Managers do not see a coming crisis
We stumble from one crisis to another: the dotcom bubble, the financial and banking crisis, and the ongoing Covid 19 pandemic. SEViX's experience shows that managers and organizations tend to ignore early warning signals with alarming regularity. Why, then, are business leaders so weak at recognizing such negative early warning indicators for their organizations and acting quickly and purposefully?
A key factor is that some, though not all, catastrophic crises do not occur overnight: They all have a "time corridor," i.e., an incubation period during which action can be taken before things get out of control. Traces of warning signals precede: The recent Wirecard scandal, the biggest in German history, was reported in the business press for about a year before the company collapsed, but almost everyone pretended the bad news didn't exist.
Ignoring warning signals
Part of the problem is that our minds are programmed to see what we want to see, and disregard the rest. This is a combination of two forces: the almost overwhelming urge to listen to ideas that confirm what we believe, and the enormous difficulty we have in estimating the probability of events that are unusual for us.
These forces have major implications. In organizations, this pushes C-level managers to overlook early warning signals and treat them as noise or as if they do not exist. Especially in Corona time, the state provides supports that make immediate action not immediately necessary. On the other hand, no deductions for the future can be made from the past. This phenomenon is even worse for organizations: they have a large number of processes and regulations that make change very difficult; moreover, there are very few employees in organizations who communicate bad news to decision makers because these signals confuse the receiver.
Underestimating the radical change
Our experience shows that organizations sometimes recognize warning signals but fail to heed them. This often happens because they are reeling from the consequences of past strategic and operational decisions or prefer courses of action that bring short-term benefits, even though those actions may be harmful in the long run. It is difficult to understand something you have an interest in not understanding.
While organizations may recognize early warning signals as important and urgent, they underestimate their impact and continue to procrastinate, believing that inaction will not have serious consequences, or at least not soon. Many managers have also become comfortable in their comfort zone. Crisis signals, crisis and crisis management are activities that people are reluctant to engage in. People sit out the crisis. Nokia, the dominant cell phone manufacturer at the time, famously underestimated the radical impact of the iPhone as a "handheld minicomputer" on the industry. Blackberry did something similar and Sony-Ericsson also ignored. They all either had an "operational blindness" of not seeing the radical shake-up of the new products that were being introduced to the market, or they had strong ties to the past.
This is very often the case with radical innovations, disruptive innovations. This term stands in distinction to incremental innovation. Sometimes a distinction is also made between revolutionary and evolutionary innovation. In incremental innovation, an existing technology or product is improved, e.g. more efficient or cheaper. Usually, some additional requirements are met and new features are added. Disruptive innovation changes the rules of the game in the market or in user behavior. Interestingly, sometimes disruption is not triggered by really new techniques at all, but by well-known ones. One business leader, who asked to remain anonymous, shared with us, "We tried to convince ourselves that we were heading for a 'soft landing' when in reality we were heading for the perfect storm."
The magnitude and potential impact of Covid-19's risks only slowly dawned on most Western countries after the crises in Italy had already flared up, as if the problems could be wished away. Early recognition and countermeasures could certainly have avoided radical action.
Solutions are there for action
What can be done? Our experience shows that organizations would be well served by cultivating a culture that helps to question assumptions and focus attention on emerging threats to counter their tendency to rely too much on experience. This requires corporate cultures with open communication and a concrete value orientation. This can be achieved by creating incentives for employees in cross-functional roles to flag emerging risks and create the conditions for them to feel psychologically safe. More employees with the courage to think outside the box and offer constructive criticism should be part of companies' requirement profiles in this regard. It also helps to look outward and increase the organization's customer orientation and critical and creative thinking. This is not new: scanning the environment for signals that enable adaptation is at the core of competitive advantage, but this scanning is easier said than done.
It is time for companies to encourage and enable their employees to respond to early warnings before they turn into full-blown disasters. This requires action at three levels. At the individual level, we can develop skills that make us much better able to gather evidence that challenges our beliefs and assumptions by giving us more flexible ways of looking at the world. We can also improve our ability to recognize the probabilities of events by learning to distinguish things that are possible but unlikely from those that are probable, because many things are true but not typical. However, this will only work if companies allow room for open and critical discussion and motivate their employees to do so.
Most economic behavior is based on immediate incentives and most of these incentives favor only short-term behavior (extrinsic versus intrinsic behavior). Companies need to ensure that they provide the right incentives, both tangible and intangible. Fundamentally, the current profile of today's manager needs to be questioned. Obviously, entrepreneurship, anticipatory, strategic and social skills are still too low a priority. The majority of managers still seem to be in demand as administrators.
Corporate leaders should definitely focus on the long term and consequences of what needs to be done so that the company comes out of the crisis stronger. A corporate strategy and a resilient business model that are developed, adopted and, above all, consistently lived by all stakeholders are essential and have an impact on the corporate culture. This is the breeding ground for successful strategy implementation, because "Culture eats strategy for breakfast - Peter Drucker". Developing commitment, trust and an environment in which employees grow both personally and professionally helps business leaders to take care of the organization. If they engage their employees to do this, they are much more likely to be concerned with the long-term success and survival of the organization. Loyalty must go both ways. Successful companies overcome crises because they are a learning organization that allows open communication and constructive criticism.