How to Succeed in an Era of Volatility

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Strategy & Business Model Section | 1

How to Succeed in an Era of Volatility

By Dunigan O’Keeffe et al., | Harvard Business Review Magazine | March–April 2024 Issue

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Over the past 30 years we’ve lived through a remarkable era of macrostability, characterized by largely peaceful geopolitics, generally falling interest rates, expanding credit markets, and moderate inflation. During that time, five new trends in the business landscape emerged: globalization, capital superabundance, the declining cost of distance, labor superabundance, and, underlying all those, technology-led innovation. Winning companies adapted their organizations to the trends, embracing such mantras as “Move fast” and “Adapt or die” to create enormous amounts of value.

We’ve now entered a new era in which new rules apply. It’s a time of post-globalization, capital rationalization, spatial dispersion, shrinking workforces, and dependence on automation. Meanwhile, technology-led innovation is only accelerating and compounding. In this environment, the intuitions that leaders have developed over the past few decades will cease to be useful—and the shape of opportunity and risk will be entirely different.

If leaders want to continue creating value in the era of volatility, they must still focus on adaptability. But they’ll also need to revive strategies that boost investment in two other capabilities that have fallen out of favor in recent years: resilience and prediction. Ultimately, every company will need a strategy that allocates time, resources, and energy to all three capabilities.

Prediction. This capability involves generating beliefs about the future of your industry with enough precision and conviction to create opportunities for competitive advantage. For example, leaders may not know the full contours of the coming geopolitical landscape, but they’re sure to face a more fractured world of sharper rivalries, and that reality will shape parts of the macroeconomy. Companies must constantly work at developing scenarios, testing them against their risk and reward potential, and selecting a strategy that will adjust their exposures over time.

Adaptability. Being adaptable means changing the business faster than competitors are changing. Most companies developed this capability during the recent era of macrostability, but they now need to refine it in key ways to grow in the era of volatility. By understanding where their current business has long or short exposures, for instance, leadership teams can track signals related to critical bets that might trigger a shift in strategy.

Resilience. Companies with superior resilience survive shocks better than their competitors do. Many shocks that companies should prepare for (perhaps even most) are known to them, but too often leaders don’t do the work of pressure-testing their chosen strategies and business models. During the past three decades of macrostability, companies were insulated from damage from shocks, and it became far too easy for them to optimize for short-term profits and avoid investments in resilience. That’s partly because resilience can have deleterious effects on efficiency: It takes time and money to make the investments in redundant capacity, alternative supply chains, and critical inventories, all necessary to weather shocks.

In determining how best to allocate your resources across the three capabilities, the following steps can help: map exposures, develop scenarios, allocate capital, and track signals.

3 key takeaways from the article

1. Over the past 30 years five trends in the business landscape i.e., globalization, capital superabundance, the declining cost of distance, labor superabundance, and, underlying all those, technology-led innovation were replaced and or augmented by post-globalization, capital rationalization, spatial dispersion, shrinking workforces, and dependence on automation. Meanwhile, technology-led innovation is only accelerating and compounding. In this environment, the intuitions that leaders have developed over the past few decades will cease to be useful—and the shape of opportunity and risk will be entirely different.
2. If leaders want to continue creating value in the era of volatility, they must still focus on adaptability. But they’ll also need to revive strategies that boost investment in two other capabilities that have fallen out of favor in recent years: resilience and prediction.
3. In determining how best to allocate your resources across the three capabilities, the following steps can help: map exposures, develop scenarios, allocate capital, and track signals.

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Topics:  Strategy, Business Model, Uncertainty, Resilience, Prediction, Adaptability