Strategic Early Warning: A risk management perspective

Strategic risk management requires an approach that places at its center the active monitoring of changes in one’s competitive environment. One systematic approach that accomplishes this goal is Strategic Early Warning (SEW). EW is a methodology that has been employed for many years by governments and their military in high-risk environments. Its migration to the business world offers exactly the new thinking required to adapt strategic planning processes to the new competitive reality of the 21st century.

Strategic Early Warning focuses on a deliberate and systematic attempt of delineating strategic uncertainties in one’s industry, the translation of uncertainties to tractable risks and then to operational indicators, the 24/7 processing of weak signals from the environment and the communication of alerts to management. Finally, Strategic Early Warning Systems use existing or refurbished organizational mechanisms to trigger action.

As studies of surprise attacks in military setting showed, true surprise is hardly the norm. Similarly, strategic surprises are very rare in business. Signs of impeding significant industry developments typically appear quite in advance, but companies lacking a systematic strategic early warning process often fail to pick them up due to various organizational obstacles (e.g., short term focus), cultural obstacles (operational efficiencies focus) and "decision pathologies" (groupthink).

Planning, risk, and action

Traditional planning processes fail to provide an adequate assessment and reduction of strategic risks. Risk identification in strategy development is not systematic. The relationship between market sensing tools (sales, competitive intelligence, purchasing) and the strategy process, whether formal or informal, is often sub-optimal. The relationship of the formal and informal strategy processes and management action is not linear and the political process of implementation and decision-making often results in late reaction in response to strategic market developments. The result is an under management of strategic risks. In a 2002 survey of the Academy of Competitive Intelligence, seventy five percent of the 164 companies surveyed described their management reaction to strategic shifts in its industry as too slow. Only eighteen percent described pro-active or at least action-oriented companies. The failure of traditional planning mechanisms to provide early warning for the effective management of strategic risks was demonstrated by another response to the above survey: Fully ninety-two percent of respondents replied that their company was surprised between 1-3 times in the past 5 years by events with a potential for a significant impact on long-term market position. Twenty five percent of those counted more than 3 such events in the past 5 years! The failure was in exactly the strategic risks that matter most: competitors’ breakthrough moves, new entry into one’s industry, technology substitution, and changing customers’ needs.

Our experience suggests four prototypes of companies in the space of early warning failures: The "analytical", "Tactical", "Couch Potato" and "Blind". We rank them from better to worse, but keep in mind – if you identify similar symptoms from your company among any of those categories, you need to change before the market does.