Wharton's George Day and co-author Paul Schoemaker discuss their new book on how companies can safeguard themselves against disruption in the digital age.

Companies that are vigilant — and responsive to changes in their business environment — see higher increases in their market capitalization than those that are not. The need for vigilance increases as digital technologies challenge existing business models. Early warning signs may not be apparent to companies that are complacent, so leaders need to groom their organizations to be responsive to weak signals of potential threats and latent opportunity. This needs to be done throughout each organization, right down to the reception rooms.

These insights and more appear in a new book by George Day, Wharton emeritus professor of marketing, and Paul Schoemaker, founder and chairman of Q2 Technologies who also served on the faculties of the University of Chicago and Wharton.

Day and Schoemaker recently published See Sooner, Act Faster: How Vigilant Leaders Thrive in an Era of Digital Turbulence. The book offers insights on how leaders can spot and respond sooner than their competition to non-obvious signals that foreshadow opportunities or threats to their business.

In an interview with Knowledge at Wharton, they identified the attributes that leaders and organizations need to defend themselves against disruption.

Below is an edited transcript of the conversation.

Knowledge at Wharton: George, what do you mean by ‘vigilance,’ and why is it so important?

George Day: Let’s start with individual vigilance, which is a heightened sense of alertness. We take that theme and apply it to the full organization. A leadership team that is vigilant is characterized by candor, high curiosity, and exploration because they receive a lot of weak signals, and they are open to them.

In the 10 years we’ve been working together on this topic, we have found that whenever an organization was late to pick up a weak signal of either a threat or an opportunity, there was someone in the organization that, in fact, knew all about it. But the leadership team didn’t know about it. We built on that insight to come up with this notion of a ‘vigilant organization.’

Knowledge at Wharton: What’s the payoff for a vigilant organization, if it is more vigilant than its rivals?

Day: We were fortunate that some colleagues in Europe conducted a study that expanded on our survey work on peripheral vision. They asked the question – “What is the payoff?” They contrasted ‘vigilant’ and ‘vulnerable’ organizations, as we had done as well, and also included those that were continually surprised and wrong-footed. They tracked 85 large European multinationals over eight years. The payoff was that the vigilant organizations had an increase in market capitalization, about double the increase in the market cap of vulnerable organizations, due to their investments in foresight capabilities and strong leadership commitment.

Knowledge at Wharton: Paul, why is vigilance so important, especially at a time of digital turbulence, as you say in the subtitle of your book?

Paul Schoemaker: You have different combinations of technologies out there, with some still emerging and other already developed technologies. When they coalesce to make something possible — a new electronic digital product, [an] Uber, [or an] Airbnb — people don’t see it coming quickly, because it is not in the traditional mold. Also, it may not be in the space where people are looking.

These digital technologies don’t respect industry boundaries the way that’s normally the case. They are often disruptive, although not always. They allow for very fast scaling, [with] light asset [bases]. They empower new entrants who don’t want to compete within the old business model. Entrepreneurs may bring in a new technology to destroy an old one or create a hybrid of [the old and the new] that is superior.

“Vigilant organizations saw an increase in market capitalization that was double the increase in the market cap of vulnerable organizations.” –George Day

Each of these digital innovations may draw on five, six or seven technologies. [For instance], autonomous cars integrate some 20 different technologies. It is hard to predict when everything is at the right point of reliability, cost and functionality, to make a car function far better. It seems digital innovations happen suddenly. In fact, there’s usually a long gestation period. But how do you get a fix on this combinatorial complexity? There’s an exponential explosion if you have 20, 30 technologies that may coalesce.  So, you need to prepare for multiple scenarios.

Knowledge at Wharton: Is that the reason why turbulence is so hard to predict?

Schoemaker: Yes, there’s a truly unpredictable element to it, and so your vigilance building strategies must respect the fact that not all future changes can be analytically predicted.

Knowledge at Wharton: George, in your earlier comment, you referred to ‘vulnerable organizations.’ Which factors matter most in explaining the difference between vigilant organizations and vulnerable ones?

Day: We’ve already talked about vigilant organizations. Now, why would a firm be vulnerable? We find that vulnerability starts at the top. It’s a consequence of the leadership team being short term-oriented and staying within in their familiar [settings]. They don’t step outside the bounds of their industry. They don’t challenge themselves.

As a consequence, there’s not a lot of curiosity. They don’t invest in foresight, which is the second big factor. They don’t undertake disciplined searches for opportunities using techniques like lead user analysis. They tend to be more inside-out thinkers. That is, they say, “We’ve got this capability, or this resource. What do we do with it now?” That sets them up to be always reacting. To us, that’s the definition of a vulnerable organization. It’s always in react mode and has lost its strategic degrees of freedom.

Knowledge at Wharton: If organizations need to be vigilant all the time, why does vulnerability seem to be the norm?

Schoemaker: The reason is that day-to-day pressures really command a lot of attention. It’s almost like Gresham’s Law of Planning, where the less important stuff drives out the more important stuff, which has to do with the longer term – which always can wait, people think, but in fact, you’re using up precious time. It has to do with where the organization’s attention goes.

