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Is your organization a target?

By David J. Glew, Stephen C. Harper and Jonathan D. Rowe

Executive summary
Managers blind-sided by waves of change keep asking  “How could we have seen this coming?” Being a little paranoid, understanding the limitations of mental models, considering different future scenarios, and practicing anticipatory management can help these managers reduce their organization’s vulnerability, give it an edge over reactive competitors and contribute to its lasting success.

Nobel Peace Prize laureate Nicholas Murray Butler once observed that people can be divided into three groups: the few who make things happen, the many who watch things happen and the overwhelming majority who have no idea what happened. The same can be applied to organizations. In today’s precarious economic climate, more firms are falling into the third group. In more prosperous times, these companies focused on the present, swimming in what seemed to be a sea of unlimited opportunities. Now, the economic weather has changed – perhaps permanently – and they are like the man caught in the surf, knocked down by wave after wave. Not only can he not make it back safely to the beach, he is being dragged into deeper and more dangerous waters.

Alvin Toffler noted years ago in his book Future Shock that as the rate of change accelerates, the future will invade the present, catching people unprepared for new realities. That change is taking place on every front, and the rate of change continues to accelerate. SWOT analysis, a tool familiar to most executives, helps firms identify their strengths, weaknesses, opportunities and threats. When times are good, it is easy and natural for executives to spend their time spotting opportunities and capitalizing on their firms’ strengths. Yet their preoccupation with making the best of the good times is like the drunk who believes he only gets a hangover when he stops drinking. Too many organizations and too many people were unprepared for the consequences of a world that drank too much of the “irrational exuberance” Kool-Aid and failed to recognize their vulnerability. For example, they failed to realize that increasingly higher prices in the housing market combined with out-of-control borrowing were unsustainable. When reality hit, they found themselves living in a house of cards that was built on a fault line in the path of a hurricane.

So how do executives make their firms less vulnerable to changes that will inevitably occur? How can they avoid having to ask “How could we have seen this coming?” First, they need to disavow the herd mentality that “If everyone ignored the warning signs, then I’m not stupid for missing the warning signs myself.” Then, they need to look inside and outside their firms for sources of vulnerability and adopt ways to prevent and reduce them.

Vulnerability is self-inflicted

Why are firms so vulnerable today? Is it just because things are changing so fast on so many fronts? Partly yes, but that is not part of the solution. The line “it happens” may have been funny in the film “Forrest Gump” when someone stepped in dog excrement, but it is not an acceptable explanation or justification when the company is blind-sided by the unexpected events that come with new realities. A more accurate explanation may be that managers have become too short-sighted, too myopic and too insular to recognize quickly enough the changes that jeopardize their organizations.

Many executives are reluctant to admit that they are one source of their company’s vulnerability. It is easier to blame others than to recognize and analyze our faults. Yet whenever you point the finger of blame at something else, remember that three fingers are pointing back at you. Cartoonist Walt Kelly’s character Pogo may have captured the root cause of many of today’s problems with his immortal words, “We have met the enemy and he is us.”

The job of managers in general, and of leaders in particular, can be boiled down to increasing the likelihood that good things happen and reducing the likelihood that bad things happen. Most managers are like firemen. They spend their time “putting out fires” to solve problems. While these managers might be very busy, they are usually just keeping their heads above water and are making little forward progress. Alternately, managers can spend their time preventing foreseeable problems from happening. This might seem more productive, but a focus on what is known often results in a failure to recognize new problems.

A third, but much less common, managerial activity is looking ahead to anticipate future problems. Managers who learn to sense future problems and take steps to eliminate them or at least minimize their impact can position their companies to take advantage of new opportunities. Actions that help managers see what the future may hold (see Figure 1) not only make their organizations less vulnerable, but they get a significant head start and competitive edge over businesses that are more reactive.

Although executives may say they think about the future, the evidence indicates otherwise. Gary Hamel and C.K. Prahalad noted in their book Competing for the Future that on the average, senior management devotes less than 3 percent of its time to building a collective view of what markets the firm should serve, what technologies it should master, which customers it should tailor its products and services to and how to get the most from its employees. This suggests top executives are not asking the tough questions and challenging the key assumptions that would help prepare their companies for the future. By failing to look ahead, top managers increase the vulnerability of their own organizations.

A little paranoia helps

It may seem strange to suggest paranoia as a way to begin the process of reducing a firm’s vulnerability, but a little fear and foreboding can be a good thing. Successful CEOs agree. Years ago, Lou Gerstner, former CEO of IBM, observed, “You can never be comfortable with your success; you’ve got to be paranoid you’re going to lose it.” A few years later, Andy Grove, CEO of Intel, wrote the book Only the Paranoid Survive. Jeff Bezos, as CEO of Amazon.com, captured the need to be a bit paranoid when he stated in an interview on “60 Minutes,” “I tell people around here to wake up petrified and afraid every morning.”

Paranoia, like most things in life, can be good if handled the right way. Too much paranoia can be debilitating. It causes managers to “lock down” their organization in a defensive posture. This level of paranoia is not uncommon today. The failure to see and prepare for threats is causing more and more firms to be in a perpetual crisis state.

