How Good Does Your Early Warning System Have to Be

Volume 13 • Number 4 • October/December 2010 www.scip.org 11

!How Good Does Your Early Warning System Have to Be?

EWSWe live in a period of increasing turbulence in the

competitive environment, caused by events such as the end of trade barriers, the evolution of information technology, the increasing deregulation of markets, and the intersection of different areas of knowledge. The 2009 world economic crisis has reinforced the idea already prevalent in the business community that the speed of business environment changes is steadily increasing.

In addition, other modes of competition are arising from the emergence of multinationals based in third world economies. Further competitive changes are developing from the new proliferation of industries and value-chains riding the wave of the new green economy. Rock-solid companies are being swept away in a matter of days. What might have happened in many of those cases?

In such a volatile environment, there is no more space for companies to only focus on productivity increases and costs reduction initiatives. Consequently, one has to systematically evaluate changes in the competitive environment. This task should not only be performed during annual strategic planning meetings, or when there is a change in top management or a financial crisis situation.

The whole idea of an early warning system (EWS) becomes more popular in this environment. When talking about an EWS, I’m referring to a system dedicated to tracking weak signals as well as the anticipation capability that should be embedded in all competitive intelligence processes. But how good does one’s company EWS have to be to deliver the expected results? The purpose

of this article is to evaluate what features and internal characteristics of the company, as well as conditions of the business environment, should affect the development of an effective early warning system. This analysis considers two dimensions of an EWS:

• its anticipation capability• its coverage area span

ANTICIPATION CAPABILITY – INTERNALAs per the first dimension, which has to do with

the capability of the early warning system to anticipate business events, some internal as well as external factors have direct impact on this matter. Fast-follower companies, characterized by strong and agile decision-making processes and execution capabilities, can be surprised by an event and still make the appropriate changes to adapt to it before the established players can. In this case, the need for anticipation is reduced. However, most companies don’t have this capability, especially market leaders that, in most cases, are reluctant to make the appropriate changes at the sufficient speed and depth.

The other internal factor affecting the company’s ability to benefit from anticipation is the human, financial, and technical resources it has available to implement the actions suggested by an early warning system. This is an important element of the decision process applied

By Paulo Gustavo Franklin de Abreu, Embraer

12 www.scip.org Competitive Intelligence

by companies to evaluate the viability of each alternative response to a given threat or opportunity. For each alternative action, two aspects are evaluated to determine its strategic adherence. The first encompasses the strategic and cultural fit. The other aspect considers the implementation viability of each action, which is closely linked to the availability of resources as presented in Figure 1.

The availability of resources will ultimately define whether or not one company can seize the upcoming opportunities and take the appropriate actions to tackle the incoming treats. Larger companies with established brands and product portfolio often have more resources and capabilities to handle opportunities and threats than smaller companies with limited budgets.

Figure 1: Competitive Intelligence’s Role on Evaluating Action AlternativesSource: Adapted from Day (1999, p. 278/279).

Figure 2: Expected Behavior by Number of Alternative Actions and Number of Signals Given by an Event Before its Occurrence.Source: Adapted from Bernhardt (2003, p. 40).

how good does your early warning system have to be?

•Strategic, culture, and value fit (Do we have to do it?)•Viability (Can we do it? Do we have the resources?)•Impact on other stakeholders?•Most likely response from other stakeholders?•Action’s effectiveness•Action’s resilience over time?

Role of CI

Strategic adherence

X

Effectiveness{ }}

t - x - rfWith CI

Number of alternatives of action

Number of evidences

t - xWith CI

t - 1Without CI

t - 0Event

Public knowledge

Industry knowledge

{ { { {

db

c a


Market leaders even have the capability to steer their market in the desired direction. They have a larger span of alternatives to direct changes in the market environment, such as taking action to:

• prevent an event from happening• support it and make it happen earlier • steer the event to a more appropriate direction

Thus, when companies have fewer resources to implement a wide range of actions in response to given threats and opportunities, they require an EWS capable of identifying those issues much earlier than the other players in the marketplace. With more anticipation time, a company can consider a wider range of alternatives of action. This enables it to pick and choose the options that require fewer resources to be implemented.

Figure 2 shows four different situations that may exist within companies in response to a given event in the business environment. For example, for an event that takes place on “t-0,” companies without an EWS in place would likely know about this event a few moments before (say on “t-1”) its occurrence, due to the abundance of evidence in the marketplace.

Companies with an EWS in place would have the capability to identify the likely occurrence of this event at “t-x,” giving its decision-makers more time (“c”) to implement their actions and more alternatives of action to choose from (“b – a”), resulting in the optimization of their decision-making process. In situations where a company doesn’t have enough resources (“r”) and is not a fast follower (“f ”), the firm requires additional anticipation time to balance the above mentioned weaknesses.

