Academic journal article The McKinsey Quarterly

Making the Most of Uncertainty

Academic journal article The McKinsey Quarterly

Making the Most of Uncertainty

Article excerpt

In extremely uncertain environments, shaping strategies may deliver higher returns, with lower risk, than they do in less uncertain times.

Shape or adapt? For years, executives have regarded the question as perhaps their most fundamental strategic choice. Is it better for a company's competitive position to try to influence, or even determine, the outcome of crucial and currently uncertain elements of an industry's structure and conduct? Or is the wiser course to scope out defensible positions within an industry's existing structure and then to move with speed and agility to recognize and capture new opportunities when the market changes?

As globalization, digitization, and unfettered capital markets raise levels of uncertainty and rewrite definitions of opportunities and risks, this basic strategic choice has morphed into a more complex and high-stakes dilemma. The right strategic bets can return far higher payoffs, far more quickly; the wrong ones carry a much higher risk of systemic failure. Betting big today may fundamentally reshape a marker on a global scale to the advantage of a company or quickly produce losses that can throw it into bankruptcy. A company may avoid foolhardy mistakes by waiting for uncertainty to diminish, or it may squander the chance to lay claim to first-mover advantages.

The truth is that no dominant solution exists. You might argue that any good strategy should attempt to shape and adapt by specifying actions designed to increase the probability of some outcomes while simultaneously preparing for others. That approach may work in some cases. Yet the actions a company must take to shape the market are often inconsistent with those needed to adapt. Consider Qualcomm. For the past few years, it has been trying to move the wireless-telephone industry toward its CDMA (Code Division Multiple Access) technology CDMA, a technical standard that determines how information travels and communicates through a wireless network, is competing with other technologies to become the industry standard for next-generation mobile phones.

Qualcomm realizes that if it wants to shape the industry, it must build a coalition of supporters around the CDMA technology. This approach involves cutting deals with wireless companies to get them on board and convincing consumers that CDMA is superior. To win the standards battle, Qualcomm must be totally committed to the cause or at least look as though it were. If the company tried to hedge its bets by producing chips for a competing technology as well--something an adapter might do--it would undoubtedly undermine its shaping efforts. How could Qualcomm convince its potential partners that CDMA was superior if it simultaneously invested in competing standards?

As the story of Qualcomm illustrates, under uncertainty, shaping actions are often at odds with adapting ones. Shape or adapt is therefore a real choice for most companies most of the time. But how, amid rising uncertainty and ever greater risks, can a company nail down the right strategic choice?

The different shapes of shapers and adapters

An essential starting point is understanding your alternatives. Shaping and adapting strategies may take many different forms. Shapers generally attempt to get ahead of uncertainty by driving industry change their way. Some, like Qualcomm, aim to increase the probability that a preferred technology or business process will become an industry standard. Others grapple with uncertainty by introducing fundamental product, service, or business-system innovations intended to redefine the basis of competition in an industry: think of the low-price, point-to-point air travel model of Southwest Airlines, Dell Computer's direct-sales approach, or Netscape Communications' break-though Internet browser, Navigator.

Other shapers try to restructure unstable industry environments by making bold mergers and acquisitions, as BP did in the oil industry, or by breaking up integrated companies, as AT&T did in 1996 by spinning off its equipment provider, Lucent Technologies. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.