Article: Change is closer than it seems

Maybe not a lot of new information in here, but the writing is pretty clear and the author makes some good points related to confirmation bias and disconfirmation bias, which are two of the most important principals on display everyday wherever people interact, such as in the markets. Cheers!


Change is closer than it seems
By Andrew White and John Bessant
Published: March 30 2006 18:30 | Last updated: March 30 2006 18:30

Just like exercising after Christmas, stretching our minds around new concepts is great in theory but much harder to do when we have to do it for real. Organisations, like individuals, grow comfortable with the ways they have always looked at things and they are good at shaping the world to fit these ways. Mindsets get reinforced and worldviews become a dominant logic.

As long as the world is moving in (relatively) predictable directions, staying with the old cognitive framework is not such a bad thing. The challenge comes when the rules of the game change and fresh thinking is needed. At this point, the established company often starts to struggle and it is the new kids on the block that do well – precisely because they are not encumbered with the cognitive baggage of an earlier mindset.

We do not have to look far to find examples of the problems companies have in dealing with discontinuity. For example, consider how the music industry landscape has shifted. In approaching the point where more songs will soon be downloaded, using services such as Apple’s iTunes, than bought in shops, the dominance of traditional players in the music industry is being challenged.

Different drivers can trigger a destabilising of the existing order. For example, by reframing the operational model around a make-to-order, internet-based supply chain, the PC manufacturer Dell caused huge problems for its competitor, IBM. Consider also how concerns about childhood obesity and type 2 diabetes have put fast-food companies on the back foot and allowed new “healthy” players to make inroads.

Sources of discontinuity

So why do incumbents often struggle to sustain their dominant positions during periods of discontinuity? Is it that they are badly managed and suffer from poor leadership? Not necessarily so – indeed, the problem of dealing with discontinuity is particularly acute for those companies that are successful.

Businesses that have developed effective ways of competing under “steady-state” conditions tend to do so by deploying good practice recipes – they get close to their customers, develop partnerships with key suppliers and manage their internal innovation operations to control risk while retaining a healthy dose of creative input. But it is precisely because they are so good at their current game that existing players often lack the cognitive agility to do something different.

Think about the revolution in flying brought about by low-cost carriers. This is not a shift in equipment – flying still involves aircraft and airports – or simply a matter of dropping prices. Instead it is a rethinking of the game, creating a new but tenable set of “rules” – and the problem for many established players is that they have failed to get their heads around the way the game is now played.

Plenty of studies of discontinuous innovation underline this conundrum. For example, Clayton Christensen’s work on the “innovator’s dilemma” looks at how companies in a variety of sectors got too close to their existing customers and were unable to respond to the needs of a newly emerging market until it was too late.

Companies that are unable to deal with the discontinuous are simply too set in their ways of thinking – they lack cognitive agility. A common problem is that they have difficulties picking up on and responding effectively to weak signals from the periphery of the organisation. This incoming information is often weak and vague: for example, how many people would have predicted the rapid take-up of text messaging – a market now worth billions of dollars but originally a simple testing tool for telecommunications engineers?

The fuzziness of these weak signals creates a need for amplifying and clarifying them through specific practices. Even assuming signals can be picked up in this way, it can often be a challenge to determine their relevance, interpret their meaning and decide how they are to be utilised.

Cognitive frameworks, or ways of thinking, consist of individual and group beliefs about the factors that determine success. They are influenced by a number of factors. For example, the formative context of a company and significant individuals who had a positive impact on it, can, even after several decades, still exert constraints over what beliefs are culturally acceptable.

Consider Edwin Land, founder of Polaroid, who helped lead that company to four decades of success. Research by Mary Tripsas and Giovanni Gavetti suggests that, long after Mr Land had died, echoes of his views could still be heard among senior managers, and were in part responsible for Polaroid entering Chapter 11 bankruptcy in 2001.

For example, its belief in the “razor and blades” business model, whereby the main product is offered at a subsidised price and the components that make that product work are sold at a high margin, served the company well when using instant print technology, but failed to prove viable when it was faced with the discontinuous change of digital photography. Polaroid was also known for its technical excellence – something that became less important in a world where rapid new product introduction and low-cost manufacturing and logistics have become the primary basis of competitive advantage.

Another factor that influences individual and group cognition is organisational memory. Previous experiences and decisions, such as investments in information systems and assets, can reflect mindsets that were present even decades in the past.

