The Adaptor Emerges

A resilient business strategy for a long-term perspective
M. Bruce Beck, David Ingram and Michael Thompson

Photo: iStock.com/kerdkanno

The COVID-19 pandemic has taught us many lessons about public health. At the same time, we also are being presented with new insights into business strategy—if, that is, we take the time to reflect. The pandemic has made it abundantly clear that a business needs to be able to adapt to changes, especially severe ones, in its operating environment.

But what is not obvious from this extreme situation of the pandemic is that adapting is an important strategic choice for any business. Business managers often are focused on today and tomorrow; they have a short-term perspective and look at what to do next. In contrast, a company with an adaptive strategy often has a long-term perspective that is at least as long as a business cycle and possibly as long as several business cycles.

We previously wrote about four business strategies, each aligned with one of four viewpoints—or attitudes—that are formed from experiencing four different economic risk environments.1,2 The various sequences of the “seasons” of risk (risk environment in Figure 1) constitute what we call the business cycle. Most often, a season within the business cycle lasts for several years. But sometimes, we experience variations on all four of them in a compressed timespan, as we have with the pandemic.

Figure 1: Rational Adaptability

Risk Environment Boom Bust Uncertain Moderate
Risk Attitude Maximizer Conservator Pragmatist Manager
Risk Strategy Risk

Trading

Loss

Controlling

Diversification Risk

Steering

Source: Created by David Ingram. First appeared in the August/September 2010 issue of The Actuary.

Four Strategies for Four Seasons—and a Fifth for Long-term Resilience

The adaptive strategy derives from a fifth attitude, one that is ever-alert to all of the other four attitudes and their risk environments. Our adaptor seeks to apply the strategy that best aligns with both the current environment and this fifth attitude’s long-term perspective on the environment. In a situation without adaptors, one of the other four attitudes will prevail. For those organizations where the prevailing attitude and strategy are aligned with the environment, the organization will likely achieve the kind of success it expects.

But when the environment shifts, the prevailing attitude will be surprised to find that the environment no longer conforms to its expectations. It does not conform to this attitude’s particular reading of the data streams it chooses to heed. And each of the four attitudes in Figure 1 does make different choices about which streams of data it will heed (and which it will not).

Each strategy has its practitioners who insist that their strategy is right and the others are wrong. The adaptor, in contrast, is ever-alert to the other four strategies, seeing each as valid at times and in places, and invalid at other times and in other places. An adaptor expects changes in the environment and stands ready to throw the switch: to shift the dominant attitude and strategy of the firm when the environment changes.

Working out when the environment has changed, however, is more easily said than done. It is the eternal problem of identifying qualitative inflection points in the environment. Yet, no matter how difficult, the principle of identifying changes in the environment and making changes in the strategy of the entity is fundamental to the adaptor. This makes the adaptor different from the other four attitudes that usually hold strong and fixed beliefs about the environment.

The adaptor’s view on the environment extends a ways into the future. As adaptors look to the far future, they are aware of the shifting environments of the past and hold an expectation that the shifts will continue.

To an adaptor, the specific outcome of the next future change in a risk environment would be unknown, but the future types of environments are knowable. In addition, the adaptor will want to adjust the entity’s strategy to the new environment while maintaining the insight and capability to make future adjustments as needed. The adaptor will be ever-alert to investing in the business’ capacity to navigate through all environments with resilience.

The Adaptor Strategy

Four tasks unique to the adaptor strategy can be identified:3

  1. Diagnosing the environment
  2. Assessing whether the company strategy is aligned with it
  3. Identifying transition situations and transitioning
  4. Investing in nurturing resilience for the long term

Diagnosing the Environment

The environment can be assessed in two ways. First, by directly observing events outside of the organization to determine whether they are best characterized as boom, bust, uncertain or moderate. Second, by tracking the performance of the organization relative to its peers.

The Surprise Matrix4 gives a quick summary of the ways that the experience of an organization might diverge from its peers when the environment has entered a new season. These include experiences such as:

  • Expected windfalls fail to emerge—only losses
  • Total collapse
  • Unexpected runs of good and/or bad luck
  • Others prosper without exercising any caution

Assessing Whether the Company Strategy Is Aligned

Figure 1 showed the four strategies that are tailored to each environment.5 At any point in time, one of the four strategies will be active regardless of the season. Left unattended, each will eventually cease to be aligned with the qualitatively new and different environment to which things will have transitioned. In such cases, people with each of the four basic risk attitudes can be asked for their suggestions for adjustments to strategy, which should reveal the strategy that is closest to actual practice.

Identifying Transition Situations and Transitioning

Small changes in one or many aspects of the environment may be just a temporary fluctuation, or they may be the first indication of a major inflection point. For instance, on occasion, there is a short uncertain period in between longer runs of the other three environments. In the case of the 2007 financial crisis, such a period of uncertainty extended for several years. Looking back on organizations active in the financial system at the time, we saw many adopt a pragmatist attitude while others stayed with a conservator attitude. Conservators feared the uncertain times were just a pause in the bust environment that was predominant over the second half of 2008 and the first half of 2009.

Such transitioning is no less of a task than the accompanying diagnosis. Crucially, for it to be discharged successfully and skillfully, the organization must have maintained a capability for the now newly appropriate strategy during the preceding risk environment, when it would have been inappropriate. In other words, the resilience with which the company can negotiate its way through transitions depends on all four of the strategies in Figure 1 being ready at a moment’s notice to be placed in the driver’s seat.