We focus, in our book, on the leadership team. We don’t think it is one person, one CEO or a board member who can say, “This is how you become vigilant.” We ask the question: “What must the leadership team do at the corporate level, the division level, the functional level, and the SBU (strategic business unit) level, in order to be vigilant?” They become vulnerable the moment they get sucked into either protecting turf, or the broader politics of organizations. With a shorter-term focus, they don’t fully anticipate how scenarios for the future may be vastly different from the status quo.

There’s a discomfort level with contemplating a disruptive future rooted in an aversion to ambiguity. People don’t want to go there. What they must do there is often counterintuitive. You have to almost say, as a leadership team, “What are the anomalies? What is happening in our environment that people are curious about?” And then they must ponder, “Why is this happening?”

“When the signals are weak, it’s hard to build a strong case that you should make a bold move.” –Paul Schoemaker

You need leaders who can unearth the paranoia simmering under the surface and who look for the reasons why things may fall apart. Such leaders must also be willing to deeply challenge the current mindsets. When Andy Grove became CEO of Intel (in 1987), he challenged the business model. He asked, “If we had taken over this company through an acquisition, would we stay on the current course?” He legitimized questions about whether [a company has] the right business model in light of warnings that are still ambiguous. When the signals are weak, it’s hard to build a strong case that you should make a bold move. But that is what Grove did and this propelled Intel to new heights.

Knowledge at Wharton: What are some of the features that define a vigilant organization? Could you offer any examples?

Day: Yes, there are many nonprofits, as well as for-profits [that are good examples of vigilant organizations]. Let’s start with Adobe, which is a masterful example of a vigilant organization. Most will remember their shrink-wrapped image-editing Photoshop program. It was only 15 years ago the software was sold that way – you bought your software, and you got full rights to it.

Adobe could see, over the horizon, ahead of almost all their rivals, that cloud storage was going to dramatically change the way images are stored and made available. So, they made the decision to shift to a subscriber-based model, where all the content was lodged in the cloud. And of course, their customers objected strenuously, because they liked having ownership. But Adobe persisted because it was confident with the evidence found in testing the cloud scenarios. We use the term, ‘See sooner, and act faster’ advisedly. Acting faster is about doing probe-and-learn studies, a lot of experimentation, and buying real options. It doesn’t mean acting in the full sense of jumping into the market. It’s getting yourself ready, so that when the time is right, you have all the pieces in place. And Adobe did that superbly.

In another domain, the Canadian government was far-sighted in realizing that the future of digital technologies was going to be inextricably linked to advances in artificial intelligence. Ten years ago, they made a major commitment to investing in keeping the science in Canada – and making it very attractive for talent to come from the U.S. to Canada. They greatly reduced the career risk for them, but this required far-sighted vigilance and a lot of initial investments to get proof-of-concept, to make people comfortable with it. Now, we are seeing the payoff to their long-term commitment.

Knowledge at Wharton: Why is it so important for companies and leadership teams to pick up on weak signals? What exactly does that mean? Could you also give any examples of companies that have done it well?

Schoemaker: A weak signal is something that on its own doesn’t have a lot of meaning. But if it is combined, either by understanding the context of the signal or by combining it with other signals, through triangulation, it holds informational value. To unlock it requires a culture that is curious about anomalies or other things that are contrary to expectation.

One pharmaceutical company, to give an example, was working on a dermatological drug. It ran standard controlled experiments, and the volunteers had to come in for medical checkups. The person who registered them noticed that some of these were very cheerful – more so than others.  This person mentioned this curious funding to people running the trial and they were also sufficiently curious to check further. Vigilance requires a culture of curiosity, a genuine desire to look into anomalies. And as you can imagine, it turned out that many of these cheerful folks happened to be in the treatment group, not in the control group. Even though this particular drug failed as a dermatological drug, it became a successful antidepressant.

“The future foreshadows itself, and there are many warnings, but they are not presented on a gold platter.” –Paul Schoemaker

Too often, weak signals from customers or partners, or even from inside your organization, die at the point where they are seen. It stays in the reception area, rather than make it all the way up the organization. So, you need champions who can amplify weak signals. Otherwise, they will just die and not be explored further. The future foreshadows itself, and there are many soft warnings, but they are not presented on a gold platter. The signals are distributed throughout your organization and even beyond your organization. Some of the signals may be in other industries. If you go too far, however, it may become overwhelming.

Day: Let’s go back to the digital turbulence problem, which is dramatically increasing the amount of data and confounding noise. Currently the amount of data is doubling every 18 months. That also means the ratio of useful signal-to-distracting noise is deteriorating rapidly.

Important weak signals of threats and opportunities are often shrouded in all the noise. We spend a lot of time in the book helping leadership teams think about how to allocate that scarce resource of attention, and then focus on a few areas that will be ultimately extremely critical.

We have come up with the strategy of ‘guiding questions’ that help keep your eyes trained on what matters and make sure the whole organization is aware of them. These questions come out of looking at where you’ve missed things in the past, diagnosing the present, and anticipating the future. We advocate finding two or three guiding questions the whole organization is aware of, [which are] widely communicated, and you have task forces working on them.

