Company responses to the tariff shocks of 2025 provide important lessons for the management of dynamic capabilities – the activities to sense, seize and reconfigure to adapt to high uncertainty.

Observation of tariff responses across industries¹ confirms several of the propositions associated with prior perspectives on adaptation to discontinuous change², while revealing additional factors important to both management practice in the face of uncertainty and future research on dynamic capabilities.

For example, the CEO and Top Management Team (TMT) hold a special role in driving dynamic capabilities³, and indeed proved critical in framing tariff response beyond short-term mitigation of supply disruptions and margin pressures to exploring longer-term opportunities created by changes in relative competitive cost, shifting geographic growth, and new customer needs. Likewise, previous studies emphasize the importance of engagement with ecosystem partners⁴, and under tariff uncertainty companies with superior relational capital obtained superior intelligence, more collaboration in shipping planning and supply chain reconfiguration, prioritized supply of scarce components, and extended delay of price pass-throughs⁵.

However, tariff response reveals three new phenomena:

Expanded And Extended Sensing

Tariff teams used AI to scrape sources – including customs data, supplier invoices, trade regulatory filings, and company announcements – across jurisdictions; generate macro-economic scenarios; simulate supply chain reconfigurations; and model future market share shifts. With the addition of AI tools, the sensing envisaged under the dynamic capabilities framework has expanded. Sensing insights are collected, processed, extrapolated and iterated, at much higher volume and velocity, than previously anticipated.

Sensing also extended beyond initial discovery of an issue, challenge or opportunity to potential actions the company could take to respond. Then the impact of these actions was itself modeled. Many tariff teams restructured their workflows into “issue loops” – combining “sensing” with simulations of “seize” and “reconfigure” options – to equip their TMTs with insights that also probed the second-order consequences of implied actions. For example, identified supply exposures implied new sourcing options, which were then modeled to gauge their financial impact and boundary conditions; a potential cost edge over competitors implied market actions which were then analyzed to estimate market share gains; longer-term trade flow scenarios suggested future geographic growth opportunities, which implied new regional hub capabilities, which were then scoped and assessed for feasibility.

An Additional Orchestrator Role

The dynamic capabilities framework asserts that sensing, seizing and reconfiguring activities need to be orchestrated by the CEO and TMT, who must possess the entrepreneurial and cognitive capabilities required⁶. Tariff response suggests the need for an additional critical role: an individual who orchestrates the work of the TMT in adapting to uncertainty.

Consider the tasks of the tariff team leader: oversee a cross-functional team; prioritize and steer issue loops; lead the tariff team through a range of business challenges - from protecting the core, to predicting and preparing for future tariff developments, to positioning the business to capture longer-term opportunities; establish a cadence of TMT reviews; shuttle among TMT members between meetings; judge the required burden of proof to reach conviction on each issue; facilitate TMT discussions spanning concrete operational moves and emerging strategic options. Not only did the CEO and TMT lack the bandwidth to absorb the expanded/extended sensing analyses, they also needed an Orchestrator role supporting them, an executive with the cognitive and entrepreneurial skills, credibility, and whole-company perspective similar to that of the TMT itself⁷. Tariff experience suggests this Orchestrator role – the project leader driving adaptive response to uncertainty – is a key fulcrum for company-wide agility and transformation under high uncertainty.

Latent Strategy

Adaptive capabilities don’t exist in isolation from strategy: organizational agility, the balance of capabilities devoted to current exploitation versus future exploration, and the mechanisms⁸ used to achieve this balance, should all align with the firm’s strategy. Dynamic capabilities need to be complementary to strategy⁹. In practice, however, tariff teams found that their strategy was no longer fixed¹⁰: it was itself being disrupted by the same uncertainties demanding organizational agility. They needed a distinctive version of strategy-making appropriate to high uncertainty: a version we can call “latent strategy”.

The CEO and TMT recognized that under tariff uncertainty they were dealing with a different mixture of inputs: a few hard analyses, cognitive fragments that represented best guesses, mental prototypes of strategies that were contingent on particular futures, and a set of future options and opportunities that spanned a wide range of time horizons and likelihoods. They were immersing themselves as a leadership team in an iterative set of questions: “What is going on? What might happen? What are or would be the implications for us?” This is the abductive logic of effective strategy-making, but aimed not (yet) at formulating an integrated set of strategic choices¹¹, but primarily at learning – conditioning the TMT’s collective thinking to thrive under uncertainty.

