The Sixth Sense Accelerating Organizational Learning with Scenarios
By Kees van der Heijden Ron Bradfield George Burt George Cairns George Wright
John Wiley & Sons ISBN: 0-470-84491-4
Chapter One Preparing for the Future
In this chapter, we introduce scenario thinking: what it means, why it is valuable, and how it enables organizations and the people within them to focus on achieving sustained competitive advantage.
This chapter is concerned with preparing for the future, introducing the concept of scenario thinking and its potential value in delivering a world-beating strategy. Understanding how best to achieve competitive advantage, in a world where the only constant is an ever-increasing rate of change, is the key attribute of profitable, market-leading organizations. As the pace and scope of change quickens, the urgency of finding the best, most competitive approach grows. In this context, the core tool to deliver continued success is the development of a new approach to strategic thinking. Tomorrow's successful companies will overturn strategic inertia and business-as-usual thinking, avoiding complacency and finding new, scarce sources of value.
In this chapter we will:
Assess the drivers both of organizational success and failure - understanding that both are inevitable, dynamic and closely tied together.
Explain the Sharpbenders research into why organizations fail - this researchhighlights problems in store for organizations that are inherently unable to detect or respond to change.
Use case examples to outline the problems in maintaining organizational performance - knowing where organizations go wrong, how and why, is essential in forming an approach that will deliver sustained competitive advantage.
Highlight the factors that are critical to achieving success - explaining how the barriers to success can be overcome, notably by creating lasting value.
The business environment is not a static arena. Establishing an ongoing, scenario-based strategic thinking process enables a business to plan for change, achieving optimum performance. These concepts are introduced in this chapter using several case study examples: Xerox and Canon, Yahoo!, Lego, Tetra Pak and Nokia.
UNDERSTANDING ORGANIZATIONAL SUCCESS
Success and Failure are Inevitable
This book is ultimately about organizational success. Organizational success is inevitable: there will always be successful organizations. Equally, organizational failure is inevitable. Organizations operating in the world are like football clubs playing in a competition: they cannot all win and they cannot all lose. Success and failure go together like the positive and the negative poles of a magnet; you can't have one without the other.
Most managers work towards the objective of making their own organization successful. Right from the start we know that they cannot all end up where they want to be. That thought has aspects that are both depressing and uplifting. We know that, however hard they try, some managers are going to be disappointed, and each of us should wonder: 'Could I be that manager?' On the other hand, knowing that everything is relative helps us to realize that the task ahead is not impossible. We do not have to be perfect, only better than the competition.
Success and failure are dynamic notions
If there is one thing we can all agree on, it is that the world around us is subject to constant and considerable change. It is clear that organizations operating successfully one day may fail totally the next. No matter how illustrious an organization's history might be, all rely on their future business. The game does not remain the same. Winning means changing the way one plays over time. Organizations that want to survive have to adapt. The challenge is that the way that the game is changing remains uncertain until it is played. This is fundamental: without uncertainty everyone could do the same calculation, or act in the same way. However, it is important to remember that not everyone can win at the same time: there are winners because there is uncertainty or, to put it in a more positive way, without uncertainty there can be no winners. Instead of seeing uncertainty as a problem, therefore, we had better start learning to love it as the basic source of our future success.
This is highly relevant to this book. We will explain how organizations that lose show poor performance due to thinking and behavioural flaws that can be improved by the use of scenario thinking. Certainly, everyone can discover this for himself, and if we were ever to reach a stage where this had become clear to all managers and every one of them was a scenario planner, there wouldn't be much competitive advantage left in it! At that stage it would have become a qualifier; something no organization could do without. But the fact is, we are far from that state of affairs. Meanwhile, as managers and organizations are slow to discover the fundamental importance of scenario thinking, early adopters can gain huge advantages.
Understanding success by understanding failure
Understanding that success and failure exist together, in close relation to each other, means that the study of organizational success starts with the study of organizational failure. Remembering that the quality of performance is relative, we will try to identify what people and organizations do that makes them end up on the losing side. Understanding weaknesses will help us to turn them into relative strengths.
In this chapter, we analyse what creates failure. This will lead to the notion of 'flaws', which we find at the level of individual thinking, organizational behaviour and community thinking, based on shared cultural beliefs and assumptions. In Chapters 2, 3 and 4 we will analyse flaws at these three levels in some detail.
We will approach the analysis from the perspective of the scenario planner, who for us is the practising manager. It is our belief that scenarios are the most powerful tools that managers have at their disposal today to move their organization to the winning side. In order to make that case, we need to understand the flaws and how they come about. In order to get us there we will first analyse organizational failure.
Explaining the Sharpbenders Research: Why Organizations Fail
In this section, we are going to make use of a body of interesting research highlighting the problems for organizations that are inherently unable to detect or respond to change. This is known as the Sharpbenders research. The people who undertook the research had the bright idea of concentrating on companies that had been failing, as manifest in a stock value that had been slipping against the market average, but which had been able to turn things around. That is where the word Sharpbenders came from - a slipping stock value followed by a recovery. The idea was that these companies, having been able to turn things around, would be able to articulate what had gone wrong and why this had happened. After all, if they had managed to turn things around they must have made a successful diagnosis of what went on during the downward part of their history. Having identified such companies from stock market records, the researchers then interviewed many of them and thus produced what is effectively a list of what can go wrong.
