Getting a handle on competition used to be a relatively straightforward matter of assessing industry peers and their supply chains. But the emergence of a new industry archetype over the past two decades has made strategy more complicated. Since 2005, roughly 85 percent of global profit growth has come from a small set of industries, including cloud computing, e-commerce, AI, robotics, and electric vehicles.
These industries, which we call arenas, have unique characteristics (see sidebar “The evolution of arenas”). They grow and evolve faster than traditional industries, draw in more new entrants, and can concentrate value in the hands of fewer players in a race to the top. What’s more, arenas don’t usually map neatly to traditional industry boundaries, with some cutting across several sectors and reshaping their value chains. An insurance company may now see its core risk pools reshaped by autonomous-vehicle platforms that reduce accidents and shift liability—an arena-driven change it did not see coming.
Arenas are defined by high growth and dynamism, measured as shifts in market share among top companies. These outcomes typically result from the interplay of a technology or business model breakthrough, competitive dynamics in which advantage compounds rapidly, and a large or growing addressable market. As companies invest more, quality improves. Meanwhile, these companies learn faster, lower their operating costs, expand their ecosystems, and strengthen their customer relationships, all of which make their leadership positions increasingly difficult to challenge.
Because arenas influence adjacent sectors and reshape customer expectations, they impact the entire business environment. Even those well outside an arena are affected by how arenas reshape competition, demand, and supply (see sidebar “How arenas reshape value across the economy”).
The rise of arenas requires business leaders to rethink strategy in two important ways. First, they can no longer anchor strategy solely in their industry structure because competition increasingly comes from fast-moving arenas that can redefine where and how value is created. Second, leaders need to understand which industries behave like arenas and how these dynamics may create both opportunities and threats. In the age of arenas, advantage is shaped less by a company’s position in its core industry and more by how effectively it allocates capital and resources across emerging arenas.
To navigate this landscape, leaders need a way to assess their position in relation to arenas and decide how to respond. This means shifting the focus of strategy from defending existing positions within legacy industries to choosing how to compete within or around arenas and allocating strategic investment accordingly.
Identifying the right strategic response
Arenas do not affect all companies in the same way. Their impact depends in part on their proximity to a company’s core business (Exhibit 1). In some cases, an arena directly reshapes the economics of the core; for example, electric vehicles (EVs) transformed the cost structure and profit sources of traditional automakers. In others, an adjacent arena may gradually shift industry profit pools and who captures them, as streaming platforms have done in media by taking control of customer relationships. An arena at the fringe may exert little influence at first until it expands and disrupts the core, as obesity drugs could for some food, beverage, and consumer-goods companies.
Companies are typically exposed to multiple arenas simultaneously, each presenting a distinct strategic challenge. Business leaders’ task becomes managing a portfolio of approaches: transforming the business in some areas, increasing investment in others, and maintaining flexibility where uncertainty remains high. This approach represents a break from traditional strategic planning, where the goal was to maximize each business’s chance to outperform within its industry. Companies are exposed to multiple arenas at once, and their relationships with those arenas evolve. Therefore, leaders must navigate interdependent choices across them, allocating capital and attention as the relative importance of different arenas shifts.
One way to think about these decisions is to map a company’s position relative to an arena across two dimensions: how directly the arena affects the company’s operating model and competitive position (distance from the arena) and whether the company has built or can build the capabilities and assets required to establish a competitive advantage (capabilities to win) (Exhibit 2).
These two dimensions help companies determine the most appropriate response to an arena. There are four broad responses: transform the core business, refocus on fewer segments, find a new way to compete, or explore opportunities at the fringe of an arena. The experiences of four companies over the past 15 years illustrate these approaches in practice: Adobe responded to a new business model in software; Texas Instruments refocused as semiconductors became hyperspecialized; a media company built a direct-to-consumer business; and Chinese companies moved early to capture the emerging EV opportunity.
Reinvent the core: How a software company switched to subscriptions
When software companies began to shift from perpetual licenses to subscriptions, Adobe faced a defining choice. Adopting the model implied lower short-term revenues, required a different operating model, and risked cannibalizing its most profitable products, but it also put Adobe at the center of what became the main business model for software companies.
Adobe acted quickly to make the switch.1 It moved its flagship products to the cloud and rebuilt the business around subscriptions, accepting initial investor skepticism and a near-term drop in revenue.2 Over time, the shift strengthened customer engagement, increased those customers’ lifetime value, and led to faster innovation cycles.
This is the essence of reinventing the core: acting while the business is still performing well to secure a position in an emerging model that could otherwise undermine performance. This response suits companies that face a direct challenge from an arena but have the assets and capabilities (including brand, customer relationships, and technical expertise) to compete effectively. The difficulty, which regularly challenges incumbents during significant disruptions, is having the willingness to commit sufficient resources to the transformation amid uncertainty.
