Airlines’ Flexibility in Facing Regulatory Uncertainty: TO ANTICIPATE OR ADAPT? Christian Engau Volker H. Hoffmann Timo Busch Coping with uncertainty is a fundamental challenge for firms. One way they can respond is by building up stra- tegic flexibility. By looking at airlines’ flexibility responses to regulatory uncertainty associated with their inclusion in the European Union Emission Trading Scheme, this article shows that firms can respond to regulatory uncer- tainty by developing such flexibility in two ways: they can either anticipate the potential consequences of chang- ing regulatory conditions and try to prepare for them; or they can adapt quickly and efficiently to them once the regulatory situation has become clear. By examining evidence from nine case studies, the article identifies the organizational capabilities required to pursue an anticipatory or adaptive strategy and demonstrates that each type of response requires a specific bundle of capabilities. (Keywords: Environmental Policy, Corporate Strategy, Sustain- ability, Emission Trading, Strategic Flexibility) C oping with uncertainty is a fundamental challenge for firms as uncer- tainty impedes accurate planning and can lead to stranded invest- ments. 1 This paper uses the example of climate policy—a field notorious for ambiguous and unstable policy conditions—to investi- gate corporate responses to regulatory uncertainty. One way for firms to respond to this uncertainty is to build up strategic flexibility, and they can choose between two main response options to do so: 2 firms can either—ex ante—anticipate the potential consequences of changing regulatory conditions and try to prepare for them; or—ex post—adapt quickly and efficiently to them once the regulatory situation has become clear. How should firms choose between these strategies and, notably, what are the internal prerequisites for each of them? What are broader implications of such strategic choices for climate policy, which aims to foster a reduc- tion of greenhouse gas emissions? CALIFORNIA MANAGEMENT REVIEW VOL. 54, NO. 1 FALL 2011 CMR.BERKELEY.EDU 107