Adapt, shape or die

Shape or adapt? For years, executives have regarded the question as perhaps their most fundamental strategic choice.

Does a company's competitive position benefit more from trying 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 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 market 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 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 is. If the company tries to hedge its bets by producing chips for a competing technology as well--something an adapter might do--it will undoubtedly undermine its shaping efforts. How can Qualcomm convince its potential partners that CDMA is superior if it's simultaneously investing in competing standards?

As the example 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?

What are the options?
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' breakthrough 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. Other companies, such as McDonald's in the 1990s, shape nascent markets by replicating business systems in new geographies. Still others focus on shaping the conduct of competitors; in the 1970s, for example, DuPont built its capacity in the titanium dioxide industry ahead of market demand, thus influencing its competitors' expansion plans.

Adapters, by contrast, take the existing and future industry structure and conduct as given. When a market is stable, adapters try to define defensible positions within the industry's existing structure. When high uncertainty prevails, they attempt to win through speed and agility in recognizing and capturing new opportunities as the market changes. They might quickly follow a potential shaper's lead, as Compaq Computer did when it bet on Microsoft and Intel with early alliances in the 1980s. Other adapters hedge against future market uncertainty when they can identify a limited, discrete set of paths the market may follow. In the late 1980s, for example, software companies could hedge against uncertainty about which PC operating system would emerge as the industry standard by developing products for each of the contenders, notably DOS, Macintosh, Windows, Unix, and OS/2.

Still other adapters build their strategies around constant experimentation in products, services, and business systems. In the credit card industry, Capital One Financial conducted 27,000 tests of products, prices, features, packages, marketing channels, credit policies, account-management approaches, customer-service methods, and collection and retention procedures in 1998.

Finally, some adapters manage uncertainty by building flexible organizations designed to respond to changing market needs. Many professional-services companies, for example, focus on recruiting and developing people with general-management skills that will be valuable to clients regardless of how the market evolves.

With such a broad range of approaches, no wonder business strategists can't agree on a dominant answer to the shape-or-adapt problem. In fact, even individual companies may not consistently choose one alternative across all issues, business lines, and times. Nor do the data support a one-size-fits-all answer. McKinsey research suggests that 86 percent of the biggest business winners from 1985 to 1995 followed predominantly market-shaping strategies. Yet the research clearly shows that adapters too can win big.

Whether a company should attempt to shape or adapt depends largely on the level and nature of the uncertainty it faces. To put things simply, when it faces very high levels of uncertainty about variables it can influence, shaping makes most sense. Adapting is preferable when key sources of value creation are relatively stable or outside the company's control.

The logic is straightforward. Highly uncertain markets--in which technology standards are changing, competitors are constantly entering and exiting, and consumers have yet to lock into a limited number of preferred brands--offer the greatest headroom to implement successful shaping strategies. A series of major acquisitions, a bold technology investment, an aggressive product-bundling strategy--all may end up making order out of chaos and fundamentally reshaping a market to a company's advantage.