In contrast, too little paranoia can result in a Pollyanna attitude that all opportunities are worth pursuing, and nothing can go wrong. It can cause people to be arrogant and complacent about the forces that surround them. In John Kotter’s book A Sense of Urgency, he notes that complacent people tend to: (1) pay more attention to what is happening inside their organizations than to what is happening outside their businesses, (2) move too slowly to succeed, (3) do what has worked in the past, and (4) even if they see problems, not feel changes are required in their own actions. Kotter’s most important observation may be that complacent people do not view themselves as complacent.

Two of the most common defense mechanisms complacent people use when confronted with threatening information are denial and rationalization. John Gardner, in his classic essay, “The Life and Death of Institutions,” noted that organizations behave similarly. He stated, “Most ailing organizations have developed a functional blindness to their own defects. They are not suffering because they can’t solve their problems but because they won’t see their problems. They can look straight at the faults and rationalize them as virtues or necessities.” He then noted, “For those in power the danger of self-deception is very great.”

The failure to recognize one’s own complacency is bad enough, but when you combine it with ignorance and stubbornness the situation goes from bad to worse. A little paranoia will help keep your eyes open.

Mental models may not sync with new realities

A mental model, or mindset, refers to the way a person collects and processes information. Our mental models affect how we see the world, how we make decisions and how we behave. Each of us has a slightly different mental model, but when our model proves correct, it is reinforced and has an even more powerful effect on how we see the world in the future. The danger in this self-reinforcing cycle is that past ways of thinking – however correct they might have been at one point in time – become obsolete when new realities set in. Organizations also suffer from this “paradox of success.” Past mental models that led to their success may now lead to their failure. Managers that hold onto old assumptions have what can be called legacy mindsets. They are, in effect, analog processors in a now digital world.

The terms being “Delled,” “Amazoned” or “Southwested” illustrate how quickly mental models can become obsolete. Dell changed the way computers were made, marketed and distributed. Amazon challenged the very foundation of bricks and mortar retail businesses. Southwest Airlines offered air fares that no one in the industry thought were sustainable. These and other companies changed the way business was conducted by changing the game rather than just tweaking the rules. Meanwhile, established firms either ignored them or ridiculed them as entrepreneurial follies. As we now know, the legacy mindsets of these established firms were the equivalent of saying “Human flight is impossible.”
Companies that are out of touch or rely on outdated mental models become vulnerable because they are unable to align their strategies with new realities. History provides numerous illustrations of people and companies that were blind-sided by new realities, underestimating how fast the future would invade the present. A few noteworthy examples are given in Figure 2. In Ken Olson’s case, an obsolete mental model contributed to the demise of DEC, once regarded as a pioneer in the computer industry. In Gen. John B. Sedgwick’s case, it cost him his life. To reduce the vulnerability of your firm, adjust your mental models to match new realities.

Scenarios: Consider the possibilities

Maintaining an appropriate level of paranoia and developing flexible mental models are two general steps that help firms reduce their vulnerability. Managers, however, also must make deliberate efforts to anticipate the specific conditions their firms might encounter in the future. This will let them position themselves to minimize the impact of detrimental events and forces, or even to prevent the impact altogether. Running “What if X happens?” scenarios helps reduce the likelihood that firms will be blind-sided. Scenarios are beneficial because they help managers think the unthinkable, expect the unexpected, learn to never say never, and ask what would make the impossible possible.

Just because something has not happened does not mean that it cannot happen. The executives at Samsung have an interesting way of getting their people in research and development to think the unthinkable. Posted above each urinal in the men’s room is a picture of a jet exploding into the side of the World Trade Towers with text in Korean below it to remind employees that “disaster can strike out of the blue.” While no one can predict the future, by running multiple scenarios about what might happen in the next few years, managers can think about how to prepare for multiple futures.

While some executives take pride in running scenarios, they often limit their focus to a field that is too narrow. Their perceptual field is like the sweep of windshield wipers. It allows them to see more clearly in one direction, but it leaves their company vulnerable to things happening around and behind them. This explains why so many are blind-sided. When they are looking – and perhaps preoccupied – with one or two things, they miss other trends and events. If they do not see, for instance, the entry of new competitors, the potential introduction of breakthrough technology or the shift in regulations, they will be vulnerable to these changes. The best scenarios do more than extend one’s mental horizon in a single direction. Rather, they consider the future in many different directions along many different dimensions. In addition, they look at the future from a holistic perspective, checking for cause-and-effect relationships among the various possibilities they uncover.

