,Instruments &ComponentsIndependent PowerProducers &Energy TradersMulti-UtilitiesAutoComponentsTradingCompanies &DistributorsWaterUtilitiesMarineFood & StaplesRetailingTransportationInfrastructureDiversifiedFinancialServicesBiotechnologyOfficeElectronics– Malleability ++ Predictability–6 Harvard Business Review September 2012This article is made available to you with compliments of FM Global Insurance.Further posting, copying, or distributing is copyright infringement. To order more copies go to or call 800-988-0886.
  • 7. positions of competitors are in flux, a company canoften radically shift the course of industry develop-ment through some innovative move. A matureindustry that’s similarly fragmented and not domi-nated by a few powerful incumbents, or is stagnantand ripe for disruption, is also likely to be similarlymalleable.In such an environment, a company employing aclassical or even an adaptive strategy to find the bestpossible market position runs the risk of selling itselfshort, being overrun by events, and missing oppor-tunities to control its own fate. It would do better toemploy a strategy in which the goal is to shape theunpredictable environment to its own advantage be-fore someone else does—so that it benefits no matterhow things play out.Like an adaptive strategy, a shaping strategy em-braces short or continual planning cycles. Flexibilityis paramount, little reliance is placed on elaborateprediction mechanisms, and the strategy is mostcommonly implemented as a portfolio of experi-ments. But unlike adapters, shapers focus beyondthe boundaries of their own company, often by ral-lying a formidable ecosystem of customers, suppli-ers, and/or complementors to their cause by defin-ing attractive new markets, standards, technologyplatforms, and business practices. They propagatethese through marketing, lobbying, and savvy part-nerships. In the early stages of the digital revolution,internet software companies frequently used shap-ing strategies to create new communities, standards,and platforms that became the foundations for newmarkets and businesses.That’s essentially how Facebook overtook the in-cumbent MySpace in just a few years. One of Face-book’ssavvieststrategicmoveswastoopenitssocial-networking platform to outside developers in 2007,thus attracting all manner of applications to its site.Facebookcouldn’thopetopredicthowbigorsuccess-fulanyoneofthemwouldbecome.Butitdidn’tneedto. By 2008 it had attracted 33,000 applications; by2010thatnumberhadrisentomorethan550,000.Soas the industry developed and more than two-thirdsof the successful social-networking apps turned outtobegames,itwasnotsurprisingthatthemostpopu-lar ones—created by Zynga, Playdom, and Playfish—were operating from, and enriching, Facebook’s site.What’s more, even if the social-networking land-scape shifts dramatically as time goes on, chancesare the most popular applications will still be onFacebook. That’s because by creating a flexible andpopular platform, the company actively shaped thebusiness environment to its own advantage ratherthan merely staking out a position in an existingmarketorreactingtochanges,howeverquickly,afterthey’d occurred.Visionary. Sometimes, not only does a companyhave the power to shape the future, but it’s possibleto know that future and to predict the path to real-izing it. Those times call for bold strategies—the kindentrepreneurs use to create entirely new markets (asEdison did for electricity and Martine Rothblatt didfor XM satellite radio), or corporate leaders use torevitalize a company with a wholly new vision—asRatan Tata is trying to do with the ultra-affordableNano automobile. These are the big bets, the build-it-and-they-will-come strategies.Like a shaping strategist, the visionary considerstheenvironmentnotasagivenbutassomethingthatcan be molded to advantage. Even so, the visionarystyle has more in common with a classical than withan adaptive approach. Because the goal is clear, strat-egists can take deliberate steps to reach it withouthaving to keep many options open. It’s more impor-tant for them to take the time and care they need tomarshal resources, plan thoroughly, and implementcorrectly so that the vision doesn’t fall victim to poorexecution. Visionary strategists must have the cour-age to stay the course and the will to commit the nec-essary resources.Back in 1994, for example, it became clear to UPSthat the rise of internet commerce was going to bea bonanza for delivery companies, because the onething online retailers would always need was a wayto get their offerings out of cyberspace and ontotheir customers’ doorsteps. This future may havebeen just as clear to the much younger and smallerFedEx, but UPS had the means—and the will—tomake the necessary investments. That year it set upa cross-functional committee drawn from IT, sales,marketing, and finance to map out its path to becom-ing what the company later called “the enablers ofglobal e-commerce.” The committee identified theOnly one in four executivessurveyed was prepared to adaptto unforeseeable events.For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.orgSeptember 2012 Harvard Business Review 7This article is made available to you with compliments of FM Global Insurance.Further posting, copying, or distributing is copyright infringement. To order more copies go to or call 800-988-0886.
