Structured Anticipation: How to Anticipate Strategic Threats to Survival
Faculty Focus: Sarah Kaplan + Joshua Gans, Profs. of Strategic Management, Rotman School of Management
“AND THE WINNER IS…” said Warren Beatty as he handed the envelope to Faye Dunaway, “La La Land!” It was a moment that would define the Academy Awards ceremony in 2017, because the winner of the Best Picture award was not La La Land, but the breakthrough movie Moonlight. Instead of celebrating the achievement of an African American-centred film about discrimination along multiple dimensions, the Oscars had become a farce.
The scene was like a nightmare sequence, specifically for one firm: PricewaterhouseCoopers. For decades, its accountants had been charged with keeping the list of Oscar winners safe and secret, to be revealed at precisely the right moment. Every year, the two accountants given this important task were shown on television, purposely nerdy, purposely boring. Their job was to remain boring. The things that kept them up at night all involved getting too much attention.
When it was discovered that Beatty had the wrong envelope (somehow for Best Actress rather than Best Picture) thoughts of who was at fault immediately turned to PwC. This nightmare was real. The two accountants would never attend another ceremony. And PwC’s careful branding was in tatters.
To be sure, nightmarish though this was, it was not of existential consequence. The accountants involved lost their dignity, but not their jobs. PwC would, at worst, lose the Academy as a customer. This was nothing compared to the destruction that had befallen Arthur Andersen more than a decade and a half earlier. Its errors led to the complete failure of the 90-year-old company.
In 2001, Arthur Andersen was one of the big leading accounting firms. Those firms had an overwhelming share of the main corporate giants. In Andersen’s case, that included one of the top-ten most valued companies in the U.S.: Enron. Enron was an energy trading and finance company that had grown off the backs of energy deregulation in the 1980s and 90s. It had a ‘go for broke’ attitude that made it the darling of many a popular management guru. But as it turned out, its financial foundations were weak. When these were exposed, Enron promptly failed.
But as with the Academy Awards, attention turned quickly to the designated caretakers — in this case, the auditors: Arthur Andersen. Overnight, other corporations lost confidence in the accounting company, employees in the thousands left to other accounting firms, and before any investigation was completed, Arthur Andersen was effectively no more: 85,000 employees and almost $10 billion in annual revenue went elsewhere. This was more than just a bankruptcy; there was simply nothing left.
It turned out that Andersen had left behind some years before the meticulous practices that had made it what it was. In other words, the failure was a symptom of a slow-moving and then long-standing problem. That problem, as it turned, out threatened its existence. So, unlike with PwC, the nightmare for Andersen was not one of embarrassment and the loss of a single client — it went to the core of the firm itself.
This example represents an existential threat to a business, and it is such potential crises that keep corporate leaders awake at night. The problem with these threats is that they can now come from every direction.
Some actually come as a result of success. In the very week of PwC’s Oscars debacle, Amazon faced a crisis of equal proportion and far greater consequence. Aside from its highly successful online retail business, one of Amazon’s most profitable divisions is the largest provider of Cloudcomputing hosting services in the world. Amazon Web Services (AWS) powers not only myriad small start-ups, but also many larger firms, from media outlets to Netflix to Google. It is everywhere.
On the morning of February 28, 2017, Amazon’s Simple Storage Service (S3) team was engaged in routine debugging to fix a problem with its billing system. What was supposed to be a command to remove a small number of problematic servers had a typo in it that instead led to a large number of servers being removed — which then caused a cascade. Virtually the entire system went down. It was out for most of the day; and with it, the Internet around the world shut down, as businesses were unable to access stored data.
The system was eventually restored, and Amazon promised to make changes so that such an event would never occur again, but this reminded the world of its dependence on Amazon. While Amazon surely reaps some benefits — such as efficiency and competitiveness — from economies of scale, this incident may cause customers to diversify away from it. In this case, Amazon did not face the loss of confidence that Arthur Andersen did, but the event did put the company on notice. What was supposed to be an unexciting, if lucrative, part of Amazon’s business became far less so.
The very same week, a problem of gender discrimination was revealed at Uber. The crisis — at least publicly — was triggered when an engineer, Susan Fowler, penned a blog post describing discrimination and harassment throughout the year she worked for Uber — including a threat of dismissal when she reported these issues to Uber’s HR department. For the record, such a dismissal would have been illegal. The blog post revealed not just a cultural problem within Uber, but a formal structure that was aligned to perpetuate that problem. This led to a new round of consumer boycotts to “#DeleteUber,” as well as major legal issues and investigations.
Examples of companies failing to anticipate strategic threats abound.
Uber’s strategic threats were literally baked into the organization. This was not a problem that could be fixed overnight. But for managers everywhere, the story should be a warning: If you have to wait until a crisis becomes public, it is too late; you have lost the ability to manage change on your own terms.