Anticipatory management can reduce your vulnerability

Anticipatory management refers to a management philosophy and style that emphasizes vigilance and preparation for future opportunities and threats. Mental models and scenarios play a key role in the three “I’s” of anticipatory management. The first “I” involves making deep, probing strategic inquiries. Asking such straightforward “What if X happens?” questions may lead to the second “I” – strategic insights. Insights into what may happen in turn enable the firm to develop the third “I” – strategic initiatives – which are actions designed to prevent or minimize threats and capitalize on opportunities. Scenarios thereby place the firm in a position to develop the “then’s” for “If X happens, then we do X” initiatives or “If Y happens, then we do Y” initiatives. A full explanation of anticipatory management is beyond the scope of this article, but the following three components are vital to understanding your firm’s vulnerability:

  1. Environmental scanning: Managers constantly must be vigilant for internal and external factors that might increase their firms’ vulnerability, as shown in Figure 3. An environmental scan is similar to the use of 360-degree radar in that it checks for potential threats from every direction. The most effective scans also act like sonar by searching beneath the surface of threats to understand their true nature. In addition, managers must remember to look up and not just out. Air Force pilots know they are vulnerable if they do not pay attention to what is above them. By looking in every direction, you reduce the likelihood that your last words will be, “Where did that come from?” Environmental scanning involves sending out scouts, setting up listening posts and establishing other types of early warning systems. Leonard Fuld reported in Harvard Business Review that 97 percent of the companies he studied had no early warning systems. His study also indicated two-thirds of the 140 corporate strategists polled admitted their firms had been surprised by as many as three high-impact events in the past five years. A thorough and frequent environmental scan is necessary to avoid what might be a devastating surprise.
  2. Key factor analysis: Not all the threats identified in an environmental scan will be of equal magnitude. Managers must next distinguish between major and minor threats. Jim Collins noted in his book How the Mighty Fall that W.L. “Bill” Gore (founder of Gore Associates) uses a technique called the “waterline principle” to determine the level of any particular threat. The principle highlights the difference in outcomes to a ship if something were to pierce its hull. Gore says you need to differentiate the types of things that may hurt the firm above its waterline and cause setbacks from the types of things that are below the waterline and could lead to devastating consequences.
  3. Contingency plans: Once threats have been identified and their relative magnitudes established, the next step is to create contingency plans to deal with these threats should they occur. The extent of contingency planning depends on the probability that a threat may occur and how bad it would harm the organization. The company is most vulnerable to likely threats that are accompanied by high levels of loss, so contingency plans for these types of threats need to be well-prepared and ready to implement. Figure 4 illustrates additional levels of vulnerability and corresponding contingency planning requirements.

Think about it today: Where is your firm vulnerable?

It should be clear that your firm needs to be vigilant about its current and, perhaps more importantly, its future threats. Regardless of the level of contingency planning, the firm’s success will depend on management’s ability to size up the situation, choose the appropriate contingency plan and quickly implement that course of action. Fuld found that only 7 percent of corporate strategists said that management acted fairly soon after receiving an early warning, and only 13 percent claimed management had a method of “forcing quick action.”

Prepare for the future today by asking managers and employees to identify where your firm may be vulnerable. Cast this initial vulnerability net as broadly as possible. The resulting list might include events, trends and changes that range from the loss of key personnel to the introduction of radically new technology that would make your business obsolete. Then ask, “Where do we think we are not vulnerable?” After all, many firms have been devastated by changes to which they were supposedly immune. Other useful questions include:

  • “What don’t we know that we need to know?”
  • “If we were a competitor, where would we attack our firm?” 
  • “Where are the areas that even if we see the need to change it will take too long to change?”
  • “What moves are we making today that could be liabilities tomorrow?”
  • “What, if it happened, would change everything?”
  • “What if a competitor changed the rules?”
  • “What if our competition decided not to play by the rules?”

More turbulence is on the horizon

Ultimately, you will need to address the question, “What can we do to prevent or minimize these areas of vulnerability?” A sense of urgency is what you need now. Consider just a sample of the major shock waves to hit firms in the last 10 years: the BP drilling rig disaster, the meltdown of financial institutions, erratic swings in the stock market, plummeting real estate prices, H1N1 flu, Hurricane Katrina, the 9/11 attacks, Y2K and ongoing wars. Change in the next 10 years is inevitable and almost certainly will be greater in scope and magnitude than it has been in the past.

While many companies will strive to develop failsafe systems, no business will be in total control. Being a little paranoid, understanding the limitations of your mental models, considering multiple possible futures and practicing anticipatory management are ways to reduce your vulnerability, give you an edge over competitors that are more reactive and increase your chances of lasting success.

David J. Glew is associate professor of management at the University of North Carolina Wilmington. He received his bachelor’s and master’s degrees from Brigham Young University and his doctoral degree in organization behavior from Texas A&M University. His research interests include team effectiveness and personal values at work.

Stephen C. Harper is Progress Energy/Betty Cameron Distinguished Professor of Entrepreneurship at the University of North Carolina Wilmington. He is the author of numerous books on leadership and entrepreneurship. His latest book, The Ever-Evolving Enterprise: Guidelines for Creating Your Company’s Future, will be published in January 2011. He has conducted hundreds of seminars on how to create exceptional enterprises.

Jonathan D. Rowe is the director for the Entrepreneurship Center and a lecturer at the University of North Carolina Wilmington. He is currently completing his doctoral thesis at the University of Auckland. He has an MBA from Babson College and an M.A. in project management from George Washington University. He has been involved with two technology startups and has worked as a project manager for IBM Global Services. He has taught entrepreneurship courses in six countries. His research focus is on angel investment and entrepreneurial entrapment.

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