What has Changed the Most for Strategy

Implications for Your Strategy

Source: Roger L. Martin

When I think about the changes in the context for strategy across my career, my view contrasts starkly with the consensus view. Most obsess about rising VUCA (the combination of volatility, uncertainty, complexity and ambiguity) as the key change. I don’t — and I explain my position in this Playing to Win/Practitioner Insights (PTW/PI) called What has Changed the Most for Strategy: Implications for Your Strategy. And as always, you can find all the previous PTW/PI here.

The VUCA Narrative

I started advising executives on strategy in 1981. The question I pondered for this piece is how has the context for strategy changed over the past 44 years?

The general answer I get from observers is that the context for strategy has gotten more VUCA, a concept borrowed from military strategy, which adopted it in the late 1980s and has gotten ever more obsessed about it since. And that obsession has rubbed off on the business world. It is a bit like SWOT. The acronym rolls off the tongue and is very evocative. The narrative holds that as a strategist, you must recognize that you live in an increasingly VUCA world, so you must do SWOT analyses (ugh) and set out OKRs (double-ugh) to deal with that scary world.

I just don’t buy the notion that the world generally, or specifically the business strategy world, has gotten more VUCA and wrote about it three years ago in this series. Perhaps my feeling is informed by the particular time I entered the business work world and my subsequent tenure in it.

I graduated into my first full-time job from business school in 1981, when the economy was in the middle of the third year of by far the greatest three-year inflation (39%) since during WWI (1916–1918). US unemployment was well on the way to hitting 10.8% in December 1982, its highest rate by far since the Great Depression. The Federal Funds rate (the basis for all interest rates) crested over 19% as I graduated. Policy makers had to invent a new name for the combination of high unemployment with high inflation — stagflation — which my economics courses taught me was impossible.

Suffice it to say, it was pretty damn VUCA. Neither governments nor businesses had a clue how to deal with it — and simply made stuff up as they went along.

Then we had the Iraqi invasion of Kuwait in 1990 and Desert Storm to follow — along with another deep recession. Then we had the dot.com bubble and crash between 1999 and 2001, followed by 9–11 in 2001, followed by the global financial meltdown in 2008–2009, followed by the Russian invasion of Ukraine in 2022.

I think it is impossible to argue that it has not been non-stop VUCA for the past (at least) 44 years.

Honestly, I think the VUCA narrative is so popular because it makes a great excuse: “We are doing badly because it has gotten so VUCA.” While the breakdown of the Soviet Union is cited as the motivation for the US War College adopting the VUCA narrative, my own belief is that it had as much to do with being outsmarted by the Viet Cong in the catastrophic Vietnam War that ended a decade earlier in 1975. Faced by the then-dominant US doctrine of overwhelming air and technical superiority, the Viet Cong said no thanks and played an entirely different game, and won against what in the old game would have been an overwhelmingly superior force. But to rationalize the loss, the losing side saw it as a manifestation of this terrible new phenomenon — VUCA.

It is not dissimilar to competing against Microsoft in personal computer operating systems. No competitor has been able to dent its near monopolistic share. However, the true competitors changed the game and worked on making an alternative device the ‘computer’ of choice — i.e. the smartphone. In that more broadly defined game, Android is the big winner with a share 50% greater than Windows — which probably felt pretty VUCA to Microsoft. Dominant winning strategies always have and always will create VUCA responses as if out of thin air.

While the world simply hasn’t gotten demonstrably more VUCA, two changes have generated the biggest impact on strategy over the time of my career: fixed/variable cost mix and price/value discovery.

Fixed/Variable Cost Mix

Historically, and still as of 1981, variable costs dominated the cost structure of business (as I chronicled in this Harvard Business Review (HBR) article. Historically, companies were mainly factories (whether product or service factories) with a thin veneer of office tower overhead. The biggest proportion of costs varied with production and a tiny proportion were fixed. The auto industry is a perfect historical example. When the customer wants a car, the auto company must buy thousands of parts, assemble them and physically deliver the product — a whole lot of variable costs.

But beginning in the 1960s, large companies started to get really big, growing revenues 5.3 times in real terms between 1960 and 2000 — huge growth. And they doubled again in real terms since.

As they grew, they built up fixed costs — in categories such as branding, R&D, and distribution — in part because they became big enough to take advantage of scale economies in these fixed cost categories. As a result, cost-of-goods-sold (COGS) as a percentage of revenues has fallen dramatically since 1981 and the share of sales, general & administration (SGA) has grown similarly. That in turn has driven scale. If you don’t spread your fixed costs over great volume, you are going to get out-invested by someone else — and then you are in trouble because your product won’t be as advanced, won’t be as branded, won’t have the distribution. In this way, scale begets more scale.

