Management Response to Surprising Changes

In Parts III and IV, we focused attention on managerial responses which prepare the firm to face a difficult and changing future. Strategy prepares the firm to face its complex external environment, while corporate capability develops responsiveness to anticipated threats and opportunities .

Positioning the entire firm is typically a massive, slow, and periodic process which cannot respond to increasingly fast-developing threats and opportunities . In Part V, we turn attention to such fast, surprising events.

This introductory chapter is based on a paper written in 1978. Our purpose was to describe the character of surprising events and observable responses by different firms, as a basis from which to suggest improved systematic ‘real-time’ approaches.

Introduction

The bulk of managerial time in business firms is devoted to coping with uncertainties induced by the environment: competitors’ moves, economic fluctuations, availability of raw materials, labor demands, etc. Most managers would agree that change has been their central preoccupation as far back as they can remember, and that managing change is the raison d’etre of management.

But, as we discussed in Part I, since the 1960s a new kind of turbulence has increasingly made it felt. Unlike the earlier changes, which arose out of uncertainties in one’s own traditional business, the new turbulence came from unaccustomed and unfamiliar sources: from foreign technologies, from foreign competitors, from governments.

An increasing number of such changes posed major threats or opportunities to the firm: obsolescence of the firm’s technology, major loss of market share, drastic increase in the cost of doing business, a chance to get a major jump on competitors, or a ground floor entry into a new industry.

As discussed in Part I, the speed with which such threats and opportunities develop has been increasing to a point where the periodic systems which we have been discussing up to now, may no longer be capable of perceiving and responding to them fast enough, before the threat has made a major impact on the firm, or the opportunity has been missed.

In this part of the book, we turn attention to such unfamiliar, momentous, and fast changes. The concern of this chapter is to analyze and to construct descriptive models of the different ways in which firms respond to such changes.

Basic Model—Decisive Management

If a firm fails to respond to a threat, the losses caused by it will continue to accumulate in the manner shown by the curve labeled ‘unchecked loss’ in Fig. 18.1. But sooner or later, most firms will take countermeasures. In the figure, this occurs at time $T_{D}$ . If the lost sales are irreplaceable, the solution is to stop the product line and to eliminate costs which no longer generate income. If more positive options are available, the solution is to develop new products which will use capacities and capabilities made idle by the threat. A more difficult response is to divest from the obsolete products while, at the same time, replacing the lost profit with totally new products. The preferable alternative, though not always available, is to convert the threat into an opportunity: To devise a response which not only replaces but enhances profits and sales. Thus a firm with foresight, which anticipates the shift in the environment, can change to new products ahead of competitors and increase its market share at their expense.

../images/435756_3_En_18_Chapter/435756_3_En_18_Fig1_HTML.gif — Fig. 18.1
Decisive management

The type of response and the timing of actions will differ among firms. In a frequent case, illustrated in Fig. 18.1, the response does not commence until after the threat has become a reality and the loss, $O_{D}$ , is substantial. Once countermeasures are started, the loss is gradually brought to zero. In the meantime, divestment of plant, liquidation of inventory, reduction of workforce, etc., incur extraordinary costs over and above the normal cost of operations. Thus, while the threat is being arrested, during the period of response $T_{R}$ , two streams of costs accumulate, as illustrated in the figure: Loss from unprofitable operations plus the cost of liquidating these operations.

By the time the threat is arrested at time $$T$$

, the firm has incurred an accumulated operating loss $\bar{O}$ , measured by the area under the upper curve, as well as the cost of arresting it, $\bar{C}$ . Thus, the total loss is.

$L_{T} = \bar{O} + \bar{C}.$

The problem of strategic response is to minimize the loss $L_{T}$ and, if possible, convert it into profit.

Reactive Management

When a discontinuity in the environment begins to affect a firm, its impact typically remains hidden within the normal fluctuations in performance. Unless the threat or opportunity has been identified out by a special forecast, the initial response is to treat it by actions which had in the past helped the firm to correct periodic reversals (such as cost reduction, efficiency improvements or sales aggressiveness).

