In an atmosphere of risk and volatility, it is clear that strategy making is more challenging than ever. Factors such as globalization and greater transparency have made it more difficult for CEOs to identify exactly what industry they are in and which companies they are competing against. They are confused on how to measure their industry position and how to apply traditional forecasting in an unpredictable environment.

This recent Harvard Business Review article, authored by Martin Reeves and Mike Deimler,  indicates that traditional approaches to strategy assume a relatively stable environment – something we do not currently have. The authors of this article believe that, instead of being skilled at doing one specific thing, companies must be really good at learning how to do new things. This adaptive approach consists of four organizational capabilities which are outlined below, in addition to how leading companies have utilized them. The article also offers tactics for large, established companies that have proved effective at developing an adaptive advantage. 

The Ability to Read and Act on Signals- In order to become adaptive, a company must be able to recognize indicators of change, decode them, and quickly proceed to either refine or reinvent its business model. Since information is now easily obtainable, it is important to respond promptly because signals may be available simultaneously to all players. Likewise, adaptive companies must rely on sophisticated point-of-sale systems to guarantee they acquire the right information. The more informed executive management can be about emerging risks, the more likely they can take action to adapt their strategies to navigate through those risks.

The Ability to Experiment- Traditional approaches of experimenting can be costly and time-consuming. A growing number of adaptive competitors use new approaches, particularly in virtual environments, to test a larger number of innovative ideas faster. These companies are experimenting at a lower cost and with less risk than their rivals can. To account for the unstable environment, adaptive companies use experimentation more broadly than their rivals do. It is clear that experimentation inevitably produces failure -adaptive companies are very tolerant of failure because they learn from it.  But, learning about potential risk exposures in an experimentation phase can strengthen the organization’s ability to respond to risks that arise once the strategy is deployed.

The Ability to Manage Complex Multicompany Systems- As a growing amount of economic activity takes place outside corporate boundaries, it is necessary to consider strategies for dynamic business systems. Adaptive companies are learning how to drive activities outside the company without benefiting competitors. Through broader signal detection, parallel innovation, superior flexibility, and rapid mobilization, multicompany systems can increase the adaptiveness of individual companies.

The Ability to Mobilize- A flexible structure and the dispersal of decision rights are powerful tools for increasing adaptability. Adaptive companies drive decision making down to the front lines, allowing the people most likely to detect changes in the environment to respond quickly.  Similarly, ownership and accountability for managing risks should be driven by those closest to the strategy.  By creating a decentralized, fluid organizational structure, the key advantage of a rigid hierarchy is damaged- which is that everyone knows exactly what he or she should be doing. To substitute the need for certainty, there needs to be some simple rules to facilitate interaction and set the boundaries within which people can make decisions.

For larger companies that would like to be more adaptive, it can be difficult because their hierarchical structures and fixed routines lack the flexibility needed for rapid learning and change. In these positions, challenge your managers to:

Look at the mavericks- Ask your managers to shift their focus from traditional competitors’ moves to what the new players are doing. Consider ways to insure your company against this new competition or neutralize its effect.

Identify and address the uncertainties- Instead of utilizing the traditional single-business forecast, get your managers to examine the risks that could significantly affect the company. Doing so can push people to recognize what they do not yet know and to address it.

Put an initiative on every risk- Retaining a portfolio of strategic initiatives should become the engine that drives your organization into adaptability. Every significant source of uncertainty should be addressed with an initiative. In managing these initiatives, your company should be as knowledgeable with metrics, time frames, and responsibilities as it would be for the operating plan.

Examine multiple alternatives- The simple step of requiring that every change proposal be accompanied by several alternatives produces a more powerful set of moves and fosters cognitive diversity and organizational flexibility.

Increase the clock speed- Companies need to accelerate change by making annual planning processes lighter and more frequent and sometimes by making episodic processes continual.

You can purchase the full article at Harvard Business Review.

Link: Harvard Business Review

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ERM Enterprise Risk Management Initiative 2011-07-01