For example, a medical device company some years ago was very concerned that a drug would displace the function of a pacemaker. Their guiding question was this: “What pharmaceutical drug could possibly displace and obsolete our product?” They created a task force to focus on the question. All the weak signals on that particular topic flowed into one central node. Interestingly, just as a sidebar, they learned an enormous amount about the drug industry, and they found some amazingly effective drugs to enhance the capabilities of not only their stents – which they also sold – but also of their pacemakers.

Knowledge at Wharton: How can companies become more vigilant? Or as you put it in your book, “How can a company increase its vigilance quotient?”

Schoemaker: It is [important] to identify cases where people were prescient in some sense – they saw the future. But just as importantly, we must also look at the past. We typically start with an audit and say, “Let’s look at what you missed in the past, in the last three years, and what you saw early. Was it more of a threat or an opportunity?” When we did that with Olympus, for example, there were things that they were excellent at. They saw underwater cameras as an opportunity before others did. But there were other things they saw rather late – such as that their high-end endoscopes were being displaced by cheaper disposable endoscopes.

When I worked at the corporate planning group at Shell in London, we asked, “Well, what has Shell missed?” It turned out they missed a geopolitical event, but they don’t miss a lot systemically in the other domains, except for one. In public relations and media, they didn’t have a good sense. They had the Brent Spar fiasco at one point in the North Sea. (In the mid-1990s, Shell had planned to sink a disused oil storage facility called Brent Spar in the Atlantic Ocean but was forced to abandon that plan in the wake of strong opposition triggered by Greenpeace.) In Nigeria, they had made payments to schools that ended up in the pockets of corrupt officials. And later, they badly overstated their oil reserves, with its head of E&P (exploration and production) losing his job over that mistake.

Once you start to develop a profile of hits and misses, you identify where the organization is systemically weak. Once you understand that, you can then say, “How can we fix that?”

Of course, past weaknesses don’t predict future misses necessarily, but at least you have a starting point to improve your hit rate. We also use company surveys at times, where employees rate the organization anonymously, to see if the requisite conditions for high vigilant are in place. Our full vigilance survey has 30 questions about seeing sooner and acting faster, and we have collected data from 345 organizations by now that provide benchmarks to compare against. These are all diagnostics that can help.

Day: We offer at the end of the book an action agenda that is consistent with all of the examples we have talked about. There’s a lot of supporting research, but we found there are two big factors: leadership commitment to vigilance that’s highly visible and signaled widely to the organization; and significant investments in foresight activities.

Leadership commitment is signaled by the amount of time spent, for example, thinking about the future. A vulnerable organization may spend less than 20%. Vigilant organizations spend up to 50% of the leadership time thinking about the future. They also network very widely. They communicate widely that they’re ready and open to weak signals.

“The litmus test is openness.” –George Day

Andy Grove was a magician at that. He gave permission to people way out on the periphery to come to him directly with a concern. That kind of openness, curiosity, and candor is critical because vigilance is a team sport, and then leaders must follow that with highly visible investments in foresight activities (walk the talk).

Companies like 3M invest a significant amount in looking for opportunities. They don’t wait for ideas and concepts to come to them, but they use lead-user analysis to pursue emerging or latent needs of their lead customers. They run a lot of experiments and make a lot of investments in small startups. The medical device company [referenced earlier] invested small stakes across many startups to get visibility into what was the next generation.

Finally, one [aspect] that is consistent through all of our studies and examples is that when information is not shared but heavily filtered, you become vulnerable.

Knowledge at Wharton: We’ve talked a lot about for-profit companies. I wonder if vigilance and vulnerability are also applicable to other kinds of organizations, like nonprofits and foundations.

Schoemaker: Yes, we also sampled, for example, American foundations with the help of the Council on Foundations (an association of grant-making foundations and corporations), and American credit unions. Our initial corporate study covered many global companies, but then we wanted to conduct a comparison between for-profit organizations and nonprofits as well. We found that the regression weight that some of the factors we mentioned earlier received in terms of explaining variance in vigilance differ as a function of size, and as a function of the degrees of freedom. If you’re highly regulated, as credit unions are, there is, of course, less scope for far-sighted leadership.

It has become clear to us that you need to understand the contingent factors. When does a new foresight capability, or say an attitudinal shift, become critical in a particular sector or organization? It’s hard to find a recipe that always works. Many factors matter, but to different degrees depending on the circumstance. It remains an important research topic why vigilance varies and what the main determinants are, because it seems to depend much on time, place and culture.

Knowledge at Wharton: Let’s imagine there’s a CEO who comes to you and says, “What’s your one piece of advice to make my company’s leadership team more vigilant?” What would be your top recommendations?

Schoemaker: Reward it if you see it, and share the best practices. Also, instill a culture of curiosity and hypothesis testing.

Day: The litmus test is openness. A vigilant leader must be open and make it clear to the organization they are open to hearing about weak signals, nagging concerns, and anomalies that people can’t explain. Such openness is a critical signal of organizational curiosity.