When the historically successful actions repeatedly fail to work, it becomes evident that the firm is confronted with a new discontinuous threat. In Fig. 18.1, the time $T_{D}$ is the rational trigger point . This is the point at which cumulated data show, with a high degree of confidence, that decline of performance will not be reversed and that special countermeasures are required.

Some firms (typically small and led by young, aggressive management) do not engage in environmental surveillance or forecasting . But they are quick to learn from the failure of conventional responses and are quick to cut their losses. This decisive management is illustrated in Fig. 18.1. As soon as the data show that cumulating loss of profit cannot be due to normal fluctuations, the management triggers a response. Management reacts at the rational trigger point $T_{D}$ as shown in the figure.

In many other cases, particularly in large, established firms which have enjoyed a long history of success, the mere presence of persuasive data frequently fails to trigger prompt response. There are many historical cases of such firms which refused to recognize the ‘writing on the wall’ of the impact of a novel technology (e.g., replacement of mainframe computers by laptop computers and then by smartphones), or of a change in consumer preferences (e.g., the shift of American preferences from the ‘gas guzzling monsters’ to the small, fuel-efficient cars—and then back again periodically), or of major political realignments (e.g., the failure of many firms to pay attention to a scenario which predicted European integration or the rise of China’s economic might).

In such cases, the start of response is delayed past the rational trigger $T_{D}$ , by another Time of delay $T_{d}$ , in the manner illustrated in Fig. 18.2. We can identify four contributing factors:

../images/435756_3_En_18_Chapter/435756_3_En_18_Fig2_HTML.gif — Fig. 18.2
Reactive management

1.
A management systems delay, which typically occurs in large firms. It is due to the time consumed in observing, interpreting, collating, and transmitting information to responsible managers. The delay is also partly due to the time consumed by these managers in communicating with one another and establishing a common understanding, as well as the time necessary for processing the decisions among the responsible groups and decision levels.
2.
A verification delay may be invoked because some managers will argue that, even though the level of impact has reached unacceptable proportions, there is never an ironclad assurance that the threat is real and that the impact is permanent. They will opt for waiting a little longer to see if the threat will ‘blow over.’
3.
A political delay may occur if certain managers, whose domain tributes to the crises, feel that recognition of a crisis will reflect on their reputation or will cause them to lose power. Even if they are convinced that the threat is real, they will fight a delaying action to avoid becoming scapegoats, to gain breathing space to develop a line of defense, or to set up a line of retreat.
4.
An unfamiliarity rejection delay could contribute to the other three if, as is typical in many managerial cultures, the managers are trained to trust prior and familiar experiences and reject unfamiliar ones as improbable and invalid.

All four delays will postpone the response past the rational trigger point and will substantially increase the total cost to the firm. This response is reactive management .

Typically, neither the political resistance nor the unfamiliarity rejection is likely to be advanced overtly as the reasons for the delay, because both carry pejorative implications for the concerned managers. The justification is more likely to be given on the grounds of a need for verification, before a major organizational disruption is triggered off.

Planned Management

Both the decisive and the reactive behaviors occur after the fact: The response is triggered after the threat has inflicted tangible losses on the firms. Such behavior is not surprising in firms in which the internally available information is confined to historical events. Since many firms use historically based management information systems, decisive and reactive behaviors are widely observable in practice. In firms which engage in forecasting, one would expect to find anticipation of threats and opportunities to be matched by anticipatory response. But observation, as well as studies of the responses to the economic upheavals, shows that many firms which engage in forecasting exhibit the same procrastinating behavior as the reactive firms.

One reason for this can be found in the nature of the forecasted information. In many firms, forecasts of economic conditions, sales, earnings, and costs are extrapolations that project past performance patterns into the future. In these forecasts, the early impact of discontinuous departures from historical trends remains hidden behind the normal statistical fluctuations induced by economic and competitive activities. Only when the impact becomes large enough to stand out from the pattern does management become aware of the discontinuities. By this time, the advantages of anticipation may be lost.

A growing number of firms use techniques such as technological forecasting that is not based on extrapolation, structural economic forecasting, scenarios which identify threats and opportunities posed by strategic discontinuities. These approaches provide information and permit before-the-fact anticipatory responses. Given a time horizon that is far enough into the future, such forecasts enable the firm to complete its response before the threat can do any damage.

