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October 13, by LSB

Be ahead, be ready. Managerial issues about “early warning signals”

Author: Prof. Dr. David W. VERSAILLES – Luxembourg School of Business

Executive Summary:

In today’s market, the frequency of change and the corresponding impacts on companies are
constantly increasing. A reactive mode is no longer appropriate. However, discontinuities and
strategic surprises do not emerge without warning. Early warning signals are a part of environmental
scanning required for the elaboration of corporate strategy. Academics and practitioners have
worked extensively on business models, on the optimization of the use of available resources or
capabilities, and on change management. In contrast to these topics, the management of strategic
surprises is still poorly addressed. The missing link lies in the collection of data and “noises” emitted
by the market or the macroscopic environment and their qualification as “early warning signals”.
To fill this gap, it is first important to acknowledge that there is nothing “weak” in the signal itself.
What is weak is the attention paid to the signal when it is still possible to introduce appropriate
responses, take decisions and avoid reactive modes endangering the business model. Another key is
to understand that the qualification of “early warning signals” depends on the ability to work as a
sort of “theorist” who operates a searchlight and applies corporate foresight. The question under
analysis does not deal with “knowing the unknown”; it deals with “navigating the unknown”. The
future is problematic, unknowable, uncontrollable and, thus, cannot be “managed”. To take the
future more seriously, it is necessary to acknowledge that there is no right or wrong foresight: there
is only better foresight. Early warning signals serve the process of taking the most appropriate
decisions in due time.

In today’s market, the frequency of change and the corresponding impacts on companies are
constantly increasing. A reactive mode is no longer appropriate. However, discontinuities and
strategic surprises do not emerge without warning. Early warning signals are a part of environmental
scanning required for the elaboration of corporate strategy. They represent meaningful leads that
can be used to anticipate opportunities, risks, and threats. Companies need to have structures,
processes, procedures, and competences in place to scan for and use early warning signals.

It remains difficult to make sense of strategic surprises in due time because this process relates to the paradox of knowing the unknown. Managers must find the best way to cope with uncertainty and scan the environment to identify blind spots in corporate strategy: irrelevant, obsolete, incomplete or incorrect assumptions about the environment. Research in management (and the subsequent teaching) has oversimplified the topic in a three phases framework based on signal collection, diagnosis generation, and strategy reconfiguration. The missing link about early warning signals lies precisely in the collection phase supposed to feed the subsequent steps, that is poorly addressed. Research on this topic reaches a twofold conclusion. Missing those signals, being late in their reception and processing or not being capable of launching corrective actions either drives companies into a crisis or prevents them from exploiting success potentials. Increasing the awareness of the importance of early warning signals and providing tangible guidelines for using them could conversely help companies to increase their competitiveness. However, such theories do not explain ways of working and practices with respect to the collection of early warning signals. This is precisely the topic of this paper.

In need of alertness: what is weak is the attention paid to the signal, not the signal itself

The assumption underlying the notion of early warning signals is that discontinuities do not emerge without warning. It is easy to retrospectively identify the relevance of warning signals. They are easy to qualify as “strong” when one knows the end of the process, like someone who watches a movie for the second or third time and makes sense of all the leads included in the scenario because the end of the story is available to interpret them as relevant. On the contrary, pointing them out in real time, and walking in the decision maker’s shoes, always represents a great challenge.
The difference between “weak” and “strong” signals does not refer to the future as such, but to the observer. It is a matter of “prepared minds”. The difference between “weak” and “strong” results from an interpretation issue based on the available knowledge to facilitate the analysis of the signals in the environment. Human beings are usually happy when everything clicks together and tend to foster confirmation because it enhances their comfort zone. The attention paid to signals depends on the consistency between our senses and our cognitive map (or interpretation paradigm). It is a matter of knowledge, not of information or of volume of available data. They usually miss signals that are totally out of the scope of their interpretation because these signals are filtered out by their cognitive schemes. To cut a long story short, cognitive maps are contingent on time, on prevailing paradigms, on social systems and value systems, on the “knowledge stock”, on stored mental models and on abilities to learn. These remarks can be easily expanded from individuals to observing systems and information technologies when automated systems, machine learning or artificial intelligence support this detection. The challenge is to identify and retain those signals relevant for decision making while the others are discarded. Relevance should be confirmed thanks to careful articulation with other “weak” signals providing redundancy and cross-validation. The question under analysis does not deal with “knowing the unknown”; it deals with “navigating the unknown”. The issue at stake is to detect that “some” disruption will emerge. The discussion about the content, the nature or the magnitude of this disruption will arrive during a second stage focused on the preparation of contingency plans and on strategic reconfiguration once discontinuities have been spotted.
Recurrent academic debates about the status of uncertainty demarcate what is eventually linked to emergence probabilities, and what cannot be made consistent with probabilities. Uncertainty is not accessible to probabilities because it describes genuinely unknowable events. This introduces a typical difference between uncertainty and the assessment of risks. Recurring patterns inherited from the past lead to an analysis of threats and to occurrence probabilities as if these patterns were deterministically framing the future. Probabilities transpose recurrent patterns about behaviors or safety into stable risk levels. In contrast, most uncertain events have a genuine aleatory nature, but it is possible to “imagine” future developments with a focus on appropriate signals. Turning away from probability language, approaches based on “possibilities” or on “corporate foresight” prefer the investigation of scenarios, thus building reference patterns suited for the analysis of external change. Scenarios empower minds for the analysis of potential change. The existence of “prepared minds” then makes it possible to work on individual and collective attention or alertness, and to explain how to sense the different “signals” present in the environment and the “noises” emitted by the market. In analyzing early warning signals and considering their consistency with available scenarios, managers can appraise threats and opportunities. Managers can also take decisions about resources, managerial processes and investments once the “possibilities” have been identified.