The outcomes of the Sharpbenders research
The findings highlight the key causes of relative decline in five categories:
adverse development in market demand or increased competition;
high cost structure;
poor financial controls;
failure of big projects;
Later, we will analyse these results in more detail. But before we do this we need to introduce a few basic concepts that will help us to navigate this territory.
The difference between hygiene factors and the business idea
The causes of failure identified by the Sharpbenders research can be divided into two categories: hygiene factors and business idea factors. What do we mean by this? As we discussed earlier, organizations have always been trying to discover ways of outsmarting the competition. This book is an example of that. Not all ideas that are developed are equally effective, but some stick out as clearly being successful. Initially some organizations develop significant competitive advantage by exploiting these ideas but, over time, others see the beneficial effects and will start to copy the ideas in their own organizations. They can be learned from studying organizations deemed as 'best in class', through a benchmarking process. They will be codified in textbooks and taught to managers. Once an idea reaches this point it has become a hygiene factor, something that is generally recognized as fundamental in running any healthy organization. Without hygiene factors, professional management knows in advance that the organization will not have a chance to play in the competitive game.
Most hygiene factors are about the need to ensure sound and efficient business processes, critical to ensure that the organization remains a going concern. These business processes are the generally accepted basics for running any organization; they are qualifiers, allowing you to play. However, winning the game requires much more: additional, distinctive factors and capabilities that will distinguish the winner from the losers. These additional, distinctive factors and capabilities that are not yet generally codified and available only to one organization are summarized in what we call its business idea.
Returning to the Sharpbenders research, the first striking observation is that most failures are due to hygiene factors. The following causes are highlighted:
Poor controls in areas such as credit, working capital, budgets, costs, cash flow or quality. This is often due to inadequate management accounts, leading to infrequent and incomplete reports that are late, too complex, too voluminous, irrelevant or incorrect.
Immature management style. Typical examples include an inflexible CEO (chief executive officer), excessive caution, authoritarianism, ineffective delegation and coordination and over-centralization.
Failure to create and communicate purpose and the business idea, both between the top and middle management, and with the workforce.
Another hygiene factor and one crucial business process that frequently gets pushed into the background is a systemic approach to sensing or responding to external change, based on maintaining sound and efficient relationships with all stakeholders. Maintaining relationships with stakeholders - such as shareholders, suppliers and customers - is vital for all organizations, as any of these groups have the power to threaten its existence. Shareholders can decide to invest elsewhere, customers may 'vote with their feet'; the government can pass unfavourable legislation, and so on. These vital groups have to be kept on board. Their conflicting expectations need to be identified and reconciled.
This book is not about hygiene factors. That does not mean that it is not important to recognize their existence as qualifiers in the race. Indeed, often they are not looked after sufficiently, notwithstanding the fact that professional managers know what needs to be done. Unfortunately, in real life things often slip due to lack of time or attention. If this results in poor performance, the manager has to create a 'sharp bend' by applying well-known codified management knowledge. For example, where management accounts are found to be inadequate, effort on getting these up to standard pays significant dividends. Similarly, inadequate internal communications leading to a poorly motivated workforce will offer significant scope for improving results with a relatively modest and obvious upgrading project. There are many examples where hygiene factors have to be considered and addressed with the application of codified knowledge in order to ensure success.
This knowledge is available, for example, in business schools and in textbooks, and help is at hand from the many consultants who offer their services in these areas. In this book, however, we will concentrate on where winning business ideas come from. Our focus here is on longer-term strategy.
Looking after hygiene factors should be seen, therefore, as a minimum requirement to play, a qualifier for being in the game. However, the ultimate aim is to try to win. For this, the organization needs a unique business idea. The Sharpbenders research shows interesting failures in this area as well.
The Sharpbenders business idea failures
The strategic reasons for failure identified in the Sharpbenders research include:
A lack of recognizable strategies in such areas as functional policies, corporate strategy and environmental monitoring.
Poor execution or timing of responses to developments such as declining market demand or increasing competition.
Inappropriate risk-taking, in terms of projects that are too large in relation to the size of the organization taking them on, or acquisitions that are assessed too optimistically.
In considering these causes of decline, we see clear evidence of organizational inability to understand and adapt to change in their environment. In retrospect, people identify changes in the marketplace that passed unnoticed at the time. Typical examples include new products and new substitutes coming on the market, changes in product technology, demographic changes, changes in income distribution, changes in fashion, and a cyclical fall in demand that wasn't taken seriously.
Similarly, increased competition often went unnoticed, while in retrospect the signals were obvious, such as technological change lowering rivals' costs, threats from substitutes keeping prices low, political changes related to loosening of regulations, trade barriers and purchasing policy, removal of protection and other barriers to entry, a significant new entry, high exit costs keeping competition intense in the face of falling sales, a lack of strong product differentiation or strong cost advantage, or falling switching costs for customers.
Turning things around
The Sharpbenders research findings also show the managerial actions that were successful in reversing a decline in organizational performance. The business idea-related strategic factors that were identified in the research included:
An emphasis on customers and their dynamic value systems.
A strong marketing focus.
A clear product focus with a deliberate concentration on what the organization can do best.
Regular reviews of strategy (the danger of formalizing this process tends to increase with the size of the business).
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