Holly Fearing
(00:00:09): Hello everyone and welcome to the Filene Fill-In. I'm Holly Fearing with Filene. The Filene Fill-In is the podcast where we fill you in on what's been going on here at Filene's home base and out and about in the financial services world. Today, I'm joined by Filene's Managing Director of Research, Taylor Nelms. As we interview two researchers from our recent report titled, Preparing for a More Turbulent Future: How Credit Unions Can Remain Vigilant and Adaptive. Paul Schoemaker, professor at the Wharton School of Business is an author, educator, researcher, and entrepreneur in strategic management decision-making and leadership. He was among the first to combine the practical ideas of decision theory, behavioral economics, scenario planning, and risk analysis into a set of strategic tools and methods for managers. Paul served for many years as the research director of the Mack Institute for Innovation Management at the Wharton School, where he taught strategy and decision-making.
(00:01:00) Next, I talked to George Day, professor at the Wharton School of Business. He served previously as the executive director of the Marketing Science Institute. George has been a consultant to numerous corporations, such as General Electric, IBM, Metropolitan Life, Unilever DuPont, W.L. Gore & Associates, Boeing, LG Corp, Best Buy, Merrick Johnson and Johnson and Medtronic. He is the past chairman of the American Marketing Association. His primary areas of activity are marketing, strategy making, organic growth and innovation, organizational change and competitive strategies in global markets. The financial industry has long face d change in technology, consumer preferences, regulation, and new business models. To thrive, credit union leaders, like all financial providers, must scan for shifts in their institutions and markets. To do so the credit union leaders need to master the twin challenges of organizational vigilance or seeing sooner and the adaptive capacity or acting faster as their environments change. To tell us more, we start with Taylor and Paul. All right, thank you so much, Paul and Taylor for joining us on the podcast today. Taylor, I want to start with you and can you help us kind of frame the research that we're talking about today and introduce who our guests are on today's show. Explain a little bit around why they're working with us and why they're the authors of this particular research.
Taylor Nelms
(00:02:27): Absolutely Holly, thank you. Today, we'll be hearing from professors Paul Schoemaker and George Day, and this ought to be a real treat for those who have any interest in marketing management and strategy and the histories of those disciplines, because both Paul and George are luminaries really in the histories of those fields. George Day is the Geoffrey T. Boisi Professor Emeritus at the Wharton School at the University of Pennsylvania and he founded the Mack Institute for Innovation Management at the Wharton School, where he's presently faculty Emeritus in residence. George is a legend in the history of marketing. He's authored 18 books and advised dozens of companies on market driven strategy and organization and he's joined by Paul Schoemaker who served for a decade as the research director at the Mack Institute at the Wharton school. Paul is a pioneer in the field of decision sciences. He's written 10 books, he's an industry leader and an entrepreneur himself. He founded a company called Decision Strategies International, which helps leaders and organizations improve their strategic thinking and decision making. So when it comes to understanding how people make decisions in the face of uncertain futures, we honestly couldn't have two more accomplished researchers and educators who are with us.
HF
(00:03:38): Fantastic, and I can't wait to hear more of the specifics on the research from Paul and George today, but I was hoping you could also share a little bit around why this topic is on the plate for the many things that Filene could be doing research on right now and what is the importance or significance of this topic to credit unions.
TN
(00:04:02): Sure, so a little bit of history back in 2006, Paul and George published a book called Peripheral Vision: Detecting the Weak Signals That Will Make or Break Your Company, which famously explores all the different ways that we can get blindsided by big social and economic transformations, which often start out quite small and on the periphery. So it turns out we have to train ourselves to pay attention to ostensibly irrelevant or tangential information because the future first takes shape out of the corner of your eyes so to speak. We miss the future sometimes because it doesn't seem to fit into the pattern or the narrative that we're currently using to make sense of the world. So next year, Paul and George are publishing a sequel of sorts to that book called See Sooner Act Faster: How Vigilant Leaders Navigate Digital Turbulence and we're excited that with Filene economist, Luis Dopico, they've adapted that framework of understanding organizational vigilance and adaptive capacity to the credit union world.
