In highly volatile markets, a company's success or failure is often attributed to luck. Turbulent markets throw out opportunities whose timing, nature and magnitude managers can neither predict nor control. The same holds true for threats. In such a competitive casino, you place your bets and hope for the best. It is better to be lucky than good.
For the past six years I have studied more than 20 pairs of comparable companies in unpredictable industries such as telecommunications, airlines and enterprise software and in countries such as China and Brazil. By pairing similar companies, I showed how they responded differently to the same unforeseen threats and opportunities.
I found the more successful companies were luckier, in the sense that time and again they responded more effectively to unexpected shifts in regulation, technology, competition, macroeconomics or other volatile factors. Such luck is too important to leave to chance. The most successful companies exemplified "active waiting", an approach to strategy in highly unpredictable markets that consists of anticipating and preparing for opportunities and threats that executives can neither fully predict nor control.
A chief executive is sometimes likened to a ship's captain, peering into the distant horizon and setting a course. In many markets that future is foggy and finding a clear view nearly impossible. In the telecommunications industry, for example, shifting regulations, continuous technological change, entry by non-traditional rivals such as Skype, and shifts in consumer preferences throw out a steady stream of unforeseen opportunities and threats. Demand for cars in China, for example, arose from the confluence of increased disposable income, government investment in infrastructure, rising middleclass aspirations, easy credit and the demise of employer-provided housing near the workplace.
But all opportunities are not equal. In volatile markets, companies face countless small and mid-sized opportunities and the periodic golden opportunity -- a chance to create value disproportionate to resources invested in a short period of time. Typical golden opportunities include acquisition of a large competitor to gain global scale, such as the Royal Bank of Scotland's acquisition of NatWest; explosive demand in an emerging market such as China or India; or pioneering a new product or service such as the iPod.
Golden opportunities occur only when external circumstances throw open several windows of opportunity at the same time. Consider the opportunity for middleware -- software that links a company's applications -- which IBM and BEA converted into billion-dollar businesses. Several developments occurred at once: the internet created demand for software that could get applications to talk to one another; available technology was up to the task; early leaders such as NCR and Novell were distracted by other markets; and the paucity of venture capital funding prevented many start-ups chasing the same market.
Timing is everything in these circumstances. Had IBM or BEA entered the market a year or two earlier, customers' pain would have been less acute and the technology fix less developed. A few years later, and new entrants flush with venture capital cash might have established a lead.
Managers can neither predict nor control golden opportunities. But they can prepare their companies to capitalise on one when it arrives. The trick lies not in heroic efforts in the middle of a golden opportunity, but in the quiet actions taken during periods of relative calm between the storms.
Keep the priorities clear: In unpredictable markets, managers often try to hedge against every possible contingency by running countless experiments and launching a flurry of new initiatives. This is a big mistake. Employees and managers are overwhelmed by multiple, often conflicting, priorities. In attempting to pursue too many priorities simultaneously, executives dissipate resources and hinder co-ordination across units. Managers must exercise ruthless discipline in choosing a small number of objectives to pursue first, putting other valid concerns to one side for the time being. Equally important, they must decide what to stop doing to free up time, attention and resources to make sure the truly critical objectives are met.
Conduct reconnaissance into the future: Prudent executives will consciously take steps to investigate a foggy future. First, they should send out probes in a few directions to broaden the search for opportunities rather than staking everything on a single way forward. Exploratory forays include investing in or partnering with start-ups, or running small-scale experiments to test the market. Second, when conducting reconnaissance, managers must remain alert to anomalies -- new information that surprises them or conflicts with expectations. In turbulent markets, a manager's mental map quickly becomes outdated, and anomalies provide clues as to where the map is wrong.
Reconnaissance can be pictured as a process of probing along a wall of resistance looking for gaps. Most of the time, a company encounters hard surfaces: competitors who won't get out of the way, customers who don't want to buy or technologies that won't work. Executives should probe for gaps in the market. When they find one, they should swarm it, pulling other resources in their wake.
Keep a reserve: During periods of relative calm, executives should build a war chest of cash to deploy quickly when a golden opportunity emerges. This requires restraint. Spreading a company's chips across too many probes or doubling down on too many bets at the same time leaves little cash in reserve when a big opportunity comes along. To avoid this risk, senior executives should scrutinise the company's resource allocation process, cap the number of probes, and increase investment only after explicit evaluation.
Keep the troops battle-ready: During periods of active waiting, executives must push through operational improvements - cutting costs, strengthening distribution, improving products.
More efficient rivals can survive storms that drown rivals. Operating improvements during the lulls contribute to the war chest, but also build the credibility required to seize the golden opportunity. The Royal Bank of Scotland, for example, won NatWest because the Scottish bank's track record of execution convinced the capital markets that it was the buyer most likely to make the deal work.
Declare the main effort: One of the greatest challenges in active waiting is deciding when to commit reserves and go for broke.
Periodically, executives encounter an opportunity or threat so important that it demands the company's full focus. Declaring it the main effort creates a sense of urgency, focuses the organisation, prioritises resource allocation and lays the groundwork for coordinated effort. Yet many executives say that this was the most difficult decision they ever made. Playing it safe in the short term can prove hazardous in the long term. Companies that pass on every golden opportunity will eventually find themselves eclipsed by players that can both wait actively and strike decisively.
Leading a company into the fog of the future remains risky. By waiting actively during periods of relative calm, however, executives can increase their chances of success.
(The author is an associate professor of management practice at London Business School)
Under syndication arrangement