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Firms need new ways to monitor their environment

Five ways to bring your monitoring process into the 21st century

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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.

Monitoring for the 21st century


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:

  • First, instead of being conducted once a year in a top-down way by a few employees as part of the strategy review process, monitoring should be undertaken on a continuous basis by everybody in the organisation. We found the successful companies in our sample to be those that had formalised data gathering by everybody in the company by holding employees accountable for identifying changes in the outside environment and by providing incentives to them to do so. Thus, instead of relying on a few people to decide what information is important to collect and analyse, successful firms employed a decentralised, bottoms-up, crowd-sourcing process. In addition, they collected this information on a continuous basis (rather than once a year) using sophisticated management systems and AI software.
  • Second, in addition to collecting information and intelligence from outside sources, internal people should also be employed to provide insights and information. More importantly, this should be done in a systematic and continuous basis and not as a one-off activity. The successful companies in our sample appreciated that knowledge about the outside environment often lies within the firm with managers and employees being permanent observers of the business landscape. As a result, they put processes in place to systematically and in a structured way collect data, information and opinions about the outside environment not only from outsiders but also insiders—both managers and employees.
  • Third, the information collected is useless unless it is processed correctly to develop actionable insights. Successful firms did this by continuously cross checking internal and external data on the environment to identify trends, blind spots or false alarms. Not only did they collect all this information and developed actionable insights but they diffused all of this throughout the organisation so that everybody can act on it. In addition, they developed clear parameters within which they gave their people autonomy to act upon the information and insights collected. In this way, they helped their organisation shift from an information focus culture to an action driven orientation.
  • Fourth, the new process must embrace experimentation as its core. What needs to be done in response to the trends and changes identified is often not obvious or clear. To avoid promoting analysis-paralysis, successful companies encouraged employees to try out what they thought the proper response to these changes ought to be. These experiments had to be small-scale and low-cost ones. Experiments that were deemed too risky or capital intensive had to be approved by senior management but most others were left at the discretion of employees.
  • Finally, the process cannot succeed without a supporting organisational context. Successful companies had put in place a culture that encouraged questioning, active listening, sharing of information and innovative behaviours. They also had leaders that encouraged an outside orientation as well as behaviours conducive to innovation (such as questioning, long-term orientation and sharing of information). What appeared to determine success was the appropriate management of the tension between the short-term behaviours produced by the control systems and the long-term behaviours produced by the culture. Managing this tension between the firm’s formal and informal systems appeared to be a key success factor and it is an idea consistent with the findings of other academic studies.

Effective monitoring as pre-requisite for agility


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.

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