HF
(00:05:01): How does this report fit in within Filene structure of our Five Centers of Excellence and how does it enhance and build upon the wealth of research already in the center that it's kind of built into?
TN
(00:05:14): Yeah, absolutely. So Filene has five Centers of Excellence at universities around the country, and those are headed up by fellows who are leaders in their respective fields. We're publishing this report under the ages of Filene Center of Excellence for Organizational Entrepreneurship, which focuses on business strategy and innovation and it's part of a long-term investment by the Filene Research Institute and its members and supporters in studying leadership in particular. And so it builds on insights from research, by Filene fellow Dennis Campbell and others on the importance of outside-in thinking of actively investing in curiosity and diversity in your organization and in creating a culture of experimentation that balances the need to exploit the current environment and explore future opportunities. I would also say that this research surfaces an important warning for credit union leadership, this is something that we didn't necessarily expect to see in the research, but I think it's really important nonetheless. The paper's based on a self assessment by more than a hundred credit union leaders of their own capabilities to see sooner and act faster and it compares their answers to those of senior leaders of, for profit corporations and nonprofit foundations. And interestingly credit union leaders rated themselves highly at seeing sooner and acting faster, but they also reported expecting less turbulence in the future and they said that they're often not very surprised and that sounds to me like a recipe for disaster. If you're not expecting turbulence, you're not expecting uncertainty, but you rate yourself very highly at not being surprised, you may have to watch out the future might be taking shape, you know, sort of in the corner of your vision without you being able to, to fully take account for it. So, what can credit unions do to improve their ability to see those weak signals and outliers, to make sense of them and remain flexible enough to adapt to them? That I think is what's at the core of this.
HF
Right, so did it surprise you that they rated themselves as not being surprised very often?
TN
(00:07:18): I think Paul and George can speak to this more specifically, but one of the lessons I think that came out of this research is that credit unions really truly are hybrid institutions. So they fall in between for-profits and non-profits. They operate in a competitive financial services landscape, but they're cooperatively owned and they are based in cooperative principles and a member owned model and are non-profits right. So I think that they have the characteristics of both kinds of organizations and I think that that's reflected in the credit union leaders self-assessments.
HF
(00:07:55): Thank you for that framing. I think that really helps us set up the questions I have for Paul. So I'm going to switch gears and let Paul speak to a few of the questions I have here. Paul, can you start out by talking a little bit about why you do this research on the topic of how organizations navigate the future in times of uncertainty and speak to a little bit about what you've learned from this research and what organizations should know from your past learnings into this topic?
Paul Schoemaker
(00:08:28): Yeah, sure. Thanks Holly and thanks Taylor as well for framing it so nicely. While the subject of how companies adapt to external change has many dimensions and if you just look at the long-term track record companies, the life expectancy of newly started companies is very short. There's a lot of infant deaths, you know, startups don't do well and then if you look at companies that make it through the first 10 years, that life expectancy is about 120 years, that's long by our own standards of life, but it's not long compared to what could be the case. A firm could be a, credit union or corporation can live forever in principle, but they don't. And the reason is that they specialize in certain things, products, customers, channels, technologies, and that is, that serves them well in the current environments, but each act of specialization is almost like developing DNA.
(00:09:21): And it may put you behind the eight ball when the world changes and that's why we call it the incumbency curse. That's when the world changes, the people in the industry, you have a disadvantage because they have to overcome legacy systems. Whereas new entrance don't have that. Now the incumbent players who have some advantages as well, they know the business, they have customers, they have an organizational capability, but look at credit unions. They declined the number of credit unions from 18,000 or so, it was decades ago to less than 6,000 today and so this whole adaptation is that within process, that the world shorts out who deserves to live and who doesn't, and as brutal as that may sound it's a real phenomenon. And for that reason, the question of how uncertainty is dealt with is of great interest. The good news is that we've learned a lot, even though the world may become more turbulent, like ships say, you know, sailing father from shore in order to find more treasure, the ability to navigate these ships, the equipment we have now on these boats, literally, and metaphorically on the organization is just much better. So there's a lot of tools that we can use, planning tools, scanning tools, battle making sense of information and that's the promising part and we want it in this research, map out a little bit what these methods are that do well, and you do that by comparing winners and losers and you run statistical analysis, but you also do in-depth case studies of companies that didn't make it or credit unions that didn't adapt. Well, of course, many were absorbed by others, not all died when we went from 18,000 to 6,000, a lot was just also reorganization, but this is a topic we haven't cracked. We really don't know what brings about longevity in organizations and that's why I find it interesting.