Practically, these TMT meetings identified investments in resilience and readiness to protect the business or prepare for eventualities (e.g., activate our India suppliers), populated a growing portfolio of possible options and opportunities (e.g., configure the Brazil hub for future expansion), and sorted this portfolio by time horizon, probability, and strategic fit. Latent strategy involved deliberately holding strategic choices as provisional¹², pending greater clarity and resolution of uncertainty.

Latent strategy represents an important – and possibly long – phase when prior strategic choices have decohered, but new ones are not yet ready to be declared¹³. This requires a different strategic dialogue process than that many executives are used to from periods of lower uncertainty; and during this phase, strategy is in flux, meaning the balance of explore and exploit capabilities, and modes of adaptation, need to be addressed simultaneously with strategy.

Tariff turbulence has been extraordinarily painful for many companies, but it’s a valuable case study of dynamic capabilities in action. Let’s ensure the lessons for managing future turbulence don’t go to waste.

References

1. Observations are drawn from companies in industrial equipment, sports apparel, medical devices, pharmaceuticals, IT hardware, and consumer packaged goods; some are clients (client specific information has been disguised); we also draw from tariff responses publicly disclosed, and tariff announcements captured from earnings calls and financial analyst briefings, see https://siepr.stanford.edu/news/scoping-trade-war-new-tool-tracks-company-responses-tariffs-economic-threats.
2. As well as dynamic capabilities, related concepts are “ambidexterity” across both exploit and explore capabilities; creating a “vigilant” organization to prepare for environmental turbulence; organizational agility and adaptiveness; and strategy under uncertainty.
3. David J. Teece, Margaret A. Peteraf, and Sohvi Leih, “Dynamic Capabilities and Organizational Agility: Risk, Uncertainty, and Strategy in the Innovation Economy,” California Management Review, 58/4 (2016): 13–35.
4. Paul J. H. Schoemaker and George Day, “Preparing Organizations for Greater Turbulence,” California Management Review, 63/4 (2021): 66–88.
5. As one executive put it, “In this crisis, I am glad we’re friends with Maersk.”
6. David J. Teece, Margaret A. Peteraf, and Sohvi Leih, “Dynamic Capabilities and Organizational Agility: Risk, Uncertainty, and Strategy in the Innovation Economy,” California Management Review, 58/4 (2016): 13–35.
7. In some tariff teams, this was the Chief Strategy Officer (CSO). However, this requires a more innovative and entrepreneurial CSO than one whose primary expertise is in running annual planning processes.
8. I.e., “ Modes of Adaptation” including structural separation, behavioral integration or sequential alternation. See Julian Birkinshaw, Alexander Zimmermann, and Sebastien Raisch, “How Do Firms Adapt to Discontinuous Change? Bridging the Dynamic Capabilities and Ambidexterity Perspectives,” California Management Review, 58/4 (2016): 36–58.
9. Paul J. H. Schoemaker and George Day, “Preparing Organizations for Greater Turbulence,” California Management Review, 63/4 (2021): 66–88.
10. Companies affected by tariffs have considered opportunities far afield from their core strategy – entering the defense sector; offering logistics services in India; developing robotics and automation software for re-shored US manufacturing plants.
11. These companies were sophisticated at strategy. They ran sound processes, based on outside-in, future-back thinking, that yield an integrated set of choices at both business unit and corporate levels, and extend into implementation through making choices about capability investments, governance mechanisms and metrics. These companies had, in other words, absorbed the lessons of Richard P. Rumelt, Good Strategy/Bad Strategy: The Difference and Why It Matters (New York, NY: Crown Business 2011) and A. G. Lafley and Roger L. Martin, Playing to Win: How Strategy Really Works (Harvard Business Review Press, 2013). The companies knew what good strategy should look like, but deliberately did not go all the way to defined choices given high tariff uncertainty.
12. One TMT compared the suspension of choice in latent strategy to superposition in quantum theory: “We don’t yet know if the cat is dead or alive, and we’re OK with that for now.”
13. This is where many companies are on tariffs today: SIEPR’s Geoeconomic Monitor records the three most common tariff announcements since Liberation Day (April 2, 2025) as (i) supply chain adjustments, (ii) monitoring, and (iii) pricing changes. Monitoring, behind the scenes, is in large part latent strategy development.