The document discusses the increasing volatility in business environments and the need for companies to understand unknown factors that could impact their strategies. It outlines two main strategies for dealing with this complexity - either focusing on flexibility to adapt to changes, or taking a more proactive approach to analyze the environment. The challenges of analyzing volatility are also discussed, as traditional strategic planning relies on past trends which are less reliable. The document proposes using the Fountain Park Strategic Signal Toolset to systematically monitor potential disruptions and analyze the dynamics between weak signals, rather than individual signals, to develop a more comprehensive understanding of the unknown factors that could impact a company's strategy.

1. Fountain Park White Paper:
The Need
to Understand the Unknown
Is Emerging within Business
The fast growing need to manage the volatile business environment is growing fast. Fortune
reported in March 2002 on an increasing request for market and industry monitoring: “So in
the past few years companies have started demanding ways to make sense of what they’ve
been collecting. Today BI is one of the few sunny spots in a dreary market for technology.
According to Forrester Research in Cambridge, Mass., 44% of companies at the end of 2002
were considering buying BI software this year. Merrill Lynch, in its December survey of CIOs,
found that the software topped the list of tech spending for 2003. Overall, the market for BI
is expected to grow from $4.7 billion this year to $7.5 billion in 2006, according to broker-
age house A.G. Edwards.”
The Drivers of Market Volatility: Increasing Complexity and Faster Pace
More and more industries are operating in volatile markets. Even companies operating in slower pace
markets experience unpredictable changes. For example, steel industry faces a threat from modern
prefabrication technologies of wood that bring novel solutions to the construction market. So not even
the established slower moving companies are safe. In the oil industry pressure from the environmental
organizations is so strong that it forces top management to co-operate or even to resign.
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2. Drivers of volatility are the increased complexity of the networked economy and the faster pace of
change.
The modern economy is a network of value chains. Due to the specialized roles and responsibilities
within a typical value chain it is connected to several other value chains forming a value network. Every
action in this value network has an impact on the whole network causing unpredicted reactions. The
dynamics make it difficult to predict what the outcome of a change will be. The numbers of participants
in the value network and their relationships are increasing, thus adding to the complexity. Networking is
the primary driver for increased complexity.
The faster pace of change also drives volatility. The faster pace on the other hand is the consequence
of a more and more effective information society. We are able to react immediately so the (lag)time span
from the primary change stimulus to the total network is growing shorter and shorter. The impact sent
out via information has different consequences.The knowledge intensive organizations are faster to adapt
the change than the capital-intensive industrial organizations.
Two Strategies to Meet Complexity
So far the competitive advantage has in most industries been gained through the use of information we
have but our customers don’t possess.The new challenge for the marketer is that the area which neither
our customers nor we have knowledge of is expanding daily.
To meet the challenge of the ever growing unknown, we may apply two different strategies. First, the
company may consider the enviroment non-analyzable; decide to give up the screening challenge (“anyway,
we cannot all the time know what is going on”) and focus all of its efforts on maximizing its capability
to adjust to occurring changes with a flexible organization. This strategy produces companies that adapt
fast. Second, if the company is a market maker or a challenger in the market, the strategy has to be more
proactive. If the market is considered to be analyzable the company has to find a systematic way to gain
understanding of the dynamics of unknown.
Within these two major strategies a company has four different alternative approaches for its business
environment screening and planning.
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3. In a stable environment the strategic planning processes rely on trends. In these cases the environment is
perceived to be independent of the activities of the company itself. When on the other hand the man-
agement of a company that operates in volatile circumstances considers it to be too complex to analyze
its environment or there just are no resources allocated for it, the information is reached through natural
networks of the company and the strategic focus is in adjustment.
Most large corporations have an active role in their market due to their relative size. They build their
understanding of the environment by systematic scanning and forecasting procedures. They use several
means: management team hones the vision and workshops for market analysis are run, planning profes-
sionals use the Delphi-method and organize expert focus groups via internet or have experts interact
in expert focus groups. The widely implemented scenario planning method is a combination of these
procedures.
There are fast growing markets where traditional strategic planning is not the most effective way to
create sustainable competitive advantage. Internet or new technology based businesses do not have the
luxury or even the opportunity to analyze the environment systematically.The environment is too volatile
and resources are too scarce for this. Here the market success is dependent on two factors: imagination
and the speed of implementation. A lucrative vision of a novel solution and the ability to launch it will
guarantee a dominant position and other players in the market will follow it. This is called enactment,
market creation where risks are huge. If a company fails in this competition, it fails totally.
For every organization the key issue is to decide on what the relevant strategy in its current situation
is. There are markets where proactive decision-making is required and systematic business environment
scanning is needed. However, there are also companies that waste their energy by establishing compli-
cated forecasting methods when their capability to adjust fast produces more competitive power in the
market.
Why Is It so Difficult?