  • 8. Spotlight on Strategymore,some70%saidthatinpracticetheyvalueaccu-racyoverspeedofdecisions,evenwhentheyarewellaware that their environment is fast-moving and un-predictable. As a result, a lot of time is being wastedmaking untenable predictions when a faster, moreiterative, and more experimental approach would bemore effective. Executives are also closely attunedto quarterly and annual financial reporting, whichheavily influences their strategic-planning cycles.Nearly 90% said they develop strategic plans on anannual basis, regardless of the actual pace of changein their business environments—or even what theyperceive it to be.Culture mismatches. Although many execu-tives recognize the importance of adaptive capa-bilities, it can be highly countercultural to imple-ment them. Classical strategies aimed at achievingeconomies of scale and scope often create companycultures that prize efficiency and the elimination ofvariation. These can of course undermine the op-portunitytoexperimentandlearn,whichisessentialfor an adaptive strategy. And failure is a natural out-come of experimentation, so adaptive and shapingstrategies fare poorly in cultures that punish it.Avoiding some of these traps can be straightfor-ward once the differing requirements of the fourstrategic styles are understood. Simply being awarethat adaptive planning horizons don’t necessarilycorrelate well with the rhythms of financial markets,for instance, might go a long way toward eliminatingingrained planning habits. Similarly, understandingthat the point of shaping and visionary strategies isto change the game rather than to optimize your po-sition in the market may be all that’s needed to avoidstarting with the wrong approach.Being more thoughtful about metrics is also help-ful. Although companies put a great deal of energyinto making predictions year after year, it’s surpris-ing how rarely they check to see if the predictionsthey made in the prior year actually panned out. Wesuggest regularly reviewing the accuracy of yourforecasts and also objectively gauging predictabilityby tracking how often and to what extent companiesin your industry change relative position in terms ofrevenue, profitability, and other performance mea-sures. To get a better sense of the extent to whichindustry players can change their environment,we recommend measuring industry youthfulness,concentration, growth rate, innovation rate, andrate of technology change—all of which increasemalleability.ambitious initiatives that UPS would need to realizethis vision, which involved investing some $1 billiona year to integrate its core package-tracking opera-tions with those of web providers and make acqui-sitions to expand its global delivery capacity. By2000 UPS’s multibillion-dollar bet had paid off: Thecompany had snapped up a whopping 60% of thee-commerce delivery market.Avoiding the TrapsIn our survey, fully three out of four executives un-derstood that they needed to employ different stra-tegic styles in different circumstances. Yet judgingby the practices they actually adopted, we estimatethat the same percentage were using only the twostrategic styles—classic and visionary—suited to pre-dictable environments (see the exhibit “Which Stra-tegic Style Is Used the Most?”). That means only onein four was prepared in practice to adapt to unfore-seeable events or to seize an opportunity to shape anindustry to his or her company’s advantage. Givenour analysis of how unpredictable their business en-vironments actually are, this number is far too low.Understandinghowdifferentthevariousapproachesare and in which environment each best applies cango a long way toward correcting mismatches be-tween strategic style and business environment. Butas strategists think through the implications of theframework, they need to avoid three traps we havefrequently observed.Misplaced confidence. You can’t choose theright strategic style unless you accurately judge howpredictable and malleable your environment is. Butwhen we compared executives’ perceptions withobjective measures of their actual environments, wesaw a strong tendency to overestimate both factors.Nearly half the executives believed they could con-troluncertaintyinthebusinessenvironmentthroughtheirownactions.Morethan80%saidthatachievinggoals depended on their own actions more than onthings they could not control.Unexamined habits. Many executives recog-nized the importance of building the adaptive capa-bilities required to address unpredictable environ-ments, but fewer than one in five felt sufficientlycompetentinthem.Inpartthat’sbecausemanyexec-utives learned only the classical style, through expe-rience or at business school. Accordingly, we weren’tsurprisedtofindthatnearly80%saidthatinpracticethey begin their strategic planning by articulating agoalandthenanalyzinghowbesttogetthere.What’sWhich StrategicStyle Is Usedthe Most?Our survey found thatcompanies were most oftenusing the two styles bestsuited to predictable en-vironments—classical andvisionary—even when theirenvironments were clearlyunpredictable.9%Shaping16%Adaptive35%Classical40%VisionaryAre You clingingto the wrongStrategy Style?A clear estimation of yourindustry’s predictabilityand malleability is key topicking the right strategystyle. But our survey ofmore than 120 companiesin 10 industries showedthat companies don’tdo this well: Their esti-mates rarely matched ourobjective measures. Theyconsistently overestimatedboth predictability andmalleability.8 Harvard Business Review September 2012This article is made available to you with compliments of FM Global Insurance.Further posting, copying, or distributing is copyright infringement. To order more copies go to or call 800-988-0886.
