Struc­ture struc­tured An­tic­i­pa­tion: How to An­tic­i­pate Strate­gic Threats to Sur­vival

SARAH KA­PLAN + JOSHUA GANS on ‘Struc­tured An­tic­i­pa­tion’

Rotman Management Magazine - - FROM THE EDI­TOR -

said War­ren Beatty “AND THE WIN­NER IS…” 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 Cloud- com­put­ing 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.

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 over­in­vest­ment 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.


Man­agers of­ten ap­pre­ci­ate only the su­per­fi­cial reTEMS. la­tion­ships 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.

De­spite the • MIS­TAKE 3: FALL­ING VIC­TIM TO COG­NI­TIVE BI­ASES. 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.

an­tic­i­pa­tex­am­ple­sex­am­ple­sof­com­pa­nies­fail­ing­toan­tic­i­pate strate­gic threats abound.

• 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.

Sys• AC­TION 2: CRE­ATE A CUL­TURE THAT EN­COUR­AGES DIS­SENT. tems 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.

Just as with in• CAU­TION 1: BE­WARE OF RISK COM­PEN­SA­TION. creased 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.

Some compa• CAU­TION 2: DON’T LOOK FOR THE EASY WAY OUT. nies 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.

In clos­ing

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.

Sarah Kaplan 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. Joshua

Gans 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. Rot­man fac­ulty re­search is ranked #3 glob­ally by the Fi­nan­cial Times.

Di­ver­sity of thought can be sup­ported by safe spa­ces to bring up con­tro­ver­sial ideas or in­for­ma­tion.

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