Weak Signals White Paper

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Fountain Park White Paper: The Need to Understand the Unknown Is Emerging within Business

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.

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Weak Signals White Paper

  1. 1. Fountain Park White Paper: The Needto Understand the UnknownIs Emerging within BusinessThe fast growing need to manage the volatile business environment is growing fast. Fortunereported in March 2002 on an increasing request for market and industry monitoring: “So inthe past few years companies have started demanding ways to make sense of what they’vebeen 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 2002were 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 BIis 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 PaceMore and more industries are operating in volatile markets. Even companies operating in slower pacemarkets experience unpredictable changes. For example, steel industry faces a threat from modernprefabrication technologies of wood that bring novel solutions to the construction market. So not eventhe established slower moving companies are safe. In the oil industry pressure from the environmentalorganizations is so strong that it forces top management to co-operate or even to resign. 1
  2. 2. Drivers of volatility are the increased complexity of the networked economy and the faster pace ofchange. The modern economy is a network of value chains. Due to the specialized roles and responsibilitieswithin a typical value chain it is connected to several other value chains forming a value network. Everyaction in this value network has an impact on the whole network causing unpredicted reactions. Thedynamics make it difficult to predict what the outcome of a change will be. The numbers of participantsin the value network and their relationships are increasing, thus adding to the complexity. Networking isthe primary driver for increased complexity. The faster pace of change also drives volatility. The faster pace on the other hand is the consequenceof a more and more effective information society. We are able to react immediately so the (lag)time spanfrom the primary change stimulus to the total network is growing shorter and shorter. The impact sentout via information has different consequences.The knowledge intensive organizations are faster to adaptthe change than the capital-intensive industrial organizations.Two Strategies to Meet ComplexitySo far the competitive advantage has in most industries been gained through the use of information wehave but our customers don’t possess.The new challenge for the marketer is that the area which neitherour 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, thecompany 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 capabilityto adjust to occurring changes with a flexible organization. This strategy produces companies that adaptfast. Second, if the company is a market maker or a challenger in the market, the strategy has to be moreproactive. If the market is considered to be analyzable the company has to find a systematic way to gainunderstanding of the dynamics of unknown. Within these two major strategies a company has four different alternative approaches for its businessenvironment screening and planning. 2
  3. 3. In a stable environment the strategic planning processes rely on trends. In these cases the environment isperceived 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 analyzeits environment or there just are no resources allocated for it, the information is reached through naturalnetworks 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 theirunderstanding of the environment by systematic scanning and forecasting procedures. They use severalmeans: 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 interactin expert focus groups. The widely implemented scenario planning method is a combination of theseprocedures. There are fast growing markets where traditional strategic planning is not the most effective way tocreate sustainable competitive advantage. Internet or new technology based businesses do not have theluxury or even the opportunity to analyze the environment systematically.The environment is too volatileand resources are too scarce for this. Here the market success is dependent on two factors: imaginationand the speed of implementation. A lucrative vision of a novel solution and the ability to launch it willguarantee 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 situationis. There are markets where proactive decision-making is required and systematic business environmentscanning 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 themarket.Why Is It so Difficult?Traditional strategic planning creates an understanding of the market and the business environment byanalyzing 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 thismethod and four trends will remain unidentified. In the worst case the organization is relying on limitedinformation and all strategic plans are based on these biased forecasts. 3
  4. 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 speaksabout ‘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 veryinefficient. Even the most massive and effective scanning system is not able to identify all potential weaksignals. So far there is no analysis method able to predict which of the signals are going to release theirpotential. Even if we could define a reliable and holistic picture of the fast changing environment at onepoint, the next moment will change everything. The rational conclusion would be to give up.When the Competitive Advantage Requires Proactive Decision-MakingFor the majority of large corporations there is no alternative. In order to create strategic flexibility therehave 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 toanalyze 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 focusingon predictable forecasts (such as the Delphi method which produces a consensus description of thefuture and filters most of the potential discontinuities out of the process) or on the inefficient analyzingof individual weak signals, it is rational to focus on the dynamics of the potential discontinuities. Even ifa single weak signal is a temporary actor in the market, the dynamic interactions between signals havemore sustainable/durable impact on the market. When the organization is systematically following up thedevelopments it is able to create understanding of the dynamic patterns and their shifts in the market.Understanding the FiltersThe nature of the traditional strategic planning process has strong built-in filters that filter all/most ofthe novel information out of the process. In order to create an effective scanning method we have tounderstand 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 tocreate an impact on the strategy process. The observation filter (surveillance filter) defines the area weare observing. It is mainly our current market.The challenge: discontinuities usually come from outside ourcurrent industry.The cognitive filter (mentality filter) is used for evaluating the novel issue that has passedthe observation filter. ”Has this issue any meaning to us? Is it important for our strategy?” The cognitivefilter 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 corporatestrategy decides whether the novel issue has to be considered in the new strategy or not. 4
  5. 5. Challenging the Current Mental ModelsEvery 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 todestabilize 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 mentalmodel 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 withidentified discontinuities. The mental model is relatively easy to describe by using the concept of theknowledge 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 easyto evaluate the flexibility potential of respondent groups and compare them. The number of sources ofinformation 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. 5
  6. 6. ConclusionsCapturing discontinuities in the volatile business environment is possible. There are no means – or eventhe need – for total understanding of all that is going on, but there are ways to capture the essential forthe strategy process. A single weak signal seldom has the power to challenge the current strategy. Butwhen a strategic planning process is systematically evaluating the dynamics of potential discontinuities, thecompany 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 capturingthe unknown www.fountainpark.com/signals_solutions 6

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