HF
(00:11:08): And in this research, there are a couple concepts. One is vigilant leadership, and another that is repeated throughout the research is adaptive capacity. Can you explain what those concepts are?
PS
(00:11:21): Yes. Thanks for asking because they're very crucial concepts, we think. So vigilance comes from the Latin vigil. Remember the Roman guards of individuals who held vigils to seize things. It's really about situational awareness. It is about, you know, recognizing what's happening and preferably, you see it early in not, you know, when the enemy is at the deport, so to speak. So vigilant leadership is being tuned in a business setting, being highly attuned, to what's going on both outside and inside the organization and the change that is likely to happen. Although it's not clear which direction foreshadows itself, as Taylor mentioned in the periphery. The weak signals show up, not at the core of the business, but weekly, you may lose some members who are not that critical, who are not that essential to your credit union anyway, but there is a signal in that.
A good example is what happened in LED, light emitting diodes, which has been around for decades, started out of the laboratory in the 1960s. And initially it was just a sideshow. It was used for very low intensity lighting, exit signs and the like, and color lighting, because it was very hard to get good white lights that is warm and bright. But as sort of the large players in the lighting industry, in the United States, which would be companies like General Electric and Phillips and Sylvania, which was part of Siemens, the German company, they kind of didn't take it too seriously until suddenly, people started to take over the traffic light business. And people came in, outsiders, and they put LED lights in and replaced the incandescent or the other forms of traditional lighting. And these three companies, I mentioned lost about a billion dollar business by not being vigilant. By not seeing that this started at the periphery, but what was going to reshape the industry. And now of course, we're in the midst of a paradigm shift away from the Edison era, to digital lighting, which can do a lot more than the old model can do. This notion of adaptive capacity is how much can you really process, are you able to do this and what makes it sometimes difficult for people and leaders in particular, since we focus on the leader and his or her executive team is that they can't do it alone. It is a team sport to be good at scanning and monitoring and picking up weak signals and the weak signals yes they are there, but they are not registered oftentimes because the internal receptors are not there. I used the analogy of a pill. You may take some medical bill daily or weekly, and it can only work in the body of the compounds that were designed in there for a particular condition.
It will only work if you have receptors in cells that connect with these compounds. And the same is true in an organization. If you got new information about, let's say 3D printing or blockchain or artificial intelligence or a new regulation or a new competitor, who are the receptors, who are the people who have enough knowledge? So it is isn't barren because if people have no prior knowledge on these issues, it will go in one ear and out the other. So what some people call absorptive capacity, how much can an organization absorb is very much tied to adaptive capacity because without prior knowledge that predisposes people to be sensitive to the weak signals, the signals will simply be filtered out and won't be registered.
TN
(00:14:51): Holly, can I jump in for just a quick second? So what Paul is talking about sounds a lot like research, good research, and I'm an anthropologist by training and so in many ways, the stock and trade of anthropological research is this kind of peripheral vision, right? Ethnography is all about paying attention to the things that people often overlook or ignore, right? All the things that people do that we don't pay attention to it, so we value the surprise. There's a famous anthropologist named Marilyn Strathern. One of my teachers, in fact, who writes about this scene in Papa New Guinea and a little place called Mount Hagen in 1964, when she sort of catches out of the corner of her eye, a glimpse of these two men carrying these big mounted pearl shells, which were going to be used as gifts in a ceremony of some kind and it was a mundane kind of throw away thing a little bit like those LED lights, right? Something you don't pay attention to, but Marilyn writes about how she was dazzled by that image in her peripheral vision, and it turned out that those pearl shells really became crucial to understanding all sorts of things about life in Mount Hagen, and the point is that you really, you don't know in advance the meaning of what you've seen, right? Research, whether you're an ethnographer doing field work or a business leader scanning the future of the competitive landscape, right? All of that research has done in anticipation of knowledge, of knowing why it matters. So you can't discount anything and paying attention to the unexpected is the whole point and so I think that Paul and George's report gives us some real tools to be able to do that in a useful way.