Examples of companies failing to anticipate strategic threats abound. Following are a few others that are described in detail in Survive and Thrive: Winning Against Strategic Threats to Your Business — a recently published collection of perspectives from our colleagues in the Strategy Area at the Rotman School of Management.
- Despite detailed safety systems, BP’s Deepwater Horizon well exploded, leading to the worst corporate environmental disaster in history and a $50 billion clean-up bill.
- Escalating healthcare expenses for current and former employees eventually contributed to bankrupting GM, as costs per car reached more than $1400.
- Walmart spent millions and suffered major reputational damage in the face of a 1.6-million-person class-action lawsuit filed for gender discrimination across the United States.
- Disruptive innovations drove Blockbuster, Nokia, Kodak, and even the mighty Encyclopaedia Britannica out of business.
- The U.S. nuclear industry faded to unimportance, with not a single plant breaking ground in the U.S. between 1977 and 2013, in part because of too-early lock-in on an inferior technology.
- Eli Lilly’s performance declined sharply because of over-investment in one growth model, even when that model had become counter-productive.
We believe that the inability of companies to anticipate and respond adequately to such threats comes from four common organizational mistakes.
- MISTAKE 1: FAILING TO APPRECIATE INTERACTIONS WITHIN SYSTEMS.
Managers often appreciate only the superficial relationships between actors or events, without examining how interactions might compound problems in unexpected ways.
- MISTAKE 2: GETTING STUCK IN EXISTING WAYS OF DOING BUSINESS.
Companies become successful by honing their strategies and operations. In times of crisis, they are often tempted to double down on these practices rather than seek out new responses, new growth models or new methods.
- MISTAKE 3: FALLING VICTIM TO COGNITIVE BIASES.
Despite the growing awareness that managerial judgment is shaped by all sorts of biases, it is still exceedingly hard for managers to break out of these traps. Unconscious biases can lead companies into crises and make it exceedingly hard for them to respond when trouble hits.
- MISTAKE 4: GETTING DERAILED BY SHORT-TERM INCENTIVES.
Economic incentives to act — particularly those driven by customer needs or demands — may blind organizations to risks that may arise.
The good news is that despite the acuity of these kinds of threats, companies can survive and thrive. The key is to develop what we call ‘structured anticipation’: that is, understanding the risks and then building capabilities to ensure that when threats materialize, quick action is possible.
Although crises may be far from pleasant, they do not have to create existential threats. In the face of the organizational mistakes identified above, two actions and two cautions can form an approach to Structured Anticipation.
- ACTION 1: DEVELOP STRUCTURED PRACTICES FOR ANTICIPATION.
Risk reviews, after-action reviews, anomaly-reporting systems, and the like can make the identification of potential risks more feasible. Without these structured practices in place, key information signals from the organization and the market will be lost.
- ACTION 2: CREATE A CULTURE THAT ENCOURAGES DISSENT.
Systems don’t operate effectively without a supporting culture. A crucial way to anticipate risk is to look for anomalies and to avoid discounting information and criticisms that don’t fit with the organization’s existing ways of doing business. Diversity of thought can be supported by diversity in teams and by safe spaces to bring up controversial ideas or information.
- CAUTION 1: BEWARE OF RISK COMPENSATION.
Just as with increased safety features in cars, the temptation that comes with increased anticipatory practices is to take even more risks once the practices are in place. The goal of structured anticipation is not to encourage potentially-foolish risks, but to anticipate internal and external threats while pursuing strong organizational performance.
- CAUTION 2: DON’T LOOK FOR THE EASY WAY OUT.
Some companies want to buy their way out of problems. Others want to just do something that fits with their existing way of doing things. More likely, the action necessary to fix the problem will ‘leapfrog’ today’s practices and require radical organizational change.
Across industries, today’s organizations face a variety of strategic threats, and the potential for crises to emerge at any time — from anywhere — keeps many leaders awake at night. In this excerpt from the introduction to our new book, we introduce the concept of Structured Anticipation and share some principles and practices for navigating an increasingly uncertain and complex environment.
is Director of the Institute for Gender and the Economy, Distinguished Professor of Gender and the Economy and Professor of Strategic Management at the Rotman School of Management.
is the Jeffrey S. Skoll Chair of Technical Innovation and Entrepreneurship, Professor of Strategic Management and Area Coordinator for Strategic Management at the Rotman School.
This article has been adapted from their introduction to Survive and Thrive: Winning Against Strategic Threats to Your Business
— a collection of perspectives from the Rotman School’s world-renowned Strategic Management faculty, published in September 2017 — and originally appeared in the Creative Destruction issue (Winter 2018)
of Rotman Management
magazine. Further information is available online at www.surviveandthrivebook.net
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