From individual to collective alertness: the need for multi-level investigations

The recognition of signal relevance and the ability to identify early warning signals refers by nature to individual cognitive patterns. One can locate cognitive aspects at an individual level, while managerial challenges incur collective and organizational efforts. Managers are obviously located at the intersection between individual and collective issues.
When considering individuals and groups, coordination and cooperation imply that competencies, knowledge assets and actions are articulated together to build an outcome “greater than the sum of its parts”. However, the only possible interplay between individual and collective aspects is located at the level of action: individual competencies and knowledge lead to individual action that combines with other individual actions to build collective outcomes. Therefore it is necessary to identify how social facts, rules prevailing in organizations or institutional frameworks, create the conditions for individual action and then lead to individual actions. Global outcomes cannot be assessed without considering the impact of rules, processes, managerial inputs on individual workers and managers, and their anticipation of performance indicators introduced by senior management. Specific responsibilities are assigned to each category of manager (local managers, middle managers, heads of business units, etc.) to install appropriate ways of working and make groupwork effective, build collective competences and create organizational knowledge. These elements present at collective level create the conditions for individual action and then lead to individual action.
The diagram made popular as a sort of “bath tub” (compare figure 1) shows the interplay between these elements. Collective alertness requires an assessment of all the aspects pictured on the lower part of the diagram because it is impossible to fill it with social outcomes without considering the different activities performed at the articulation nodes respectively labeled as “conditions of individual action” (between arrows #1 and #2) and “human action” (between arrows #2 and #3).
Initial social and institutional conditions prevailing in the organization frame the potential for alertness along with values, ideologies, and paradigms for thought and action. Rules and managerial inputs frame the conditions of individual action about alertness, thus drawing a series of red and green lines about attitudes, behaviors and contributions.
Individual action itself can be “unpacked” into several aspects (the list is not exhaustive):
• Individual evaluation of internal and external signals collected “into the wild”,
• Decisions about signal transfers throughout the organization,
• Decisions about the eventual use of the outcomes of signal evaluation to adapt operations or the business model and thus reconfigure the company.
• Decisions about the contents of change management after reconfiguration decisions.
• Individual decisions to accept, block or foster change management because the relevance of signals is not (individually) acknowledged.

Social and collective outcomes cover any sort of reconfiguration of an organization, for instance about the sustainability of a business model and the associated change management.

Figure 1: Coleman’s “bath tub”

Source: Felin, Foss, Ployhard, 2015: 591; Versailles and Foss, 2019: 22.