HF
(00:16:24): Yeah and I was curious to know, Paul, your reaction to that, and also if you could speak to the impact that you've seen on business results, for those organizations that can be vigilant and have a good use of these concepts within their organization.
PS
(00:16:42): Yeah and I think Taylor gave a good example from anthropology and it holds an important lesson, I think for executives, because we all look at the world through certain lenses, we filter information. We have to, otherwise we get overloaded and what anthropologists are good at is they're not having these filters. Not coming in with a lot of preconceptions so they are more open to understanding what's going around them. It's very hard to leave your values and also your prior mental constructs about how the world should work or does work at the doorstep and just observe the thing for what it is. And ideally with emerging technologies or new regulations, we can look at these things with fresh eyes and we don't listen with a third ear and we can learn indeed from social scientists and anthropologists and sociologists about how you do that. Because often the signs are there.
We did some studies, let's say in large companies and documented everything that was missed and also things that were seen early. But we asked a question about the things that were missed. It wasn't that they came out of the blue. In fact, I can't think of one big event either in politics or in technology or within an organization that really shook things up that didn't have precursors that didn't foreshadow itself in some sense. So it's not the absence of signals. It is the inability to interpret these signals because a weak signal on its own may not mean much, but once you combine it, connecting the dots, as they famously say, with other dots, then the meaning becomes apparent. What Sherlock Holmes was so good at, you know, picking up the fact that the dog was not barking after murder had happened and that struck him as curious as the local police didn't think that it was curious and it meant, of course, that the murderer knew the dog and the dog didn't bark for that reason. So sometimes the things that you're not seeing is information in its own right, as well, so that gets tricky. So you need, I think CEOs, with the leadership skills you need, are people who are very curious and so organizations that have those kinds of leaders, who create inquisitive enterprises and are open to learning new things that may not seem immediately relevant.
There's sort of the manager, there's sort of the tough task master who just talks about, okay, let's talk about where we are with this project, within schedule, on time, and only want to talk about immediately relevant operational things. Those people will not be good at peripheral vision because all their focus is dealt with the here and now and delivering the task. The more you focus and that's the paradox, the less peripheral vision you have. Many of you may have seen that famous basketball video where you count how often the basketball is passed, and then a man or a woman dressed in a gorilla suit walks through and half the people don't see it because they are overly focused. And the FBI will teach its agents when they're looking for a possible assassin for, let's say the president, for when he's speaking. They say, don't focus. Look through the crowd. Don't make assumptions, have the widest aperture that you can have. And CEOs, you can go into a meeting and just don't have the agenda drive everything, but who can be open to what people are saying and are willing to hear Mavericks and contrarian viewpoints. Those tend to be better vigilant leaders, but it starts with, well, so personality traits. If you don't have great curiosity, if you're not connected to lots of interesting social networks, you're just not going to be as much in tune with what's happening. And you can, of course, use your children or people from other generations. I mean, they bring experiences and you need to have a certain openness to that. Otherwise the tone at the top is that, oh, it's all business here.
We're not gonna, you know, explore things out a little bit away from the core of the business. And that's tragic because the changes that will change the business, manifest themselves first at the edges of the business. As Andy Grove, who at Intel used to say, snow first melts at the edge, that's where it's most exposed. And so that's where you need to look. So IBM famously did not look at personal computers because they were into mainframes and when Apple and others started to use, you know, personalized computers, that was a side show, but that was the first indicator that that whole industry would almost bankrupt IBM. So that is the challenge. How do you build people who have those attributes? And I think curiosity ranks very high. Openness, willingness to have deep dialogue, generating hypotheses, trying things out, creating, learning cultures. There's all of these things that we also mentioned in the report that I think are relevant to developing this kind of leaders that could be good at that.
