Filters in the Strategy Formulation Process
Leena Ilmola
(Helsinki University of Technology, Finland
leenai@fountainpark.com)
Anna Kotsalo-Mustonen
(Fountain Park Ltd. Helsinki
annak@fountainpark.com)
Abstract: In the fast moving businesses the ability to be flexible
and adaptive to change is crucial. When monitoring their operating environments
for weak signals and for other disruptive information companies face filters
that hinder the entry of the information to the company. We are discussing
three filters: mentality filter, surveillance filter and power filter.
Each filter has a logic of its own that hinders effective knowledge flow.
We introduce a software tool that helps to overcome these filters especially
in a strategy formulation process.
Key Words: Strategy process, filters, weak signals.
Category: J.4 Social and Behavioral Sciences
1 The Importance of Knowledge to a Company: An Introduction
The importance of knowledge to business increases and there are few
signs that the pace would slow down. This is due to the fact that more
and more of the added value companies create is built on the tacit and
explicit knowledge that individuals collect, possess and create. The purpose
of a company is, by its existence, to produce more value than individual
actors operating alone. One of the characterizing features of the new economy
as a system is the fast feed back loops that create an emergent order for
the economy [d'Aveni 1994, Brown
and Eisenhardt 1998]. The literature suggests that flexibility is the
best means to compete in this context [Sanchez 2002].
The key competence of an organization is its capability to capture the
external information and then to build up proactive strategies or innovations
for the changing environment.
The above implies that one of the major challenges that the managers
are facing today is how to take full advantage of the knowledge that individuals
within and outside the company have and transform it into organizational
collective knowledge.
We aim to present theories that clarify the obstacles in the knowledge
creation process of strategy formulation. In the worst case, the obstacles
can prevent the utilization of existing knowledge that lies within the
reach of the company. We also present a tool that can be used to overcome
some of the obstacles. The tool collects signals for strategy formulation
and innovation processes.
2 Flow of Knowledge into the Company
Nonaka [1995] described how knowledge flows into
a company: It flows in having a tacit form along with individuals after
which some of it is made explicit and by explication it becomes an organizational
explicit knowledge asset.
Organizational knowledge becomes a true competitive asset only when
it runs through a strong sensemaking process [Weick
2001] and it takes a tacit form in the interactive process and it is
embedded into the structures of the company and its ways of operation.
This applies to all knowledge entering the company. External stimuli entering
the sensemaking process creates the potential for the change stimulus and
this way the nature of the sensemaking process will have a strong impact
on organization's flexibility. The effects of success or failure in the
knowledge flow process are most meaningful to the strategy formulation
and thus to the success of an organization [Sanchez
2002].
3 Obstacles for Acquiring Filter-Free Knowledge
Sensemaking includes both explicit and implicit mental processes of
scanning, framing, interpreting, and constructing a concept of the situation
at hand. Sensemaking, that precedes decision-making, plays a significant
role in defining the scope of forthcoming decisions [Woodside
2001].
The theoretical frame we are following here is from Karl Weick [1995,
2001]. It provides us with seven properties of sensemaking;
identity, retrospective nature of sensemaking, enactive of sensible environments,
social process, ongoing nature, focus on extracted cues and driven by plausibility.
The core of sensemaking is the continuous process of redefinition of identity.
The organizational identity defines which stimuli are extracted as a cue
for a sensemaking process. Ability to extract cues from external stimuli
is better if the participants in the strategy process have various identities.
According to Weick action is a precondition for sensemaking. The choice
of the stimulus affects the choice of what action means and both choices
are heavily dependent on the situational context. Extracted cues are simple,
familiar structures that are the seed from which people develop a larger
sense. Cues are context dependent but they need a reference from our earlier
experience. Context defines which stimulus is extracted as a cue and then
context affects how the extracted cue is interpreted. So we create meanings
looking back to our memories and synthesize the action to all the other
meanings we have. The meanings we create are path dependent, as individuals
interact with their environments and build cognitive frameworks. [Abelson
1976, Fiske and Taylor 1991, Bogner
and Barr 2000].
The conscious cognitive processing of external stimulus takes place
if the cue can interrupt the ongoing process. There are two basic types
of interruption that trigger sensemaking and cognitive change: new event
is not expected (unusual, novel) or something expected does not happen
(discrepancy in actions). This creates ambiguity in organization. Ambiguity
requires attention and sensemaking process begins. The objective of this
process is to reduce the tension that uncertainty creates.
