Seeing and shaping the future

Arto Kaunonen, Founder and Senior Partner |czwartek, 19 Październik 2017

Titanic’s problem was not the crew’s inability to spot the iceberg, but the mental models Captain Smith had developed during his 26-year career and the dubious goals set for the maiden voyage of the dream ship, which prevented the crew from correctly interpreting the iceberg warnings and making the necessary changes.

Titanic symbolised stability, luxury and power. The captain held an iceberg warning in his hands, when he gave an order to increase speed. Smith believed he would have ample time to spot an iceberg large enough to put the unsinkable ship in danger. But when such an iceberg appeared in the horizon of the dead calm sea, it was already too late. The largest passenger vessel of its time, sailing full steam ahead, could not be turned quickly enough. One goal – to surprise everyone in New York – became reality in quite an unexpected way.

Operating in a genuinely uncertain environment, it is not enough to make an effort to know what is happening, but also train your mind to imagine what may happen.

The management of a Finnish company, anticipating greater price competition, turned to us for help on building scenarios on how their competitive landscape and market situation could develop and how low the prices could drop. When we later met the executive team, they were very pleased with the scenario work. In reality, the situation had unexpectedly changed in line with the most radical scenario, and the prices had actually sunk even further – somewhat below the level indicated in the worst-case scenario. No one had been able to foresee the development, and in the eyes of the experienced management, the outcome was not the most likely one. The scenario team had been barely able to envision that, under certain assumptions, this kind of a future state was also possible. What made the management so pleased was the fact that the process had forced them, in advance, to walk through the different options and the necessary actions involved in the scenario that then unfolded.

Strategic intent and response capability

The matrix below outlines the applications and benefits of scenario work in the strategic management of companies operating in different situations. The y-axis: “Company’s ability to anticipate and utilise changes in operating environment” indicates how quickly and accurately a company can detect and interpret changes in its operating environment, and how it is able to take the necessary action. A company’s capability to set a strong strategic intent and to shape its future in line with the intent is depicted on the x-axis: “Company’s ability to execute its strategic intent”.

 

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Companies adapting to the future

One way of coping with the future is to improve adaptability. Companies adapting to the future are capable of identifying changes in the operating environment and responding to them. But an externally controlled, adaptable mindset can easily lead to a follower strategy. These companies often focus on mapping threats and risks when analysing their operating environment. To counteract this approach, scenario work aims to inspire management’s own ambition and to create strategic options to break away from the conformity underlying this leadership style. Jointly built strategic options and a credible future outlook help to develop a strategic intent. Without a shared view of the desired future, the management will continue to adopt a reactive approach, with no chance to develop real competitive advantage and unique competences.

Companies ignoring the future

Companies to which external events come as a surprise are victims of circumstances, lacking the ability to anticipate changes. Day-to-day events steer actions, and strategic renewal is postponed. Management wakes up to the changes only when cash flow has dried up. A passive, reactive leadership style that lacks vision, together with a vague strategic intent, drive fragmented and erratic activity. In such companies, scenarios are needed to instill a new way of seeing reality. The goal is to detach from the business-as-usual mentality, engage in an active dialogue and build new strategic foresight. This is often a painful learning process that requires management to question its current perceptions and assumptions. Scenarios help to free up thinking and create mental space for developing a strategic intent and a strategy for corporate renewal. Finding a new direction also makes monitoring of operating environment more meaningful.

Companies believing in the mantra

Strategies in these companies are guided by a firm belief in an “institutionalised future”. Two types of companies can be identified in this group: conglomerates whose current situation is an extension of a strong historical position, and start-ups fulfilling the dreams of their founders. Start-up companies typically see something relevant that others don’t, but they often lack the resources to actively monitor their operating environment. Both types of companies are determined or even stubborn in pursuing their goals. Management’s strong beliefs and interests may lead to collective delusions and denial of facts. In these companies, scenario work gives managers a chance to reconsider, brings forth underlying strategic assumptions and challenges existing mental models. Scenarios help to bridge the gap between strategy and action and strategy and developments in the external environment.