Industries that have the lowest fixed costs (as a percentage of revenues) remain the most fragmented, as with the auto OEM industry that has been famously consolidating for decades yet the biggest player, Toyota, still has a mere 12% market share and the next highest is below 10%. Industries with highest fixed costs — like software where variable costs are miniscule — are consolidated or consolidating. For example, in cloud software services, three companies — Amazon, Microsoft and Google — have 63% market share. In smartphone operating systems, Android has 75%, iOS 24% and everybody else combines for 1%.

Across sectors, this shift in fixed/variable cost has driven increased concentration, which I discussed in the HBR article above and is shown in various pieces of research including this University of Chicago study.

Price/Value Discovery

The second huge change impacting strategy is the dramatically increased speed and efficiency of price/value discovery. As of 1981, it was genuinely hard to compare prices and assess value of offerings, whether in B2C or B2B. Competitive prices were not easily available. You might need to go physically from store-to-store to compare — and in many B2B businesses it was even harder. And to get accurate assessments of quality/value, you would need to subscribe to Consumer Reports or Car & Driver magazine and wait for the issue that dealt with the offering for which you were interested. In B2B, pioneer Gartner Group only came into existence in 1979.

In B2C, if a seller could lure you into its physical location, it had a decent chance to sell you something without you knowing what it cost elsewhere or how the offering actually performed. In B2B, a salesman visited you to sell you person-to-person and use the relationship to get you to buy — again often without knowing competitive prices or performance.

Obviously, it is completely different 44 years later. In most industries, there is ease and efficiency of price comparison. There is very little you buy today without knowing the price relative to competitive offerings. And there are endless customer reviews available to provide a (relatively) unbiased assessment of value. Price and value discovery happens instantly and cheaply — a few clicks and you have what you need.

Implications for Strategy

For me, there are three big implications for strategy of the intersection of these two fundamental changes.

More Deterministic

Strategy has become more deterministic. With customers able to discover price and value quickly and efficiently, companies can’t hide or obfuscate. Either you have invested more fixed costs wisely in making your product more appealing, or not. And that will determine results.

Of course it isn’t perfectly deterministic. Nothing in life is — except death and taxes! But it is far more deterministic today than in 1981 when obfuscation was much more effective.

Quicker to Logical Conclusion

The path to a logical competitive conclusion is shorter. In 1981, mediocre companies could survive as viable entities for decades. It was a controversial statement for Jack Welch to say in his famous 1981 speech that GE would either be #1 or #2 in its industry or exit the business. That seemed overly extreme — #3 or #4 players could be profitable for a long time, couldn’t they?

They could then but they can’t now. If you can’t find a Where-to-Play (WTP) in which you can put in place a How-to-Win (HTW), the clock is ticking fast for your demise. Winners get on an upward spiral of being able economically to invest more fixed costs in greater winning while losers get on a downward spiral of investments becoming unaffordable — and these upward and downward spirals are happening quicker than ever before.

Peakier

Winners are winning bigger than they have ever before. As I discussed in the HBR article above,

in 1978, the 100 most profitable firms earned 48% of the profits of all US publicly traded companies combined, but by 2015 the figure was 84%. Even more narrowly the so-called Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Telsa) have been responsible for a huge proportion of stock market growth in recent years, as I have written about in this series earlier (though Telsa less so recently).

While these winners are winning big, losers are losing big — whether Rite-Aid, Tupperware, Silicon Valley Bank, Neiman Marcus, Spirit Airlines, etc.

Practitioner Insights

The first insight is that strategy is more important than ever in this deterministic, speedy and peaky business context. Please ignore the voices who argue that seeking competitive advantage is fruitless in this VUCA world. They are 180 degrees wrong, and their advice is deadly to your health.

Pick a WTP in which you aim to create a matching and powerful HTW. Invest in that WTP/HTW combination quickly and aggressively. If your WTP is too broad and/or your investment is slow or tentative, someone else will be able to out-invest you — and customers will figure that out fast. And when they do, it is a quick downward spiral for you.

If you are investing energy and capital in activities without an intention of winning, you are fooling yourself. I hear it all the time: Roger, we can’t exit that mediocre product line/business unit because our overall sales will shrink. They foolishly assume that their position in that mediocre business is stable. It isn’t. It will be crushed — quicker than ever. And it will continue to bleed investment resources away from product lines/businesses that have a chance of an upward spiral.

Figure out a place to stand — and fight to win. Out-invest your competition. If you can’t, you are fooling yourself. If you can, double down and take the fight to your competition. Encourage transparency in price/value discovery. Be like Progressive Insurance and show your competitors’ rates on your own website. If you are truly superior, the more transparency the better.

It is the age of ‘killer apps’ (which I mean metaphorically — F-150 is a killer app). Few offerings will win and win big. Many offerings will lose and lose entirely. If your chances of creating a killer app while doing X things is A%, it will be >A% if you focus on doing .5X things.

Simply, what has changed most in strategy is the diminished efficacy of throwing spaghetti at walls and playing-to-play.