The collection of “noises” into the wild explains the “locus” of alertness: all aspects appraised with the internal and external analysis of the firm are potentially relevant. They may emerge from interactions with clients, suppliers, or from the investigation of market conditions. Other relevant “noises” relate to internal organizational resources and most notably deal with human and financial resources, as well as the other capabilities present in an organization. The aspects to be covered in this second category are present in the traditional agenda of the ‘resource-based view’ of the firm.
The long list of domains potentially generating “early warning signals” explains that a combination of different people, from different levels of the organization, all contribute together to the identification of warnings and of their relevance. Processes relating to collective alertness, as explained with the “bath tub” diagram, indicate the need for multi-level analysis, that can only emerge from an explicit investigation of the conditions related to individual action, targeting a combination of individual tasks operating (consciously or indirectly) in complementarity. Building a bridge between individual and collective alertness to handle “weak” signals requires an ability to confront different sources of data and information inside the organization (because of the dispersion of knowledge) and to combine these elements to jointly characterize them as “early warning signals”.
How is it possible to organize and to compute these assessments in a company? Here precisely lies the managerial challenge linked to early warning signals. There is no magic toolbox to solve this issue, except that a combination of contributions from front line employees, local managers, middle managers and strategic decision makers is required to make the appropriate decisions. The bridge between individual and collective alertness also requires explicit rules describing how data and information should travel through the whole organization. It is necessary to install a sort of information and cognitive slack to store them and make them available for further investigations. Best practices indicate that specific categories of managers are required to act as mediators and perform an intermediation function between all the different types of people working in the organization; they serve as bridges or catalysts (“boundary spanners” in the jargon) during this process and contribute to eventual reconfigurations. These people have a transverse understanding of product lines, technical architectures, supply chains, etc., and most often perform the “boundary spanning” function in teams supervised by the innovation director. In smaller firms, typically in family-owned businesses, the managing director or the main family representative usually conducts this supervision and coordinates all these activities.

How can early warning signals be transported into strategy and operations?

To understand the complexity of acknowledging signals as “early warning signals” and transporting them into decision making processes and operations, it is possible to think about a company as a sort of “organizational drivetrain”. A company could be compared with a bike: managers sitting on it and pedaling it would “sense” the external “noises” before characterizing them as relevant. Here is a list of questions illustrating the (managerial) challenges to be addressed: Who is “operating” the eyes orienting the “scanning” process that mimics the detection of “noises” while driving the bike? If employees are only pictured as the back wheel, how is their feedback considered in the analysis of “warnings”? Is it normal to figure out contributions by front line employees and local managers as some sort of deterministic consequence of the pedaling performed by “someone” who is also “driving” the bicycle? Who is activating the brakes? Who is pedaling? Who is activating the crankset, the front and back gears to adapt activities to challenges presented by the environment and adapt the pace of the bike to mandatory reconfigurations? Who is handling the stem and negotiating turns? Where is the necessary evolution of the “conditions of individual action” located on the bike (for instance, an evolution of norms, rules, and routines)? Is the activation of the derailleur an image for change management or for managerial contributions to operations? Is the bike rider sitting alone on the saddle? Should the analysis consider that each business unit represents a specific bike?
These questions all show the managerial challenges to be addressed when articulating alertness at individual and collective level, thus contributing to build a bridge between the bike driver’s eyes and the group. When focusing on the appropriate “signals”, firms can adapt, reconfigure their internal processes, reshape their portfolios of services/products to best adapt to market conditions and competition, and thus defend their competitive advantage. The assessment of early warning signals is a temporal and logical antecedent to any reconfiguration of the company and explains the ability to deal with external shocks. The capacity to deal with early warning signals therefore represents a distinctive asset building a company’s competitive advantage (a “core competence”).
To work on core competences, management research has produced an analytical framework comprising three distinctive steps, respectively coined as “sensing”, “seizing” and “reconfiguring”.

Figure 2: Early warning signals resituated in the dynamic capabilities’ framework.

Adapted from Teece, 2007; 2017; Merindol and Versailles, 2020.

The “sensing” represented by the first building block is very close in content to the already described debate about the qualification of “noises” as early warning signals. Their correct recognition as early warning signals thus constitutes the starting point of the journey towards the reconfiguration process. The second block of activities relates to the interpretation of “noises” generated during the collection phase and the elaboration of a list of options leading to decisions relating to corporate strategy. During this phase, significant efforts are devoted to the alignment of perspectives and to the progressive elaboration of a “shared big picture”, preparing at the same time for the elaboration of strategic reconfiguration and for the acceptability of the subsequent change management. The third block focuses on the reconfiguration of activities and the subsequent implementation of change, covering here any dimension of the service/product portfolio, of operations and of funding for investments.