Companies seeing and shaping the future

Adapting to the current operating environment is not enough for these companies. On the contrary, their culture aims at actively changing the playing field in line with their strategic intent. Management mindset in these proactive forerunner companies is well trained in monitoring and interpreting the influencing factors and discontinuities that impact the dynamics of the operating environment. They read the signs of the times, learn faster than their competitors and are able to execute necessary changes. In these companies, scenario work helps to prepare the organisation for continuous renewal and learning. On the other hand, scenarios are used for creating a credible future outlook and a shared strategic vision, challenging official truths and actively seeing and testing strategic options.

 

Making the most of uncertainty

Scenarios help decision makers to become more sensitive to seeing changes and identifying influencing factors. If management cannot spot the early warning signs of change, it will be impossible to recognise the change in time. Scenarios combine management views with analysis of external operating environment. They provide a framework for management thinking, helping to distill strategically relevant knowledge from an overflow of data.

The purpose of scenario work is to uncover and allow different interpretations of what is happening around us. Formation of a sustainable strategic intent requires cognitive humility and tolerance of uncertainty. Or even more.

Traditional strategic planning offers very few tools to cope with uncertainty, while scenario thinking helps to treat uncertainty as a natural part of strategy making. Uncertainty is no longer seen as a problem, but rather as a source of future business potential. It pays off to use the best tools available when making decisions about the future. Strategic management requires insight, which cannot be mechanically generated without human interaction, and foresight, which can only be developed in the presence of uncertainty. That is why the strategies of those who see and those who shape the future are increasingly based on a shared strategic intent built with the help of scenario work.

 

arto

Arto Kaunonen
Founder, Senior Partner

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Master’s Thesis: Generation of strategic growth alternatives – Empirical evidence from large companies listed on NASDAQ OMX Helsinki

Tuomas Paananen, Aalto University School of Business|czwartek, 19 Październik 2017

“The investor of today does not profit from yesterday’s growth.” – Warren Buffett

In order to serve the underlying purpose of any business, to make a profit for its shareholders, companies regardless of size, industry or geographical location need to consider and seek growth. However, creating growth is not a simple task but requires thorough thinking and decision making from top executives steering their businesses.

Objective of the study

The objective of this study is to find out the factors or approaches that companies take into consideration when generating strategic growth alternatives. Also the sources of these inputs are examined. In addition, the study aims to address the ways in which the growth alternatives are communicated to the decision makers.

Methodology

The theoretical foundation of this thesis lies on rational strategic decision making and strategic growth alternatives. The empirical data for the study was gathered from 13 semi-structured thematic interviews with top level executives responsible for strategy in their organizations. At the time of the research, all the companies were listed on NASDAQ OMX Helsinki and had a market capitalization in excess of 250 million euros. The interviewed strategy executives represented the following companies: TeliaSonera, Neste Oil, Elisa, Cargotec, Valmet, Tieto, Sanoma, Aktia, Oriola-KD, Basware, F-Secure, Finnair and Lemminkäinen. The interviews were interpreted through thematic analysis using a systematic coding process. Data collection and data analysis were conducted as an iterative process building on the theoretical framework constructed based on earlier research on the topic.

Findings

Generation of strategic growth alternatives is a multi-dimensional process including various inputs. Based on the findings, the outside-in approach, in which external operating environment is essential, is emphasized when creating strategic growth alternatives. Especially customers are seen as an invaluable source for growth opportunities. High priority factors from the external environment are also market growth and the competitive field. In addition, the relevance of widely discussed static positioning strategies seems to be eroding. Core competencies, capabilities and even organizational culture are replacing the older underpinnings when it comes to new business development. Growth generation needs to be continuous – not tied to the calendar year.

 

Keywords: strategic management, strategic decision making, new business development, strategic
growth alternatives, growth, NASDAQ OMX Helsinki

Download the full article.

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