But, again, experience shows that in many firms, forecasts remain unheeded, and procrastination may last until after the threat has become a painful reality. For example, studies have shown that the presence forecasting scenarios that accurately predicted a discontinuity frequently made no difference: The responses were still after-the-fact, even when forecasts of the crisis were available to the management.

This case is illustrated in Fig. 18.3, which is called planned management . As the figure shows, the rational trigger point $T_{D}$ is also the forecasting horizon . The firm should start its response as soon as the forecast has unambiguously identified an impending threat.

../images/435756_3_En_18_Chapter/435756_3_En_18_Fig3_HTML.gif — Fig. 18.3
Planned management

But, curiously enough, the procrastination delay $T_{d}$ , which is found in reactive management (and is absent in decisive management ) resurfaces in planned behavior . The same factors contribute, but for different reasons.

The systems delay is smaller in planned management . Unlike reactive management, where the information is derived secondhand from data intended to measure past performance, the threat or opportunity forecasting is primary input data. Typically, when forecasts are made, the individuals making them are not under pressure from other activities; they report their identification of the threats, either directly or through a small chain of command, to the responsible managers.

Offsetting the smaller system delay are potentially larger delays due to verification, political resistance, and unfamiliarity rejection. The fact that the triggering information is conjectural and no longer based on painful experience, as it is in reactive management , reinforces and provides justification for the natural delay tendencies.

The verification process, instead of questioning whether an observed result will persist, is now concerned with whether the threat will occur at all; and if it occurs, which course to follow. The defensive political tendencies of threatened managers are supported by the argument that it is imprudent and foolish to respond to ‘mere speculations’ about the future.

The threatened managers will be joined by others, who refuse to take seriously a vague threat which has no precedent in prior experience. The delays are psychological rather than political grounds. The delay mechanisms tend to counteract the potential advantages of forecasting.

The damage done depends on the relation between the three factors; the forecasting horizon $T_{D}$ , the procrastination delay $T_{d}$ , and the time required by the firm for response, $T_{R}$ .

1.
If the procrastination delay $T_{d}$ is controlled, so that sufficient time is left to implement the response before the threat begins to impact, the optimal situation will result. On the one hand, the response is not premature and on the other, the only cost to the firm is the cost of implementing the response. This case can be described by the equation:

$T_{d} = T_{D} - T_{R}$
2.
If a response is triggered before the threat begins to impact, but too late to complete the response before impact starts, the cost will be higher: a combination of cost of response and operating losses. The relationship in this case is:
$T_{d} > T_{D} - T_{R}$
3.
If the procrastination delay $T_{d}$ is excessive such that $T_{d} > T_{D} ,$ most of the advantages of forecasting are lost and the response moves into either a reactive or decisive category.
4.
Finally, it may occur that the response time $T_{R}$ is longer than the forecasting horizon $T_{D}$ :
$T_{R} > T_{D}$

In this case, the response will not be completed before the threat begins to impact, even if procrastination $T_{d}$ is eliminated,

In seeking to assure a timely, low-cost response to discontinuity, management can control (within limits) all of the three determining factors: the forecasting time horizon $T_{D}$ , the response time $T_{R}$ , and the procrastination $T_{d}$ . In the following chapters, we shall explore all three possibilities.

We can now offer a concise summary of the preceding discussion. The three types of observable behavior (reactive, decisive, and planned) are typical points on a spectrum of observable trigger behaviors which change as the primary determining parameters vary. In the descriptive model of trigger behavior, which we have constructed in the preceding pages, we have recognized the following concepts:

1.
The rational trigger, $T_{D}$ , which is the point in time at which data is available within the firm to justify extraordinary response measures. T_D may be positive, after the threat has begun to impact on the firm, or negative, based on a ‘reliable’ forecast of a forthcoming threat.
2.
The actual trigger adds the additional time delay for management decision making $T_{D} + T_{d}$ to determine the time at which management, in fact, turns attention to extraordinary counter-threat measures.
3.
The additional time delay $T_{d}$ is separable into two categories:
1. a.
  Management systems delay incurred while interpreting and distributing the threat or opportunity information to influential managers.
2. b.
  Behavioral delay due to verification, political resistance plus lack of will to deal with both threatening and unfamiliar prospects.