Yet, according to Emerson (1962), the dependency of a company to its external environment is directly related to the importance that a given product or service offered by agents from the external environment has on that company’s business. With the prevailing phenomena of outsourcing, companies have come to depend on more of the external environment. Processes which were previously done in-house are now conducted by third parties. Ultimately, this will require a higher need for anticipating the external environment.

To summarize, three internal aspects of organizations affect their level of need for anticipation through an EWS: Fast-follower capability, resource availability, and dependence on the external environment. If one company does not have fast-follower capability, has little resources to handle the changes in the business environment and has a high dependence on the external environment, its EWS must have a much better anticipation capability.

Figure 3: Company Readiness to Handle Threats and Opportunities Along an Industry Cycle.



ANTICIPATION CAPABILITY – EXTERNALAlthough we have so far explored the internal

aspects of an organization that affects its need for further anticipation provided through an early warning system, external factors are equally important. These include:

• the market cyclicality • the variability of the external environment• the industry structure

Market CyclicalityMarket cyclicality affects the level of anticipation

capability required through an early warning system, since during a downturn companies focus on cost cutting and layoffs to raise and save money (cash generation issues). In difficult times, managers tend to be focused on the short term and devote most resources to handle those issues. Thus, even if the company’s EWS can identify specific threats and opportunities ahead of its peers, it’s very likely that in a downturn situation the company will not have the resources to act upon that information. Consequently, the need for even more anticipation increases, as important threats and opportunities have to be identified before the industry cycle downturn phase.

In Figure 3, the early warning systems of companies facing this kind of industry cycle would need to identify future threats and opportunities, most preferably out of the “tied-hands zone.” This zone is characterized by the period when the company’s

management and resources are fully focused on operational matters. Consequently, the longer the industry cycle (and more importantly, its downturn phase), the earlier a company’s early warning system has to anticipate events.

Variability of the External EnvironmentThe cyclicality factor was addressed by Duncan

(1972), as it is a proxy of one component of environmental uncertainty. This uncertainty has two dimensions:

• simple/complex: the number of factors and variables that a company takes into account in decision making process.


TABLE 1: INTERNAL ANd EXTERNAL fACTORs ThAT AffECT ITs NEEd fOR ANTICIPATION

Factors Need for anticipationInternal Fast follower capability Yes Less

No More: the company requires more time to implement the actions

Resource availability Abundant LessScarce More: it needs more

time to identify more alternative actions that would demand less resources

Dependence on the external environment

Low LessHigh More: changes in the

external environment will have a stronger impact in the organization

External Amplitude and length of market cyclicality

Small Less need for long term anticipation capability

Big More need for the long term anticipation capability to overcome management’s tied-hands zone

Industry structure Monopoly Less due to the company’s ability to steer the market

High competition More

Environmental uncertainty

Static LessDynamic More


• static/dynamic: the intensity and the variability of the external variables.

Duncan’s second dimension (static/dynamic) has an impact on the level of anticipation required. When a company is in a static external environment, it has little need for much anticipation. This condition usually occurs in controlled and closed markets. Although this situation is very unlikely to happen in the external environment as a whole, it can still appear in regulated markets or in a sub-segment of the external environment.

Industry structureA third factor in the external environment is the

industry structure. If one organization is strong enough to guide or strongly influence its external environment, this reduces its need for anticipation. Thus in monopolistic situations the need to anticipate events is lower. If a company’s structure is misaligned with the environment, it can still remain in the key influencer position for a certain time only if it exerts some kind of control over the environment (Donaldson, 2001).

Table 1 summarizes the internal and external aspects that affect a company’s need for anticipation in an early warning system.

ThE sCOPE Of AN EWsBoth internal and external factors also come into play

when determining the required scope for an early warning system.

Before discussing how wide the coverage area of an EWS should be (or for that matter any other effort to understand the business environment), additional considerations should be taken into account. In order to identify events that may affect the company businesses, an early warning system has to include two different approaches (Aguilar, 1967):

• searching, when there is a pre-defined objective for information gathering.

• scanning, which occurs when there is no pre-defined search objective.

In the last case, the scanning approach goal is to identify key potential events not identified during the needs assessment phase of the EWS implementation process. With that in mind, let’s explore what can affect the scope of an EWS.

dependence on the External Evironment

Again, one internal characteristic of a company that affects its EWS coverage area span is the company’s level of dependence on the external environment (Emerson 1961). If this dependency is high, the impact of changes in the external environment on the organization will also be high. This is considered an internal aspect since it is linked to the company’s business model, which is an internal choice.

Donaldson (1987) proposed that adaptation to a significant change in the external environment causes

High Level of Uncertainty High Level of Conviction

High

Risk of cognitivedissonance

Low

Infancy Maturity Decline

Organization’s Life Cycle

Figure 4: Motivation for Cognitive Dissonance Along One Organization’s Life Cycle.Source: Abreu (2006, p. 53).