If the Airbus 380 has a similar lifespan to the Boeing 747 (a product of the 1960s), it will still be in use in 2045 and beyond. With 40 years of accumulated experiences contributing to a strong mindset, how will operators and manufacturers deal with the new political and social pressures, such as noise concerns or climate change, that will emerge over that period? Will they be able to let go of the past or try and superimpose old models on the newly emerging world?

The communities of practice to which managers belong are another influence on the formation of cognitive frameworks. Networks of contacts within and outside the company – conferences, professional societies, even informal gatherings in the bar – all serve to reinforce common beliefs and assumptions.

Under steady-state conditions, these links are important because they help us shape and develop our ideas. But sometimes the problem is that they reinforce our prejudices and ways of looking at the world, and stop us picking up on new and important signals, or alternative ways of seeing. As the social network theorists Laurel Smith-Doerr and Walter Powell commented: “The ties that bind become the ties that blind.”

One idea that can help explain what is going on in companies that are faced with discontinuity is a theory devised by Leon Festinger called “cognitive dissonance”. This suggests that, when a person is faced with two competing bodies of evidence concerning something they consider important, this tension will create feelings of discomfort that will cause them to reject or misinterpret one body of evidence in favour of another. In addition, they will tend to seek out the company of others whose views support their own.

This theory can help explain why companies can appear to ignore evidence of an approaching discontinuity, often creating drastic consequences for shareholders, employees and suppliers. Learning how to recognise, embrace and utilise these tensions is crucial to the successful leadership of companies through periods of discontinuous change.

Enabling cognitive gymnastics

So what can companies do to minimise the negative impact of these cognitive frameworks? How can they begin a process of stretching and flexing their mental muscles to be able to think outside their boxes? How can we build a greater tolerance for ambiguity? Some routes might include the following:

■ Recruit to develop diversity. Deliberately seek to change the mix of ideas and experiences feeding into the company’s thinking.

■ Outsource to buy in temporary diversity. Companies such as Wipro, Quanta Computer and Compal are emerging as major players in the original design manufacturer (ODM) sector, and IDEO as specialists in the idea generation process. Although, in part, this reflects a desire to reduce the development costs of steady-state innovation, it also opens up opportunities to widen the network from which ideas emerge.

■ Open innovation. Rather than seeking to do all the thinking (especially R&D) in-house, companies are increasingly opening up their systems and building rich networks to enable a two-way flow of new ideas. For example, Procter Gamble has indicated that it wants half of its new product ideas to be generated from outside the company by 2010. Its use of the “open innovation” approach had led to hundreds of new product ideas.

■ Develop wider networks. Rather than always focusing on long-term and close relationships, managers should deliberately try to establish some “weak” and diverse links. Looking beyond the “normal” search environment can sometimes bring in some radical new options – for example, the academics Francesca Mariotti and Rick Delbridge discovered that the use of titanium components in Formula 1 engines was helped by insights gained from observing the moulding process used by a company that makes golf clubs.

■ Explore alternative pictures of the future. Royal Dutch/Shell and others make regular use of scenario approaches – richly woven backgrounds that describe technologies, markets, politics, social values and other elements in the form of a “storyline”. None is necessarily the right answer to what the world will look like, but scenarios do offer a richly described set of hypotheses within which to search. They create a space in which a company can think about deploying its particular competencies to advantage (or asking whether it needs to create new ones) and to carry out a kind of “targeted hunting” in its search for innovation triggers and ideas.

■ Generate diversity by operating a number of parallel sites for research. While this risks an element of duplication, it has the advantage of enhancing the range of search behaviour available to a company, especially if those sites are located away from the central core. An example of this approach would be GlaxoSmithKline’s decision to structure R&D around nine discrete centres rather than concentrate their resources in one location.

To conclude, consider how the human eye has evolved to enable us to respond rapidly to threats located in our periphery. The eye’s retina has substantially more rods, which are used for peripheral vision, than cones, which focus on a narrower field. If companies were to dedicate more resources to activities on the periphery, while maintaining a focus on factors such as quarter-by-quarter financial performance, they could substantially increase their ability to navigate discontinuities successfully. Managing these discontinuities is not for the faint hearted and leading through periods of discontinuity not only requires cognitive agility – it also helps to have plenty of insight, judgment, precise timing and courage.

AUTHOR INFORMATION

Andrew White is a senior research fellow at Cranfield School of Management.

John Bessant is professor of innovation management at Imperial College.

Advertisements