Thus, if the benefits of threat or opportunity forecasting are not to be lost, improvements in forecasting must be accompanied by comparable increases in managerial preparedness to accept the uncertainties and partial information of long-term forecasts.

Post-trigger Behaviors

The period between the first awareness of the threat and the point in time at which management begins coping with it may last months or even years. But it would be wrong to visualize the pre-trigger period as one of watchful inactivity. The daily life of management consists of problem solving: Coping with unwelcome deviations and planning to ensure future successes. During the pre-trigger period, this coping goes on as before: deficiencies are perceived, analyzed, and corrected, but all within established routines and programs of ‘normal’ activity. The significance of the trigger point is that it ushers in extraordinary, non-routine, drastic measures.

It is useful to divide these extraordinary measures into two classes:

1.
The first-class copes with discontinuous changes in the firm’s relationship to the environment, in its internal dynamics, or in its value system. Discontinuities such as diversification into new businesses, divestment from major product lines, major reorganizations, introduction of strategic planning systems—all exemplify such measures which change the ‘face of the firm,’ alter perspectives, introduce new ways of life. These changes are strategic measures .
2.
The second-class stops short of changing familiar relationships. Nevertheless, they are drastic enough: An unusual major sales promotion, a substantial price-cut to revive flagging sales, a major write-off of assets, disposal of large amounts of obsolete inventories, replacement of obsolete plant, a freeze on hiring, arresting management development programs, or cutback in Research and Development (R&D) expenditure. These are extraordinary operating measures .

In many firms, the operating measures (while drastic in their impact) will be familiar and acceptable either because they have been tried before or because their impact can be forecast with confidence. Strategic measures will be acceptable only in firms which have previously made drastic strategic change a way of life. For those who have historically confined themselves to incremental change, drastic strategic measures appear strange, risky, and threatening.

The management response, typical of reactive management which has been widely explored in strategic planning literature, is illustrated in Fig. 18.4. The initial assumption is that the difficulty can be overcome through familiar, but drastic, operating countermeasures. A series of measures are tried sequentially starting with ones which have been successful in the past.

../images/435756_3_En_18_Chapter/435756_3_En_18_Fig4_HTML.gif — Fig. 18.4
Sequential response to threats in a reactive firm

If none of the countermeasures produces a sufficient improvement, the tendency is to conclude that the situation is out of the firm’s control, but that the environmental disturbance is temporary, and that if the firm holds out long enough the problem will go away. The firm turns from countermeasures to retrenchment. The ‘game plan’ is no longer to address the threat but to weather it. Typically, ‘non-essential’ activities such as management development are the first ones to suffer. Secondly, future-oriented activities, such as R&D and capital investment, are decreased; thirdly, expenses supporting current operations are cut down.

It is only if the losses continue in spite of both operating countermeasures and retrenchment that a reactive firm turns to strategic remedies. Meanwhile, a great deal of time has been lost, substantial losses accumulated, and extra costs incurred.

This sequence will not be changed substantially if extrapolative forecasting and even long-range planning exist in the firm (see the upper left-hand corner of Fig. 18.4).

In a decisive firm, the initial response to operating measures is also typical as shown in Fig. 18.5. The decisive firm is still unwilling and unprepared to face unfamiliar strategic threats. But instead of sequencing responses, the firm analyzes, selects and executes the best combination of counteractions and retrenchments. Once these prove futile, it moves decisively to strategic countermeasures.

../images/435756_3_En_18_Chapter/435756_3_En_18_Fig5_HTML.gif — Fig. 18.5
Response to threats in a decisive firm

Finally, Fig. 18.6 models the planned management behavior. Extrapolative forecasting is augmented by environmental surveillance that searches for threats or opportunities. The diagnosis simultaneously considers operating and strategic remedies. The organization has the capacity to execute both in parallel.

../images/435756_3_En_18_Chapter/435756_3_En_18_Fig6_HTML.gif — Fig. 18.6
Response to threats in an entrepreneurial planning firm

Comparison of Behaviors

The key differences between Figs. 18.4, 18.5, and 18.6 arise from the manner in which managerial decisions are sequenced. Management has two sequencing decisions to make:

1.
The sequence in which the strategic and operating problems are addressed.
2.
The sequence in which the specific measures are taken within each problem.