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alternations in an organization’s structure through the following process:

• Perceived change in the external environment.•Occurrence of behavioral disorders in the system of

the organization (such as reducing the quality and speed of decisions, problems of communication, motivation, etc.).

• Fall of the company’s financial performance, placing pressure on the company’s management to make changes in the existing rules and structure of the organization.

Still, according to Emerson (1962) the extent and

depth of the company’s relationship with the environment is directly related to the importance or impact that a product or service acquired from the external environment has on the company’s business. With the phenomena of outsourcing, companies rely more on the external environment, as a bigger portion of the value chain previously complete in-house is now done by third parties.

Consequently, companies with high dependence on external factors are heavily investing in processes to adapt to this new state, such as investing in a process focused on risk analysis of the supply chain. Thus, if one organization has a strong dependency on suppliers, government or other entities, its early warning system will have to be wider than the one in an organization that is fully integrated internally from the bottom to the top of the value chain. In the latter case, the focus will tend to be more in the optimization of its internal operations rather than in the external environment.

Company Market shareAnother internal variable that affects the scope of an

early warning system is the company’s market share. This is considered an internal variable since market share is a consequence of the company’s view of what its target market should be. When a company’s market share is very small, two things may develop.

The first is that the company’s understanding of the whole market could be compromised and prevent its leadership from identifying the most important issues affecting their business. Consequently, there is a high likelihood that its early warning system is focusing in the wrong set of external variables. Alternative ways to tackle this issue include inviting outside industry specialists

to participate in the needs assessment phase of the early warning system implementation process, and embedding a stronger scanning process in it.

The other implication of a small market share is that the company’s network throughout the industry is likely to be relatively small as well. Therefore, the company should not rely only on the information identified by its internal network to maintain updates about what is happening in the market place. In this case, the early warning system should develop an extensive outside network of primary and secondary sources to balance this weakness.

The same rationale can be applied to the company’s supply chain. If the supply chain share is small, it would be very dangerous to rely only on the information brought by its internal network to keep pace of what is going on in its section of the business environment.

Life Cycle PositionAnother internal aspect that can affect how wide

the scope of an early warning system should be is the organization’s position in its life cycle. An organization in the initial stage of its life cycle has numerous uncertainties in relation to the competitive environment. It has many questions regarding the behavior of its main suppliers, competitors, and customers as well as the possibility of substitute products and new entrants. The same applies to uncertainties regarding regulatory, technological, social, environmental, and political issues in the marketplace.

As the organization develops and reaches maturity, management gains a corresponding increase of experience in running the company. Thus decision-making becomes more stable and predictable (derived from the history of previous decisions), knowledge is increased concerning the behavior of the external environment actors, and processes and information flow within the organization are standardized, among other factors. Consequently, management’s conviction about competitive environment behaviour and how to respond to it prevails in the decision-making process, increasing the likelihood of congnitive dissonance towards the external environment.

Then the odds for a mismach occurring between the company’s perception and the actual competitive environment increases. Thus, in the maturity phase cognitive disssonance may be generated from the overwelming prevalence of conviction in the decision-making process, as opposed to a company that is in its infancy where the danger lies on the high level of uncertainty.



risk, but not the strategic risk that occurs when there is a misalignment between the strategy and the competitive environment. Therefore, a high degree of uncertainty is as dangerous to the survival of an organization as a high degree of conviction about the strategy that is being applied.

Figure 5 shows two possible situations where two companies have taken different paths over time. In Company 1, the importance of competitive intelligence (including the early warning system) in decision-making has grown at the same pace as its DMFF. With Company 2, the importance of the DMFF in the decision-making process became greater than competitive intelligence, which increases the odds of cognitive dissonance.

The contribution of competitive intelligence to the organization’s decision-making process should evolve according to the organization’s position in its lifecycle. In the initial stage of operations, competitive intelligence and its early warning system should reduce the level of uncertainty an organization has in respect to its competitive environment. In the maturity phase, the competitive intelligence processes must also encompass the tracking of the assumptions and beliefs upon which the company bases its strategy and plans.

decision-Making frozen factorsThe prevalence of conviction and certainty over

market data and intelligence can be even more pronounced if the company has experienced a long period of sucessful growth and the natural necessity to delegate power and share responsibilities. Each functional area in a given organizational structure tends to freeze its working processes, rules of conduct, and procedures that build up since the beginning of the organization’s activities (Cyert and March 1992). With maturity, growth, and a more complex decision process the coalition of power and the standardization of internal procedures strengthens. On one hand, these decision-making-frozen factors (DMFF) give strength and agility to the organization’s decision-making process, but on the other, they create rigidity.

