By Katherine Hornbach and Patti Anklam

From the point of view of their victims, it is cataclysmic events such as these that cause business downturn, negative earnings, and loss of market share.

Sudden? Overnight? They may seem so to a company that manages itself from within a long established and unquestioned worldview. But cataclysmic changes don't, in fact, happen overnight. It's just that the warning symptoms of their impending arrival are often misinterpreted, overlooked, or slighted.

To explain unexpected changes they are experiencing, companies will devise reasons that are consistent with their current world view. When this worldview is disengaged from reality, they unintentionally start to "make up stories" that help them make sense of their world. As problems increase, the stories must grow ever more elaborate and far-fetched, in order to accommodate the growing distance from reality. The root cause of these "denial stories" springs from a company's inability or unwillingness to examine the assumptions upon which its business is built and the shared mental models its managers hold, unquestioned, in their heads.

Could this be the case with your company? It's hard to believe it might be, when things are going well. But, wait, might there be a few nagging issues at the periphery that just never quite seem to get resolved? That's often how it starts...

What follows is a set of stories that we've repeatedly heard in companies that have been unable to grasp critical market shifts that are impacting their business. Notice that the stories reach successively deeper into the heart of what the company is about, getting closer and closer to the true nature of the problems the company must deal with.

There is something new in the external environment that doesn't match the company's model of how the world works.

External reality is kept from intruding by measuring oneself only against oneself. What is missed is how competitors and the market are changing.

As the changes in the external environment put more stress on the company, shortcomings in a particular organizational structure become increasingly apparent. Energy is diverted to reorganization, without understanding that any organizational structure is a compromise among competing goals. Because the root problem remains unaddressed, the new organization soon reveals a different set of faults, and the company reorganizes again.

As the features or pricing of a product become less competitive, current customers buy less, and fewer new customers sign on. From an internally focused viewpoint, the pricing and products haven't changed, therefore it must be a sales and marketing problem.

It finally becomes obvious that certain market segments (usually low-end, low-margin) have found a preferable product. Rather than downscaling to meet the needs of these relatively unattractive segments, the company chooses to look for other segments it can sell to, rather than changing its products or business model.

As more segments defect, it becomes obvious that current markets aren't going to provide the sales required. Forecasting the imminent emergence of a brand-new, multi-billion dollar segment is another way to avoid having to change products or business model. (The Internet is a current favorite for creating these instantaneous multi-billion dollar segments.)

As the market problems deepen, they start to threaten the core business of the company. The magnitude of change required when a core business is threatened means that it is almost impossible for anyone to conceive of such change, let alone build it into a plan. As a result, the company's plans are not based on market reality, but on the internal requirement for the company to retain its core business.

As it becomes impossible to deny the threats to the core business, people retreat to the illusion of permanence: an organization with a history of 30 or 50 or 100 years, with big buildings in countries around the world, certainly seems like it can't be vulnerable in the short term.

After a company has internalized that its core business cannot continue indefinitely, it looks for new growth opportunities. There is often an implicit set of "acceptance criteria," based on the company's current business model, skill set, and customer base. But the market has shifted, business models have become leaner, the basis of competition has changed, and customers are substituting the new products. The strategic alternatives open to a company under pressure are far less attractive and certain than its traditional business, and are almost certain to fail the criteria. So, the new opportunity is rejected, and the situation continues to worsen. Eventually, the "acceptance criteria" are lowered, but options that were open earlier are no longer feasible, given the company's weakened position and the maturation of the new markets. The strategic alternatives that do remain are so unattractive that they can't pass even the lowered "acceptance criteria" -- and thus the cycle continues.

The need to fundamentally change the company's business is by now obvious, but it is impossible to get agreement on what to do because any alternative leaves winners and losers among the different parts of the organization. After arguing into exhaustion, a compromise is reached that all can agree on. Such compromises usual contain generalities or ambiguities that allow each stakeholder to interpret the agreement in whatever way is most useful.

As the situation becomes increasingly desperate, people come to believe that it is impossible to fix from within. Attention focuses on finding an external force that will magically make things better. Elaborate rescue fantasies are woven, usually about a white-knight take over. The acquirer will have deep pockets, will recognize the unique value of the people and technology, and the good days will return. Other rescue fantasy variants include spinning off one's group from the mother company into a hot start-up, a strategic alliance, or a brilliant new CEO.

As the rescue fantasies fail to materialize, people turn to just getting through the day. None of the strategic alternatives is acceptable, no rescue has occurred. The attitude shifts to simply surviving the present: address today's tactical issues and let someone else think about the long term. By this point, the company's precarious situation ensures that there are more than enough tactical symptoms to absorb as much management attention as possible.

Often, major change requires a fundamental rethinking of what the company instinctively thinks of as its core. Usually this belief is so deep it remains unspoken. It simply runs through the fiber of all parts of the organization. Until the new CEO Jack Welch arrived, General Electric managers found it unthinkable to sell the Small Appliance business upon which GE was founded - despite the fact it was non-strategic and only marginally profitable.

Recognize any of these stories?

Is your company exhibiting any of these denial behaviors? Does it strike you as implausible that whole groups of managers in a company could adopt these stories, falling prey to such misconceptions and rationalizations?

We've seen it, over and over again. Few management teams take the time, as a team, to surface their assumptions about their business, to search for root causes, or to systemically explore the eventual implications of puzzling new changes in their markets. Even when an individual manager grasps the implications of external changes to the business, he/she often misses the larger systemic impact that a whole series of market changes is having across the corporation. Managers are held captive by their shared understanding of how the market used to behave, and are unable to have the conversations that would allow them to jointly discover the systemic changes in the market and implications for their company.

And so they start telling themselves stories to explain their increasingly irrational world, progressing ever downward in this implausible chain of denial.

The sooner the unpleasant and painful reality of a market shift is faced, the less unpleasant and painful the resulting adjustment will be. Unfortunately, few companies are able to proactively seek to understand the situation they're facing, and then take painful, pre-emptive measures to address them. The hardest change of all is giving up a deeply held belief about the role of the organization - the core of how it creates value. Consider Los Alamos National Laboratory, which ably performed its charter to help "save the free world" for half a century. It's hard to imagine a more striking core belief to give up than "saving the world", but that's the challenge the Lab is proactively undertaking, as it finds that its unique competencies are now best applied as maintenance custodian for the few remaining, aging nuclear bombs and to cleaning nuclear-contaminated soil and buildings.

How does a company begin to confront (or prevent) these denial stories? There are a number of strategic planning processes that help. The most effective process we've used is based on scenarios. Scenarios offer a non-threatening way to face reality as a team, to examine the forces at work in the external world, and to start to figure out what to do about it. We've provided a reference list to get you started.

Scenarios

Scenario Planning - from a site devoted to systems thinking, this sub-page has an excellent overview on scenario planning and a good list of references and links

GBN Scenario Planning Bibliography - an extensive bibliography, from one of the leading scenario consulting firms

Mapping the Future of Electronic Commerce -- CommerceNet Workshop - see the output of an actual scenario planning exercise, on the topic of electronic commerce, from another leading scenario consulting firm

Surviving in Rapidly Changing Environments

SCIP - Organization & Strategy - Standford University's SCIP program has done some of the best work around on understanding how firms can be successful in rapidly changing environments

Fast Company - a cross between Harvard Business Review and Wired magazine, this publication and its online site have some great   perspectives on how to survive and thrive in a rapidly changing world

General Business and Management

@BRINT: Business, Management and Technology Research & Reference - probably the most comprehensive site topics related to management, technology and business

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