The reactive behavior is doubly sequential. Strategic response does not commence until after the operating options have been exhausted. When operating responses are being explored, each action is tried sequentially—one at a time. This behavior is an experience-dependent trial and error process.

Decisive management is sequential-parallel: operating measures then strategic actions are addressed sequentially, but when it comes to specific operating actions, an analytic approach is used. Alternatives are identified and compared. If necessary, several measures are implemented in parallel.

Planned management is a parallel-parallel approach. Both the type of response and the measures are chosen through comparisons and analysis. A number of action programs can be initiated in parallel.

Figure 5.1.7 brings together the three types of management behavior. All three modes of behavior are observable in practice. Since this book is concerned with prescriptive advice, the question is ‘what mode of response management should a firm be advised to pursue?’

The answer, indicated in the bottom two lines of the figure, is that the cost-effective choice depends on the level of environmental turbulence. Reactive response is adequate at turbulence levels 1–2 when the speed of change is slow and strategic discontinuities are rare. At turbulence levels 2–3, strategic discontinuities are infrequent, but the speed of change makes it advisable to establish a rapid management response. Strategic discontinuities are frequent at levels 4–5—both operating and strategic responses must be made expeditiously.

Summary

When a discontinuous change impacts on the firm, two costs are incurred: The cumulative loss of profit and the cost incurred in halting or reversing the loss. The management problem is to minimize the sum of the two losses by restoring profitability of affected product lines or by shutting down the operations that support them.

Observation and research both reveal three types of management behavior. In the reactive behavior, response is delayed until the impact of change has become painful and threatening. Once the response is triggered, the first efforts are ‘heroic’ operating changes and retrenchment. Operating actions are tried one at a time, and only when they have been exhausted, does attention turn to strategic countermeasures.

In decisive management , the response is triggered when the impact of change has become unambiguous. The additional procrastination observed in the reactive management is avoided. Operating countermeasures are tried first, but in a planned systematic manner. Once the operating actions have been exhausted, the firm turns attention to a strategic response.

Planned behavior differs from the preceding two in the fact that operating and strategic countermeasures are considered at the outset. A proper combination is implemented in parallel.

In both reactive and planned behavior, there is frequently an additional period of procrastination beyond the point at which the importance of the threat has become clear. This procrastination is composed of a systemic delay (due to data processing and decision making) and a behavioral delay (due to resistance from the power structure and resistance from managers who refuse to accept evidence which is at variance with experience). In planned management , the procrastination delay can waste the time advantage offered by forecasting and planning.

All these behaviors have their place in the repertoire of management responses to threats and opportunities . In slowly changing environments, reactive management , while costly, can avert disaster. As the environment becomes more and more turbulent, it becomes necessary to use the decisive response or the planned response, if the firm is to avoid a disastrous impact.

Exercises

Compare the three behaviors described in Table 18.1 with the capability profiles presented in Chapter 8. What are the similarities and what are the differences? Which capability profiles does a firm need to assure reactive, decisive, and planned behaviors , respectively?

Table 18.1

Comparison of behavior in confronting a strategic threat

Period	Management behavior
Period	Reactive	Decisive	Planned
Pre-trigger phase	Delay trigger past threshold until sure of threat	Act when rational threshold is reached	Act in advance of threat
Post-trigger phase	–Assume threat as operating –Respond sequentially –Try past operational successes –Try retrenchment –Turn to strategic response	–Assume threat as operating –Select optimal operating responses –Try responses –Turn to strategic response	–Diagnose nature of threat –Select both optimal strategic and operating responses –Try strategic and operating responses
Conditions for best cost effectiveness	Strategically and operationally continuous environment	Strategically continuous operationally fluctuating environment	Both strategically and operationally discontinuous
Appropriate turbulence level	1–2	2–3	3–5

2.
Prepare detailed checklists of the factors which contribute to the systemic, procrastination, political, and unfamiliarity delays. What measures can be taken within the firm to minimize each of the delays?
3.
What steps can be taken to reduce the delay $T_{R}$ ?

18. Management Response to Surprising Changes