In arenas, the winning strategic formula is rarely clear up front. Multiple technologies and business models often compete, and early bets may not pay off immediately—or ever. But waiting for clarity can backfire because, as others accelerate their investments, their advantage can compound quickly. Companies that test new business models, scale them, and commit early are likely to shape the outcome, while those that wait risk being locked out.
In practice, the lack of a clear horizon can mean facing tricky decisions, including the following:
- continuing to experiment with new economic models even when they underperform the core business in the short term
- reallocating capital toward these emerging models at the expense of the core, which is still the dominant cash generator
- shifting assets and developing capabilities to support emerging ways of competing
Reinventing the core typically requires moving a substantial share of capital early, while the core business can still fund the transition. In McKinsey’s experience, companies that successfully reinvent tend to direct 50 to 70 percent of strategic investment toward building and scaling emerging models, with the remainder supporting the core business and enabling flexibility to pursue more emerging opportunities.
However, organizations often fall into the trap of treating the new operating model as an extension of the existing business. This can feel like a lower-risk path: The new model may even help defend or strengthen the core by protecting customer relationships, preserving relevance, or extending the life of the legacy cash generator. But this beneficial outcome is most likely when leaders commit to the new model as a source of future advantage, not as an incremental add-on. In the age of arenas, partial commitment and gradual investments often slow learning, limit the ability to build a strong position, and become the highest-risk choices. Business leaders need to accept that some bets will not pay off, that parts of the legacy business will decline, and that protecting the core may require building the model that eventually reshapes it.
Refocus to win: How a semiconductor company repositioned
When an arena reshapes a company’s core business, leaders often face a hard truth: They cannot win in every category in which they previously competed. Trying to take arena leaders head-on across the full scope of the market can stretch capabilities, dilute the impact of investments, and erode returns. The best option is often to choose where to play and where not to.
Texas Instruments faced this challenge as the semiconductor industry moved toward increasingly advanced, capital-intensive chip designs, particularly those used in processors for mobile phones. Competing with the leaders would require large, sustained investment and ecosystem relationships that were concentrated among a few players. Rather than try to keep up, Texas Instruments exited that segment and refocused on analog and embedded semiconductors—markets with longer product cycles, more stable demand, and stronger alignment with its manufacturing capabilities and customer relationships. The repositioning allowed the company to concentrate its resources where it could build a structural advantage. Over time, this focus delivered stronger margins and a more resilient competitive position than if Texas Instruments had continued on a more diversified path.
In the arena context, refocusing to win is the best strategic posture when a company lacks the capabilities, scale, or ecosystem position to compete on the terms set by arena players. Organizations that refocus often allocate 60 to 80 percent of their strategic investments toward strengthening or repositioning the businesses, with the remainder supporting necessary transitions (such as exiting noncore segments, restructuring operations, and redeploying talent) and maintaining flexibility. When confronting inroads from arenas, lack of focus is often more damaging than lack of scale.
Build the next advantage: How a global media company built a direct customer business
Some of the hardest strategic decisions arise when the core business is still performing well, but its competitive advantage is beginning to erode. In these situations, companies are typically not fully competing within the arena, but the arena’s dynamics are starting to reshape where value is created and captured. The revenue and profit pools often shift from one part of the value chain to another—for example, toward customer interfaces as new channels redefine access and relationships; toward systems and services, when value moves beyond the core product; toward supplier networks when scarce capabilities become critical constraints; and toward new use cases as arenas shift customer preferences toward different products, features, or ways of consuming the offering. The risk to an incumbent is not immediate disruption but a gradual weakening of its competitive position.
A global media company faced this challenge as digital distribution platforms increasingly controlled customer relationships and market access. The company’s core businesses remained highly profitable, but value was moving to competitors with direct connections to consumers. In response, the company accelerated investment in owned customer channels, shifting key content and customer experiences towards the platforms it controlled. The company accepted the short-term trade-off of reduced revenue from existing commercial partnerships and distribution arrangements to secure a position where value was concentrating.
The company acted from a position of strength to build an advantage in an arena that was not yet central to its core business but was likely to redefine it. The main challenge for incumbents in this situation is overcoming the inertia born of success. Leaders often continue optimizing the core business while making small, fragmented bets within the arena’s sphere. But when competitive advantages compound quickly, waiting to make a move until it’s necessary can put the organization too far behind to catch up with others that act more decisively.
The strategic challenge is to identify where advantage is moving and commit enough resources—typically 60 to 70 percent of strategic capital—to build a position in the adjacent arena.