Investing in Nurturing Resilience for the Long Term

To be effective, the adaptor organization must sustain and nurture lively subgroups of each of the four attitudes. The adaptor will need to be accepting of all views and not appear to coerce anyone into changing their opinion. This is necessary for two reasons:

  1. To maintain the talents of each viewpoint with respect to diagnosing the environment and aligning strategy
  2. To maintain the capability to envision the details of a new strategic approach and the expertise to execute the new strategy

During a long run of any one type of environment—for example, during the “Great Moderation” in the U.S. economy from 1984 to 2007—people and groups tend to migrate toward a risk attitude that is consistent with the long-standing environment. This includes shifts from the other three main risk attitudes (other than the manager, in this example) through a process described as “surprise.”6 Groups are “surprised” that their expectations are not met by an environment that is different from their beliefs. Eventually, these “surprises” lead to a change in risk attitude. Any drift away from the adaptor capability results from the longevity of the single enduring season. Supremely expert management (excellence in just the one manager strategy) is beguiling. Great moderation must surely eliminate not only the boom and bust seasons, but uncertain, too?

The adaptor actively resists all such temptations. Adaptors know that the four seasons will return and, indeed, manifest themselves in ways that are ever-evolving, business cycle after business cycle.

The adaptor wants to see such plural (fourfold) viability; to have the clout within the organization to guide it to drop one strategy and pick up another; to be able to navigate with aplomb through all manner of broadly recognizable sea changes; and, above all, to achieve resilience of company performance over the long term. Such deft navigation requires maintenance of the diversity of strategy illustrated in Figure 2. The four basic strategies are arranged according to the level of the organization’s appetite for and tolerance of risk, and the rigor of enforcement of the risk appetite.

Figure 2: The Invaluable Diversity of Strategy

  High Enforcement  Low Enforcement
High Risk Appetite Maximizer
Moderate Risk Appetite Manager
Low Risk Appetite Conservator Pragmatist

Diversity of viewpoints is at a premium. Without it, blind spots result, which can lead to bad decisions.7 The logic of rational adaptability also brings this inescapable fact: All four stances cannot be correct at any point. Adaptors should be ever-alert to such matters and take steps to preempt them.

In short, the adaptor must be acutely aware of the changing risk environments and possess the capacity to switch strategies in a timely manner. Likewise, the adaptor must be every bit as aware of the human element in all of this and the implications for human resources and hiring strategies. Investing in people with off-season attitudes is an important component of nurturing the makeup of the business in respect to its long-term resilience.

Is This Possible?

The adaptor strategy is an ideal, like a frictionless plane or a pure vacuum. It is highly unlikely that any organization run by humans could immediately discern changes in the environment and then promptly execute an effective change in strategy. Entertaining just the possibility of such an uber-strategy, however, can help an organization begin to approach the ideal. The adaptor is, at bottom, the champion of resilience—the ultimate long-term strategy for any organization.

We strongly suspect that a less-than-perfect adaptor organization can exhibit much more resilience than an organization that allows itself to be surprised by many of the major changes in its environment. However, we are not sufficiently prepared to prove this quite yet.

Actuaries and Adaptors

The actuarial profession has long aspired to support the long-term resilience of the financial security programs with which actuaries are associated. Yet, actuaries can sometimes be lured into a fervent belief in the manager attitude alone because those beliefs and the accompanying steering strategy shown in Figure 1 place a high degree of value and reliance on the expert analysis actuaries provide.

Diversity of viewpoint and approach, as described in the adaptor attitude and strategy, provide real potential for supporting the long-term success and viability that actuaries seek. The adaptor attitude can also be one that allows actuaries to fully understand and work collaboratively with the prevailing attitude and strategy of an organization (manager attitude or not), rather than standing aloof with just their manager-steering (and non-adaptor) point of view.

Time Is of the Essence

As society and businesses move on to the next phase of the COVID-19 pandemic and eventually out of its severe stages, no one will challenge the idea that business strategies that were adapted to the compressed chopping and changing realities of the COVID-19 times will need to be adapted again. Some businesses simply will seek to snap right back to the attitude and business strategy in place before the pandemic. Other businesses will look at things as an emerging adaptor would. Consciously—or unconsciously—they will do all of these things:

  • Assess and reassess the environment
  • Assess their business’ alignment with that environment
  • Implement the strategy-transition switches when needed
  • Observe and learn from all of the changes and dislocations
  • Invest in resilience within the company

Time and time frame are of the utmost importance to an adaptor. The adaptor operates with a view of time and a perspective over the long run in which there is no enduring stability. But for the adaptor, there can instead be resilience.

M. Bruce Beck, Ph.D., is Scholar in Residence, FASresearch, Vienna, and Guest Senior Research Scholar at the International Institute for Applied Systems Analysis (IIASA).
David Ingram, FSA, CERA, FRM, PRM, is an independent researcher, writer and speaker regarding ERM and insurers.
Michael Thompson, Ph.D., is Emeritus Scholar at the International Institute for Applied Systems Analysis (IIASA).

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

Copyright © 2021 by the Society of Actuaries, Schaumburg, Illinois.