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Everybody knows that companies need to monitor their external environment in order to identify potentially disruptive changes and respond to them before it is too late. The story of the boiling frog is a much-used analogy that warns firms to the dangers of ignoring changes—even small ones—happening in their environment.
Not surprisingly, our research has found a positive link between ‘monitoring intensity’ (that is, how much time and resources a firm spent on monitoring its external environment) and performance. This was particularly the case for firms operating in volatile and turbulent environments. However, our research has also uncovered a surprising finding: within the sample of firms that did a lot of environmental monitoring, there was a lot of variance in performance—some were performing well and some were not. This implied one of two things: (a) Environmental monitoring is only one of the many factors that influence performance; and/or (b) It is not how much environmental monitoring that you do that is important but how you do this monitoring.
We explored the differences between those firms that did a lot of environmental monitoring and were successful versus those that did a lot of monitoring but were not successful. It appears that many firms still monitor their environments by using practices, tools and techniques that were developed in the post-war era when the outside environment was not as volatile and fast changing as it is today.
In today’s world, agility is a pre-requisite for success.
Given today’s speed of change and the frequency with which disruptions emerge and unsettle seemingly formidable incumbents, we need new tools and a different process to monitor and respond to environmental changes. Given the evidence from our research, we’d propose that the new process that will meet today’s needs and demands ought to have 5 characteristics:
In today’s world, agility is a pre-requisite for success. There are many things that can enhance a firm’s agility but a key one is the effective monitoring of the changing environment, the development of correct and actionable insights and the quick implementation of responses. To achieve all this, firms need to revamp their environmental monitoring processes which are often relics of an era gone past.
The new process they now need to put in place must be based on the principle that all employees will have, within certain parameters, the freedom and autonomy to act on the information collected. Their actions and responses will be informed by small scale, low-cost experiments that are encouraged in the organisation to quickly assess the quality of the response. It is this fast and decentralised use of information that will improve a firm’s agility.
It is not how much environmental monitoring that you do that is important but how you do this monitoring.
At the same time, the formal systems of the firm (such as its processes and incentives) must be supported and many times counterbalanced by its informal systems (such as its culture and values). The right culture and leadership are necessary to either promote long-term behaviours that counterbalance the short-term behaviours encouraged by the control systems of the firm or to minimise the short-term behaviours that emerge in response to the control systems.
Costas Markides is Professor of Strategy and Entrepreneurship and holds the Robert P Bauman Chair in Strategic Leadership at London Business School. He teaches in the School’s Senior Executive Programme.
Daniel Oyon is Professor Management Control at HEC Lausanne, Switzerland
Tony Davila is Professor of Entrepreneurship and accounting & control at IESE Business School, Spain.
Mael Schnegg is a Senior Research Fellow at the University of St Gallen, Switzerland.