  • 9. Operating in Many ModesMatching your company’s strategic style to the pre-dictabilityandmalleabilityofyourindustrywillalignoverall strategy with the broad economic conditionsin which the company operates. But various com-panyunitsmaywelloperateindifferingsubsidiaryorgeographic markets that are more or less predictableand malleable than the industry at large. Strategistsin these units and markets can use the same processto select the most effective style for their particularcircumstances, asking themselves the same initialquestions: How predictable is the environment inwhich our unit operates? How much power do wehave to change that environment? The answers mayvary widely. We estimate, for example, that the Chi-nese business environment overall has been almosttwice as malleable and unpredictable as that in theUnited States, making shaping strategies often moreappropriate in China.Similarly, the functions within your companyare likely to operate in environments that call fordiffering approaches to departmental planning. It’seasy to imagine, for instance, that within the autoindustry a classical style would work well for opti-mizing production but would be inappropriate forthe digital marketing department, which probablyhas a far greater power to shape its environment (af-ter all, that’s what advertising aims to do) and wouldhardlybenefitfrommappingoutitscampaignsyearsin advance.If units or functions within your company wouldbenefit from operating in a strategic style other thanthe one best suited to your industry as a whole, it fol-lows that you will very likely need to manage morethan one strategic style at a time. Executives in oursurvey are well aware of this: In fact, fully 90% as-pired to improve their ability to manage multiplestylessimultaneously.Thesimplestbutalsotheleastflexible way to do this is to structure and run func-tions,regions,orbusinessunitsthatrequiredifferingstrategic styles separately. Allowing teams withinunits to select their own styles gives you more flex-ibility in diverse or fast-changing environments butis generally more challenging to realize. (For an ex-ample of a company that has found a systematic wayto do it, see the sidebar “The Ultimate in StrategicFlexibility.”)Finally, a company moving into a different stageof its life cycle may well require a shift in strategicstyle. Environments for start-ups tend to be mal-leable, calling for visionary or shaping strategies. Ina company’s growth and maturity phases, when theenvironment is less malleable, adaptive or classicalstyles are often best. For companies in a decliningphase, the environment becomes more malleableagain, generating opportunities for disruption andrejuvenation through either a shaping or a visionarystrategy.Once you have correctly analyzed your environ-ment, not only for the business as a whole but foreach of your functions, divisions, and geographicmarkets, and you have identified which strategicstyles should be used, corrected for your own biases,and taken steps to prime your company’s culture sothat the appropriate styles can successfully be ap-plied, you will need to monitor your environmentand be prepared to adjust as conditions change overtime. Clearly that’s no easy task. But we believe thatcompanies that continually match their strategicstyles to their situation will enjoy a tremendous ad-vantage over those that don’t. HBR Reprint R1209EMartin Reeves is a New York‒based senior partnerat the Boston Consulting Group and the director of itsStrategy Institute. Claire Love is a New York‒based projectleader at BCG’s Strategy Institute. Philipp Tillmanns is aconsultant at BCG in Hamburg and a Ph.D. candidate atRWTH Aachen University, in Germany.Haier, a Chinese home-appliancemanufacturer, may have takenstrategic flexibility just about asfar as it can go. The company hasdevised a system in which unitsas small as an individual caneffectively use differing styles.How does it manage this? Haier’sorganization comprises thousands ofminicompanies, each accountable for itsown P&L. Any employee can start one ofthem. But there are no cost centers in thecompany—only profit centers. Each mini-company bears the fully loaded costs of itsoperations, and each party negotiates withthe others for services; even the financedepartment sells its services to the others.Every employee is held accountable forachieving profits. An employee’s salary isbased on a simple formula: base salary ×% of monthly target achieved + bonus(or deduction) based on individual P&L.In other words, if a minicompany achievesnone of its monthly target (0%), the em-ployees in it receive no salary that month.Operating at this level of flexibility canbe as rewarding as it is daunting. Nearbankruptcy in 1985, Haier has since be-come the world’s largest home-appliancecompany—ahead of LG, Samsung, GE, andWhirlpool.The Ultimate in Strategic FlexibilityFor article reprints call 800-988-0886 or 617-783-7500, or visit hbr.orgSeptember 2012 Harvard Business Review 9This article is made available to you with compliments of FM Global Insurance.Further posting, copying, or distributing is copyright infringement. To order more copies go to or call 800-988-0886.