Traditional strategic planning creates an understanding of the market and the business environment by
analyzing the past and current data. The prognosis for the future comes by extrapolating current trends.
In the discontinuous environment a business planner is able to predict three out of seven trends using this
method and four trends will remain unidentified. In the worst case the organization is relying on limited
information and all strategic plans are based on these biased forecasts.
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4. A major challenge arises from both the volatility and the nature of information. Potential discontinui-
ties have to be identified at a very early stage for proactive decision-making. Strategic literature speaks
about ‘weak signals’ that are still weak but have a huge potential to change the dynamics of the market.
Both the weak nature and the huge amount of information makes the scanning and processing of it very
inefficient. Even the most massive and effective scanning system is not able to identify all potential weak
signals. So far there is no analysis method able to predict which of the signals are going to release their
potential. Even if we could define a reliable and holistic picture of the fast changing environment at one
point, the next moment will change everything. The rational conclusion would be to give up.
When the Competitive Advantage Requires Proactive Decision-Making
For the majority of large corporations there is no alternative. In order to create strategic flexibility there
have to be systematic business environment analysis systems and systematic procedures also for captur-
ing the potential discontinuities at their early phase. We concluded above that it is not efficient to try to
analyze all weak signals in the environment, so we have to find another approach.
Fountain Park Strategic Signal Toolset provides an alternative, effective approach. Instead of focusing
on predictable forecasts (such as the Delphi method which produces a consensus description of the
future and filters most of the potential discontinuities out of the process) or on the inefficient analyzing
of individual weak signals, it is rational to focus on the dynamics of the potential discontinuities. Even if
a single weak signal is a temporary actor in the market, the dynamic interactions between signals have
more sustainable/durable impact on the market. When the organization is systematically following up the
developments it is able to create understanding of the dynamic patterns and their shifts in the market.
Understanding the Filters
The nature of the traditional strategic planning process has strong built-in filters that filter all/most of
the novel information out of the process. In order to create an effective scanning method we have to
understand these filters in order to be able to open them (or to close them, if needed).
A clue from the external environment, a weak signal, has to pass three different filters in order to
create an impact on the strategy process. The observation filter (surveillance filter) defines the area we
are observing. It is mainly our current market.The challenge: discontinuities usually come from outside our
current industry.The cognitive filter (mentality filter) is used for evaluating the novel issue that has passed
the observation filter. ”Has this issue any meaning to us? Is it important for our strategy?” The cognitive
filter is formed from previous (success) experiences and we have a tendency to filter the novel issue off,
”because it has not been of any importance earlier”.
The power filter is activated when the same management team that has been responsible for the corporate
strategy decides whether the novel issue has to be considered in the new strategy or not.
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5. Challenging the Current Mental Models
Every organization has a natural tendency to stabilize, a feature of social interaction. When the environ-
ment is volatile and management has recognized the importance of strategic flexibility it is necessary to
destabilize the organization. Acquiring external information in the strategy process destabilizes the situa-
tion. If discontinuities are captured and brought to the strategy process, they challenge the current mental
model about the operating environment and thus destabilize the current strategy in that respect.
The first step is to explicate the current mental model and after that consciously challenge it with
identified discontinuities. The mental model is relatively easy to describe by using the concept of the
knowledge structure by scanning the organizations understanding of the recent changes in the operat-
ing environment. When the collected observations are classified to the mental model matrix it is easy
to evaluate the flexibility potential of respondent groups and compare them. The number of sources of
information reflects the diversity of strategic thinking.
Mental model A explicates
that the organization has a
strong market and customer
focus. When discontinui-
ties often come out of the
current market, this model
predicts a weak capability
for pro-active decision-mak-
ing in the organization.
Mental model B describes
an organization that has
ver y diverse sources of
information and diverse fo-
cus.This organization is more
often capable of capturing
discontinuities when they
are weak by nature. In this
respect there is potential for
pro-active decision making in
this organization.
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6. Conclusions
Capturing discontinuities in the volatile business environment is possible. There are no means – or even
the need – for total understanding of all that is going on, but there are ways to capture the essential for
the strategy process. A single weak signal seldom has the power to challenge the current strategy. But
when a strategic planning process is systematically evaluating the dynamics of potential discontinuities, the
company is able to increase its strategic flexibility and the capability for proactive decision-making.
To get started with capturing the unknown:
1. invite a large heterogeneous group of constituencies to
participate anonymously in business environment scan-
ning.
2. give participants an open, even an ambiguous brief; it brings
more diversity to the material.
3. make sure that every potential weak signal is processed
even when it does not fit into the current mental
model.
4. scan the environment frequently.
5. focus your attention on the dynamics of the environment
and analyze the changes.
More information on our solution and the theoretical background of Fountain Park Strategy Signals for capturing
the unknown www.fountainpark.com/signals_solutions
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