Strategy process is a specific type of sensemaking process that the
organization runs. It is one of the few frequent and standardized external
cue-capturing processes (other examples are customer surveys etc.). Successful
sensemaking process produces a corporate strategy that is a strong-shared
cognitive scheme [Hendry 2000] that defines the scope
of organization's actions. Strategic decisions represent a response to
managers' needs to structure their perceived environment [Hendry
2000, Weick 1995, Laroche
1995] and reduce its complexity [Ansoff 1984].
To gain competitive advantage, a company requires novel knowledge and
its refinement for proactive action [Juvenel 1967:1,
Bell 1987, Ansoff 1984 p. 22].
In the strategy process, we define objectives for the vision building process
and choose the way it is to be run. The choices of objectives, methods
and quality of the participants have several implications on sensemaking
process.
Figure 1: Filters of information [Ansoff
1984]
One potential way to analyze the prerequisites or hindrances of this
information flow is the framework of Igor Ansoff [1984].
He described for the first time the barriers that the novel information
in an environment has to pass in the strategy process. He states that all
environmental surveillance and analysis techniques can be viewed as filters
through which information must pass on its way, to have an impact on the
firms operations. Ansoff classified these filters into three different
classes: surveillance, mentality and power filters. [See Fig.
1]
The surveillance filter defines the field of observation. It
is the first of the obstacles the novel information meets. To be efficient,
the sensemaking process has to be focused and the focus is usually based
on previous experiences. We observe our current market and pay attention
to those features that have succeeded in disturbing our processes before
[Weick 2001]. If the objective is to increase the
organization's flexibility, this orientation is not beneficial, because
at their early stages [Ansoff 1984] the discontinuities
of the operating environment seldom appear in the traditional market, but
come from other fields. The current surveillance system may filter out
appropriate data. The management has a capability to observe only those
issues that they have observed before. In turbulent environments, extrapolative
systems filter out important discontinuity information [Ansoff
1984].
How to open the surveillance filter? The diversity of participants
of observation processes is an obvious way to open the surveillance filter.
Participants' identities, roles and differences in their value orientations
have a strong effect on their scope of observation [Weick
2001].
It guides how they set categories in their sense making process. Also
the way participants are briefed is essential. The less restrictive the
focus of the information gathering process is, the more diversity will
be achieved in observation [McCaskey 1982, Ansoff
1984]. If the nature of observation is allowed to be in the form of
a paradox or contradiction, this facilitates a more diverse outcome. In
the sense making processes organizations receive more explicit information
than is ever analyzed. Similarly, there is an unknown amount of tacit information
that is left out of analysis. According to Nonaka [1992]
the knowledge flows into the organization so that tacit knowledge can be
passed to each other only in face-to-face context and the explicit knowledge
that we are exposed to is only internalized through a process of embedding
it to the structures of the organization.
The mentality filter. The magnitude of information and signals
from the environment that managers receive is usually inoperable [Ansoff
1984]. There is an urgent requirement for reduction. In the sense making
process, the reduction criteria are based on managers' experiences and
their reference points. When information does not support the current mental
model, the acceptance of new ideas is hindered
How to open the cognitive mentality filter? Explicating the mental
model that is used can open the cognitive filter. When the model is visible
[Ansoff 1984], the organization is able to identify
the 'empty' areas of information and analyze the fit of collected information
with current strategic goals. [Senge & al.1999].
The sense making process can be improved also by relaxing the argumentation
requirements [Weick 1995]. Detailed argumentation
results in a strong cognitive filter. The cognitive flexibility [Sanchez
2002] in sense making process is higher and the mentality filter is
more open if multiple interpretations and the use of symbols and metaphors
are in use within the organization.
Power Filter. The novel information that is captured from the
operating environment may cause changes in the power structure. In the
knowledge intensive organizations the power is based on expertise not so
much on the position. The nature of power filter is stabilizing. The experts
whose importance could be reduced by the discontinuities may try to neglect
vital information in order to maintain their current position [Ansoff
1984].
How to open the power filter? Presenting ideas that are out of
current context can risk one's status as an expert. Anonymity of participants
in a process of acquiring novel information is a way to open the power
filter. Ideas that may cause changes in the formal power structure or the
prestige structure of expertise can be presented [Kuusi 2000]. One way
to open the power filter is to avoid formal, well-defined measurement systems
when assessing the results of a strategy or innovation process [McCaskey
1982]. Also multiple voices are more likely when the decisions are
made at a late stage in the process. If decisions are made at a very early
stage, the cultural perception filter [Ansoff 1979
p. 105] and the shared rules [Levitt & March 1988]
result in a single common voice.
