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Strategy & Execution

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Adjusting Your Strategy in

a Tight Market
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by Michael G. Jacobides
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Adjusting Your Strategy in a
Tight Market

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by Michael G. Jacobides
Published on HBR.org / June 30, 2022 / Reprint H074MC

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Juan Moyano/Stocksy

During the past two decades, corporate scope and priorities were
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shaped by an abundance of capital. Today the univested capital of

private equity funds stands at an all-time staggering high of $3.4 trillion.
With such massive liquidity chasing few opportunities, valuations for
innovative investments have been high. The prevailing low interest
rate environment has only reinforced the focus on growth: With debt
so cheap, capital has felt able to afford patience, and the promise
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of growth, even in the absence of profitability, has been enough to

convince investors of the value of a business.

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Now that interest rates are rising and that liquidity is being drained out
of the system by central banks the world over, the focus is switching
to returns. As investors turn from irrational exuberance and fear of
missing out (FOMO) to a concern with earnings and valuation, the

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criteria of what adds value will adjust, creating challenges for businesses
predicated on the value of growth. While in the past skilled salespeople
like WeWork’s Adam Neumann could oversell a concept even when
the financials wouldn’t add up, burning cash without much by way of
reassurance other than buying growth, higher capital costs and lower

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liquidity will inevitably lead to greater scrutiny.

Such scrutiny may be a welcome change. Infatuated by the promises of

new business models, and obsessed with stratospheric valuations and
cash generation of Big Tech, many corporations embarked on a strategy
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of digital expansion. Look at tech platforms, the folklore went: A focus
on profits would have drowned the business. Jeff Bezos was right to
fend off pressures to be profitable, as growth and ultimate scale would
later lead to untold riches.
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The challenge is that big tech companies had some unusual advantages,
and their ability to be a gatekeeper, which commands extraordinary
power, cannot be easily replicated. So alongside many courageous
business transformations that have added value, we have also seen a
blind belief that that emulating some aspect of major tech companies’
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approach by acquiring a firm that would help firms credibly argue

that they could become a platform owner or ecosystem orchestrator.
Firms the world over rushed to showcase AI credentials, signal their
commitment to the metaverse, and declare themselves the next
platform.
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In a tighter market with less liquidity and higher expected returns

managers can no longer afford that blind belief. That’s not a bad

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 HBR / Digital Article / Adjusting Your Strategy in a Tight Market

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thing but the risk, of course, is that corporate leaders may veer from
unbridled enthusiasm to excessive caution, when the structural forces
transforming our world are stronger than ever. As companies will
inevitably have to absorb part of the cost hikes and reduce their profit

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margins, the question of whether they will turn from naïve excitement
to mindless caution remains.

That would be a mistake. The collapse in cryptocurrency valuations, for

instance, does not mean that the technologies behind them pose any

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less of a risk for banks and other financial institutions. Digitalization
is continuing to progress apace. Customers are open to being wooed
by all-encompassing multi-product or experience ecosystems. While
WeWork’s original thesis was oversold, smaller competitors like
Estonia’s Workland are finding that returns can emerge if the model
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is thought through.

From wellness and lifestyle, where big tech giants are making
significant strides, to services that financial institutions and retailers
want to offer, the face of competition is changing. The likes of Chinese
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tech giant Tencent and its WeChat all-in-one service, Japanese retailer
Rakuten, Chinese insurer PingAn, Indian conglomerate Reliance Jio,
and the Western big tech firms are in a race to find a unique point
of contact for consumers. Companies like Omada in the U.S., which
focuses on in care for chronic conditions such as diabetes, are using
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their experience ecosystems as a new way to woo the customer.

Italian coffee supplier stalwart Lavazza is experimenting with a role
as orchestrator of a coffee experience ecosystem. In short, in sector
after sector, value is migrating towards creative multi-firm propositions
spanning the physical ad the digital and connecting different players.
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As firms adjust to these new conditions managers will need to:

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1. Accept change, which is probably the hardest ask. It’s important that
managers understand that the cost benefit calculus should not
compare the investment case to the status quo. It should compare the
investment case with what inaction will entail — and this often

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means declining margins and volumes, and changing customer
needs.
2. Understand the nature of the value add of engaging with
innovation. They need to show how innovation relates to both
growth and margins. This means going beyond the buzzwords to see

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what digital transformation and disruption really bring to the table,
understanding the merits of engaging in platforms and ecosystems,
the benefits of using AI, the potential upsides of getting involved in
the metaverse early on, and the merit of employing gamification to
better connect to their customers.
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3. Acknowledge that rather than try to dominate and risk over-
investing as an orchestrator in these new platforms and ecosystems,
they can also engage in a more modest strategy of being a good
partner or complementor, and that they will need a portfolio of
thought-through propositions. Their criteria should not be the
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upside alone, but also the risk and magnitude of the investment they
will undertake.

The challenge firms face is that the world is changing, and success will
probably come from fresh ways of adding value. Yet, with no quick
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fix to inflation in sight, we should expect a re-evaluation of strategic

priorities, with reduced liquidity and increased capital costs leading
to more scrutiny. This will require the ability to develop reasoned
arguments on what adds value and why more than glib salesmanship.
The time for proper strategy work, grounded in reality and connected to
the long term vision of a firm has arrived. Time to embrace it and roll up
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our sleeves.

Copyright © 2022 Harvard Business School Publishing. All rights reserved. 4

This document is authorized for educator review use only by ATANU BHATTACHARYA, Lovely Professional University until Apr 2023. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
 HBR / Digital Article / Adjusting Your Strategy in a Tight Market

t
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Michael G. Jacobides is the Sir Donald Gordon Chair of
Entrepreneurship & Innovation and a professor of strategy at London
Business School. He is the author of In the Ecosystem Economy,
What’s your Strategy? (HBR, September–October 2019).

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This document is authorized for educator review use only by ATANU BHATTACHARYA, Lovely Professional University until Apr 2023. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860