Foundation

Market views make or break strategy

Time and again, in one company and one country after another, our consultancy and research experience hammers home one point: What makes or breaks strategy is whether managers “get” something so overarching it mostly escapes attention: the very nature of markets. For, whilst markets are the core concept of economics and commerce, they have so far been overwhelmingly glossed over or misunderstood by orthodox strategy. But in 2017, business has crossed a threshold of complexity where a correspondingly complex market view becomes indispensable.

Today, only by getting the nature of markets as complex adaptive systems can firms hope to read and respond to their environment. More enticingly, only by learning to operate, and co-operate, in complexity can they take part in proactively adapting that environment to themselves – instead of reactively adapting themselves to the environment. And therein lies strategy’s new prize, which turns established strategy paradigms on their head. Mastering the collaborative dynamics of complex market systems enables Strategies for MArket SHaping – SMASH. Market shaping unleashes value gains from greater market size, efficiency and profitability which dwarf the zero-sum wins eked out in market-share increments by traditional competitive strategy.

 
 

Orthodox strategy states no view of markets, but implies a poor view

The standard playbook still weighing down managers’ bookshelves, have taught a single meta-formula of strategic success. Broadly, the formula goes: Analyse your market to identify opportunities, find your unique position and create a master plan to outwit your competition.

Working backwards, this strategic posture makes assumptions, assertions, and approximations about markets, which imply markets are either very simple, like a supply and demand graph, or utterly incomprehensible.

Variously:

·     The market is externally given: from whence it came, we cannot know. The exception is that occasionally a heroic outlier launching a breakthrough technology manages to conjure into being an entire new market.

·     Market opportunities are precursors to strategy. The non-heroic majority of firms are stuck with the market they’ve chosen, and must adapt their firm to the opportunities that they find.

·     Market dynamics are deterministic. They can be analyzed, predicted and operated on using the everyday mechanical logic of cause and effect.

·     Markets are synonyms for the aggregate demand for products – hence phrases like “the mobile phone market”. What this view leaves out is the value created when customers use the product.

·     Markets are industries. Consequently, we create institutions that limit our ability to look beyond the boundaries of the industry: statistics that measure the growth of the industry, and trade associations that stabilize the market.

None of these premises is true, and many are incompatible.

 

 

A poor market views impoverish your strategy playbook

To strategize on this basis is to build strategy on sand. In most cases, the operating environment is so inherently unpredictable that market analyses aren’t worth the pixels they’re written in. The poor views impoverish strategy from every angle:

·     They make strategy reactive and defeatist because markets are supposedly given.

·     They doom firms to compete for market share in a zero-sum competitive game.

·     Their very dominance kills the hallmark of good strategy: originality.

·     Finally, they miss the main chance: to unleash value that is orders of magnitude greater than market share increments. In other words, they miss market shaping, achieved by adapting markets to the firm, not vice versa.

If these poor market views and the strategy built on them are so deficient, why do they still prevail? We argue they have persisted partly because of sheer incumbency; partly through self-reinforcing definitions in the data on markets and industries; and partly for the lack of an articulated alternative. But the day of reckoning has come in one field after another as markets have crossed a threshold of complexity. Globalization, digitalization and network effects render the old, models of markets and strategy obsolete.

 
 

A rich market view requires systems theory

Drawing on the transdisciplinary science of systems theory, and combining insights from biology, psychology and sociology as well as economics and management, we offer the rich reality of markets as complex adaptive systems. That's "complex" like an ecosystem or a society, rather than merely "complicated" like the flight deck of a Dreamliner. Indeed, as frequent fliers, we’re delighted that airplanes still obey mechanical cause and effect. But complex systems don't. They can be neither controlled nor safely predicted. Markets as systems constantly evolve; partly by random “emergence”, partly by the deliberate market shaping efforts of the likes of Uber and its smart entrepreneurial cousins. Consequently, the firm is part of the market, rather than the market being external to the firm.

Markets are complex systems of exchange for the purpose of co-creating value. More precisely they create what classical-era economics called “use value” to the customer. Use value is as opposed to our standard neoclassical metric: exchange value, which is really price. Yet boosting use value – which is limitless – can ultimately boost exchange value, markets and profits.

The complex-systems view of markets has always been true but only recently become essential. Recognizing markets as complex systems spells strategic implications. Notably, just as markets are socially constructed, so they can be reconstructed by social methods. And whilst they cannot be predicted or controlled, they can be influenced by market players.

 

Read our next section: What is Market Shaping?