4 A Tool for Signal Collection
We present a tool that is developed for those organizations that operate
in complex turbulent environments where there is constant need for monitoring.
The tool is designed to overcome most of the filters described in the previous
chapters. It is important for the leaders in this kind of environment to
identify potential discontinuities as early as possible, at the stage of
weak signal that [Ansoff 1979]. The flexibility for
change - and the capability to be the first mover in the market [Brown
and Eisenhardt 1999] is essential competitive factor.
The logic of the tool is based on the theories presented above. It can
be used via Internet in order to cover as a wide group of respondents as
possible to gain novel insight. With this tool, multinational organizations
have succeeded in opening filters both in strategy formulation processes
and in product innovation.
The tool is used in three stages: collection, evaluation and analysis
of weak signals.
1. Collection of signals with a minimal surveillance filter and power
filter. The respondents are heterogeneous and anonymous. For the analysis,
background variables are gathered. [See Fig. 2].
Each of the signals has to have a capability of arousal/interruption
in the sensemaking process [Weick 1995].The input
provider is explicating his/her thoughts as a narrative. Kuusi [2000] has
analyzed different formats of weak signals or innovation ideas and has
found out that a story format is able to carry meanings in the multi step
sensemaking process. The tool has three different templates for signal
collection. One for rational ideas accepted in our analytical cognitive
models. The second one is for randomly chosen questions that have no direct
links to the theme under investigation. The third one is used to trigger
thinking and encourage the respondent to give up the analytical thinking
with the help of 'distant thinking models'.
With 100 participants we can easily collect 500 signals of potential
discontinuities or weak signals. With the tool we are challenging the traditional
cognitive filter of strategy process, which is the group of experts or
management team that has previously evaluated what is essential and what
is not. The second challenge that the tool aims to overcome is the qualitative
format of the signals. Efficient continuous monitoring requires quantitative
material. The transformation is made in the next stage.
2. Signal evaluation. Respondents evaluate the data. The tool provides
each respondent 30-40 randomly chosen signals for evaluation. The signals
are authentic and the evaluator is able to read the narrative. No one has
used his or her mentality filter for classifying, choosing or editing the
material. The method of evaluation is a simple application of a cognitive
map [Miles and Huberman 1994], where the respondent
is asked to position the signals according to their relevance vis-s-vis
the reflection point that is the theme of the survey [see Fig.
3]. Argumentation of one's own views is not required and thus the mentality
filter stays open.
Figure 2: One of the input templates used in the signal collection
stage.
3. Analysis of evaluated signals. The reporting structure forces the
analyzing group to overcome the mentality filter by explicating also such
potential weak signals that do not fit within current mental model. In
the context matrix [see Fig. 4] that is using Ansoff's
[1984] classification of weak signals, the tool is
explicating the mental model of the participants. Elaborating all cognitive
maps with equal weights opens the power filter. The grid report [see Fig.5]
is indicating the potential weak signals - those considered low in relevance
and high in deviation i.e. some find them to be very important. The analyzing
team is faced with signals that do not fit into their success model [Ansoff
1984]. When these potential weak signals are analyzed e.g. with Policy
Delphi methods [Kuusi 2000], the cognitive filter of the team is opened
temporarily and some of the potential discontinuities outside the current
mental model are identified. Power filter is kept open by treating all
signals equal as long as possible in the process.
Figure 3: Cognitive map for evaluation of the relevance of
signals.
Figure 4: Content matrix that explicates the mental model
of the analysis team.
Figure 5: The result grid that presents the weak signals.
5 Conclusions
The application we presented has been created to overcome some of the
barriers [filters] identified in monitoring processes of the operating
environment. We presented theories that clarify the obstacles in the knowledge
creation process of strategy formulation. We have combined two theories,
sensemaking theory Karl Weick and strategy filter theory by Igor Ansoff.
One of the key issues for the top management for organizations operating
in the turbulent environment is flexibility. When the organization is too
stable the management should open the organizations sensemaking flow for
change signals. That requires identifying and opening the filters described
above. The openness of knowledge creation process is not a value as such
but it is contingent to the situation of the company. On one hand there
are occasions when the organization needs some stabilization, e.g. after
an acquisition when the filters have to be managed (closed ) in the way
that information flow will lead to a strong sensemaking process.
On the other hand when we are looking for weak signals for the formulation
of a new strategy we need all the knowledge available within and outside
the company in to the process for further evaluation. By understanding
how the filters work as obstacles we have a chance to bypass them. The
tool that we introduced is one way to try to bypass them especially in
the process of unearthing weak signals.
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