Explore at the fringe: How China grew its EV industry
Industrial robotics was once largely confined to automotive manufacturing. Over time, however, as costs declined and capabilities improved, the technology began to spread to other industries, setting new benchmarks for efficiency and quality in manufacturing and pressuring manufacturers in sectors such as electronics and consumer goods to adopt automation or risk falling behind. This is the nature of arenas at the fringe of a company’s core business: Their impact is limited until it’s suddenly important.
When arenas are developing, unevenly evolving, or still searching for viable business models, they don’t seem to require urgent action. Consider the case of EVs in China, which were once treated as peripheral but have since become central to competition in the automotive industry. Tellingly, many Chinese EV companies began in other industries (for example, BYD, which started in batteries). Yet as technologies mature and adoption accelerates, arenas can shift from peripheral to central to a company’s business in a relatively short period. The challenge is staying prepared without overcommitting.
Exploring at the fringe means building options for and insights about arenas that are not yet influencing business but could do so. Early signals often appear in the form of emerging customer needs, new technical capabilities, or small pockets of demand. For example, drone deliveries were initially limited to niche use cases such as medical supplies before expanding into broader commercial applications. These signs can be easy to dismiss when the core business remains strong, but ignoring them can leave the organization unprepared when the pace of change accelerates.
To prepare for the rapid acceleration of an arena, leaders can set explicit trigger points—including specified adoption rates for a new technology, cost thresholds for the technology, regulatory changes, or expansion of the ecosystem—that would justify greater investment. This approach enables business leaders to move quickly without requiring them to commit prematurely. Investment timing matters as much as focus. Capital allocation when exploring an arena at the fringe is more limited than in the other cases we’ve explored—typically in the range of 5 to 10 percent—though it’s important to preserve the flexibility to scale rapidly if conditions change. The objective is to be ready to play a strong role if and when the arena moves closer to the core.
Leadership in the age of arenas
Arenas are changing where and how companies compete and exposing weaknesses in how some leadership teams approach strategy. Winners are not always those who get it right from the start, but those who combine conviction with adaptability. Many organizations struggle with this. As a result, they either hesitate too long or commit and then double down when they should pivot. But it’s no longer viable to develop strategies as if industries are stable, capital investment can be staged, and all decisions are reversible. Delay can compound disadvantages.
Leadership in the age of arenas requires a new kind of discipline. It means making difficult choices about where to compete, concentrating capital and attention behind those choices, and using the core business to fund the next source of advantage—even when that undermines the core business. In this context, strategy is about managing a trajectory through a sequence of deliberate, often irreversible choices about where to build advantage, committing resources before the outcome is clear.
Three principles can guide how CEOs approach leadership in the era of the 18 future arenas:
- A portfolio of hard bets beats a five-year plan. The concept of strategy as a three-to five-year plan is increasingly outdated. Arenas evolve too quickly, and competitive positions shift too fast. What matters is the direction of travel and the quality of the foresight that guides it. Most companies are already exposed to multiple arenas. Some arenas are already reshaping their core business, others are adjacent to it and influencing its competitive environment, and others are emerging and may become more important over time.
The question is where to commit. Trying to participate everywhere can lead to winning nowhere. Success comes from concentrating capital and attention on a few positions that can endure and deprioritizing or exiting other areas. - Strategy hinges on resource allocation; everything else is commentary. In the age of arenas, competitive advantage is built through investment cycles: more capital enables faster learning, stronger ecosystem partnerships, and lower cost positions. Spreading capital thinly across too many initiatives and avoiding hard trade-offs are common pitfalls, reinforced by annual budgeting processes that tend to keep resource allocations largely static year to year. It’s critical to move capital to where the company can build a future competitive advantage.
- Waiting for clarity is the highest-risk move. Arenas evolve as competing technologies, business models, and ecosystems jockey for advantage. The winning model is rarely obvious early on, but early moves can shape who wins. Leaders who wait for certainty preserve optionality in the short term but risk losing the long game. Strategic foresight is essential for identifying where value may shift, which factors may shape that shift, and which signals may indicate that it is happening. Business leaders need to place staged bets, expand them as evidence builds, or pivot decisively if assumptions prove wrong.
These three principles will become even more critical as new arenas emerge, such as low-earth orbit satellites that may transform the space and earth economy; robotics, drones, and autonomous vehicles that may reconfigure physical labor; and AI that may spawn new types of organizations and even industries.
In the age of arenas, CEOs need to determine where arenas are reshaping their companies’ positions and whether they have, or can build, the capabilities to compete. Advantage is determined by where and how decisively companies allocate capital, which requires a dynamic approach to strategy. It’s crucial to continuously reallocate resources, make deliberate trade-offs across a portfolio of opportunities, and commit early despite uncertainty. The risk of inaction is not just underperformance; it is losing the right to compete for future sources of growth.