If an organization’s decision making process is dominated by the DMFF, its early warning system may not be strong enough to convince the organization when the external environment changes require the company to adapt itself to a new reality. High confidence in past patterns and the feeling of security, plus a low sense of urgency and excessive confidence (reinforced by a history of success) can lead an organization to reduce the level of attention it pays to the environment.

Gilad (2003) recalls that, generally, organizations are well prepared to monitor operational risk and financial

Company 2: Enter in the Decline Phase

High

CI and DMFF importancein the decision-makingprocess

Low

Life Cycle

Company 1: Growth trajectory is kept DMFF

CI (EWS) Company 1

CI (EWS) Company 2

Figure 5: Possible Tracks of Decision-making Behavior Along the Life Cycle of an Organization.Source: Abreu (2006, p. 55).



CultureThe existence of an appropriate culture is paramount

for the company’s early warning system to develop a strong and active internal network. If the company has a strong culture of trust, respect and curiosity, plus the recognition that information sharing is crucial (as pointed out by Day and Shoemaker 2006), implementing an EWS based on the scanning approach is much easier.

On the other hand, if this culture does not exist the EWS manager must place a higher focus on secondary sources and building an external primary source network to identify weak signals. As the early warning system develops more internal respect and credibility over time, the EWS manager can embrace the difficult task of creating the right environment for a people-based internal network gathering system to prosper and grow.

suMMARY Of EWs sCOPEThe internal characteristics of a company impact the

early warning system’s scope. The smaller the company’s

dependence on the external environment and the bigger its market share, the smaller the system’s scope. The company’s position in its life cycle also impacts the wideness of the EWS scope.

Concerning the external factors that affect the system’s scope, the simple vs. complex dimension (explored by Duncan 1972) has a strong impact on the number of variables that an early warning system will have to track. In some cases, the complexity of the environment is so high that this task would have to be distributed throughout many areas of the company.

A second aspect of the external environment with strong implications to the early warning system’s scope is the industry connectivity among other regions and industries. If this connectivity is high, the focus should be on the global market as well as on substitute products. In this case, the EWS will have to cover different industries that are related to the company’s core business. On the other hand, if the connectivity is low the EWS scope should be more focused in the company’s main market and industry.

TABLE 2: INTERNAL ANd EXTERNAL fACTORs ThAT AffECT COVERAgE AREA sPAN Of AN EWs


Factors ScopeInternal Dependence on the external

environment (outsourcing)Low SmallerHigh Bigger as many of the service and component

providers would be difficult to be replacedCompany’s market share Low Stronger focus on scanning approach and

external network buildingHigh Strong reliance on the searching approach and

strong focus on internal network buildingInformation sharing culture Low Higher focus on secondary sources and external

primary sources network buildingHigh High focus on internal network

External External environment complexity level

Simple Smaller

Complex Bigger and should be handled by many CI areas in the company

Industry connectivity with other regions and industries

Smaller Focus on the local market and/or industry and not too much focus on substitute products

Higher Focus on global market and strong focus on substitute products and other industries

Industry maturity level New market Stronger scanning capabilitiesMaturity market Stronger searching capabilities as market

dynamics are already known


A third characteristic of the external environment affecting the scope of the early warning system is the level of maturity of the industry itself. Emerging industries are very difficult to predict, as the inter-relationship amongst the players is still developing. Thus it would be very difficult for an EWS to focus on a specific set of variables, as they could lose their relevance in a very short period of time. In this case, the EWS has to be flexible and agile to make the appropriate adjustments at the right pace.

There are certainly other external environments issues that affect the scope of an early warning system, but the ones pointed out above provide a starting point to help the professionals who are responsible for implementation of their company’s early warning system.

When an organization operates in an industry that is complex, has numerous connections with other markets and industries, and is in its infancy, its early warning system should have a much bigger scope. The ability of a company to implement this complex system will depend on its internal characteristics, such as the information sharing culture. Nevertheless, the searching approach is the best ways to start as it addresses the main uncertainty points of top management, even when they are biased. The scanning mode should come second as it depends, in most of the cases, of a cultural shift. Table 2 summarizes the internal and external aspects that affect the coverage area span of an early warning system.

IN CONCLusION Many internal and external factors affect the need for

anticipating changes as well as the wideness of an early warning system’s coverage area. What are the characteristics of the industry you operate and how does your own company rank on those internal aspects? Depending on how you are ranked in comparison to your direct and indirect competitors, you may have to adjust your early warning system to cope with that.

What are the gaps in your current early warning system? In the event you find no gaps, is it better than the systems of the other players in your industry? If not, what are the internal aspects of your company you need to improve to create the conditions for a better EWS?

Yet each early warning system is unique, since each company faces a different reality. Thus one should pay attention to not design its own EWS based on a success case of another company. There is no copy and paste in this game.

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