Managers and decision makers as “theorists” working on change

Business model adaptation, business model innovation and change management operated at strategic level represent difficult undertakings, but practitioners and academics have already proposed strategies to work on these topics. Nobody asserts that the seizing and reconfiguring sequences are easy to understand. The elaboration of a shared big picture is also among the greatest challenges faced inside companies. However, inquiries about the management of the sensing phase have not yet reached the same level of maturity. It still represents a sort of magic box even though scholars acknowledge that it does not operate at random, and that it is constituent of a new survival paradigm for firms. Filling this gap is precisely the purpose of this research project about early warning signals. The rest of this section will introduce directions towards concrete responses.
Managers often limit their actions and decisions to resources and capabilities that they already possess, but this approach is often translated into the replication of existing paradigms and of current business models without considering the evolution of the business environment. The discussion of strategic discontinuities and strategic surprises requires another perspective, that should focus first and foremost on the sustainability of competitive advantage. Optimizing the use of existing resources and capabilities, or “pivoting” to use them differently, only represents one aspect of the debate because the best possible exploitation of resources and capabilities frames the lenses through which reality is appraised. It results in a sole focus on internal drivers. Instead of filtering out “noises” and data inconsistent with the current business model, the approach consistent with the management of strategic surprises should focus instead on how to renew or sustain competitive advantages in the framework of a changing environment. It is then necessary to complement the “resource-based view of the firm” and jump into the “theory-based view of the firm” to analyze potential scenarios for the future as well as the external conditions framing the sustainability of the competitive advantage, for instance regarding the components in the supply chain or the determinants of effective demand. This never-ending journey is based on assumptions, questions, and scenarios, and is more important than the destination. In order to navigate uncertainty and potential disruptions, a culture of “sensing” becomes a necessity, and requires a dialog between, on one the hand, the “noises” collected about any part of the business environment and of the organization and, on the other hand, the shared big picture that sums up, in particular, strategic directions inside a company. This dialog is based on awareness. It does not operate at random, like some sort of “blind” trawling. It can only become effective when operating like a searchlight.
Nobody asserts that operating the sensing-seizing-reconfiguring sequence goes without challenges. Many different dimensions should be considered, especially in relation with the shared big picture, the preparation of reconfiguration and the change management incurred by reconfiguration itself.
However, the mandatory step leading to an eventual adaptation to strategic change locates upstream, during a data collection phase that is most often ignored or mishandled in organizations.

The use of early warning signals as relevant inputs for corporate strategy echoes very old debates in philosophy, economics, and management: the objective of working with early warning signals is not to “manage the future” (singular). Signals serve to build representations of potential long-term futures (plural) with scenario-based analysis. Future scenarios are (collectively) created during corporate foresight projects as a set of plausible states to be worked with, and as a tool to achieve outcomes in the present. It includes the discussion and enhancement of mental models, of (individual) creativity, of (collective) flexibility and of routines and ways of working in companies. The future is problematic, unknowable, uncontrollable and, thus, cannot be “managed”. To take the future more seriously, it is necessary to acknowledge that there is no right or wrong foresight: there is only better foresight. In this framework, early warning signals serve the process of making the most appropriate decisions in due time.

Conclusion: the need for strategic foresight

Many conceptual and practical questions about early warning signals are still open for research in management science. However, a conclusion already prevails. Firms that do not practice corporate foresight or have a low level of foresight proficiency tend to underperform in comparison with their peers: they miss opportunities because they do not react in due time.
The best description of business ecosystems in the 21st century is supplied by the motto “Anticipate and prepare for change ahead or die”. Lower levels of preparation (preparedness) lead to difficulties when defending or sustaining competitive advantages. Learning how to work with early warning signals at individual and collective level represents a key distinctive capability explaining the ability to survive in business ecosystems.

List of references

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About the author

Prof. Dr. David W. Versailles develops a twin career as academic faculty and consultant. He currently chairs the Strategic interest group (SIG) on Innovation at the European Academy of Management (EURAM). He is an Ord. Professor and Research director at the Luxembourg School of Business, and an Ord. Professor at the Paris School of Business in Paris where he co-heads the “new Practices for Innovation and Creativity” (newPIC) chair with Prof. Dr. Valerie Mérindol. He holds a Doctorate and the Habilitation to supervise research in economics. A French citizen with residence in Luxembourg, Prof. Versailles is a Founding Partner in ISK Consulting SA (established in Luxembourg in 2017), and the managing director of this company. His research and consulting specializations are in strategic management, the management of innovation, the management of complex systems, and the methodology of social sciences. Prof. Versailles is the author of 30+ articles in scientific peer-reviewed journals and in edited books, and of 3 books. He is also regularly active as guest editor for internationally recognized academic journals, and as keynote speaker.

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