Think of all the ways your company manages its internal information – sales forecasts, ERP systems, and so on. Now, think about the resources spent tracking external events. If your company is like most, it is spending a fraction of its time and effort on the external as it is on the internal. Yet, isn’t the greatest source of strategic surprise found in the events and conditions that lie beyond the corporate walls?
Strategy guru Peter Drucker once said, “ninety percent of the information used in organizations is internally focused and only ten percent is about the outside environment. This is exactly backwards. “ At the heart of Drucker’s comments is the notion of competitive surprise. By failing to monitor external information, companies raise the likelihood of being surprised by external developments.
Research conducted by the Wharton School of Business found that two characteristics of surprise affect companies’ responses: the source of the surprise and the company’s ability to react. The source of the surprise can be looked at in two ways – is it from unknown sources (for example, terrorism) or is it a familiar surprise, such as the timing of a recession? While known threats such as recessions can be anticipated better than sudden ones, successful companies are the ones that can adapt to both.
Surprise acts as a risk-multiplier. It’s bad enough for companies to be confronted with an external development that complicates their strategy. However, if companies at least have an indication that such developments could occur, they can focus on remediation. When such developments happen by surprise, the company’s ability to act in a thoughtful and effective way is compromised. Surprise takes what could be a manageable – though perhaps unpleasant – situation and makes it almost completely unmanageable.
Why do companies do such a poor job of keeping tabs on information that has the potential to cause severe strategic disruptions? I believe there are two causes:
- First, companies have a hard time knowing what to monitor. Given the wide range of industry participants and conditions that can be at the root of external threats, firms struggle just determining what is significant. As a result, many companies attempt to monitor everything, and build elaborate “environmental scanning” systems that crumble under the weight of the mountains of information they accumulate.
- Second, even if companies are able to isolate those external conditions that pose a threat, there are few effective means by which to monitor those conditions. News alerts and filters usually are not precise enough to capture information that is truly diagnostic for assessing a developing threat. At the same time, knowledge management efforts that attempt to encourage employees to share information and observations related to strategic threats have for the most part been a failure.
The early warning indicators a company will monitor may include areas such as technology disruption, competitive shifts, regulatory changes, environmental factors, consumer or social changes, economic conditions and political influences. Analysts should collect industry information from a mix of published and human sources. The information collected can be further synthesized through an IT application designed for just this purpose.
As analysts determine that certain indicators are behaving in such a way so as to present a developing threat, they can generate early warning alerts that argue for a particular strategic option – ideally one considered during the scenario-planning phase. This way, the element of surprise is almost completely eliminated from the equation, and managers can focus on deploying a response.