HF
(00:21:12): It does seem like a tricky skill to develop, you know, how do you know what you don't know? And it feels like a little bit of a soft skill and maybe something that today's leaders haven't learned in formal education, or, you know, maybe they've picked it up in experience, but maybe they haven't. Do you have any tips on how more consciously, leaders and CEOs, can build up these skills within themselves and at their organizations?
PS
(00:21:46): Yeah, so you need to develop sort of meta knowledge about what you're good at and not. So I'm an author and so I've written lots of articles and each time I still misestimate how long it will take to finish the article. So you need to put a fudge factor. And so when people now ask me, how long will it take before this or that happens, and also in the consulting firm, we would simply say, okay, we think it will be three months, but we know from experience that we never do it on time, and we tend to be 50% over budget or late, so we now put a fudge factor. That's kind of an engineering solution. You know, if you want to have some buffers built in a more profound way is of course, to start to really canvas how the world is changing.
So tools like scenario planning, which we taught in the QCO program for decades at Wharton, and is a very proven technique, which Royal Dutch Shell and other pioneered, to deal with really long-term uncertainties. What you're doing is you're telling narratives about the future, of [inaudible] anthropological technique and the different narratives, direct attention to different issues and themes, and this legitimates these themes, because the narratives combine lots of components, and makes it coherent. That's what a narrative is, right? It's a coherent story that has an interesting development. Thinking in terms of options, what we really highlight is that when the world is very uncertain, you don't want to bet the farm, right? You want to do it in stages and you carve it up and you create what we call real options, and you then give yourself a portfolio so that you can win no matter which way the future turns out.
And it was surprising to us in the surveys, that the credit union executives we surveyed, scored themselves poorly, themselves. It's a self scoring on using these kinds of tools, also data analytic tools and artificial intelligence and predictive analytics. I think the credit union industry is very strong at relationships and member service and things of that sort. They are not really at the cusp of where technology, you wouldn't expect them to necessarily create new technologies, but we would expect them to be abreast of sort of the state of the art and that's not always the case. Now I'm talking to you when I say the survey shows, I'm talking about the mean response, the average, and I should also say there's a fair amount of variance around any one question. So some score themselves lower and higher, and also it turns out to asset size, the size of the credit union matters et cetera. So there's sort of a more complex story here, but I'm giving you kind of the elevator pitch if you just look at the average scores that were reported, what does that suggest?
HF
(00:24:08): And you mentioned the survey and Taylor also described a little bit of the survey that went into conducting this research. Can either one of you speak to some of the key insights, or if you had any aha moments from the research and the survey, as you did this research?
PS
(00:24:28): Taylor, you want to take the first stab at that?
TN
(00:24:30): Sure. So I think Paul pointed to one of the big takeaways, which is that credit unions have a few areas that they can grow in, and those are often areas that are going to be really crucial in the next decade or two, and being able to stay adaptive in the face of a really rapidly changing financial services landscape. Rapidly changing both in terms of technology and in terms of consumer preferences and expectations. So a couple of things to note, you know, one area that is changing very quickly has to do with the ways that consumers expect financial services to be delivered to them. You know, obviously there's a big story about digital and mobile technology here, but I think the story is maybe even bigger than that and it has to do with what we've experienced over the past 10 years with the desegregation of financial services, through a bunch of different interfaces.
And I think the next move will be around institutions who are able to reallocate financial services under one roof and credit unions need to be able to sort of see where that's going to happen. One area that they might pay attention to for example, is payments, which is often acts as a kind of gateway to financial services. But the point is that credit unions, as Paul said, score themselves very highly on some of those old school banking characteristics. Relationship banking, getting to know your members, member experience and member service. They don't always score themselves particularly well at, you know, being flexible and adaptive and that scenario where they will need to grow if they want to thrive in the coming decades. I would say, you know, one of the other big takeaways for me is the importance of diversity in credit unions, but in organizations more broadly, if you all have the same backgrounds and experiences, your ability to detect those weak signals and your ability to act on them is not going to be as strong than in a diverse room. And so Paul and George have written about the importance of diversifying your own professional and social networks so that you're coming in contact with people with lots of different experiences and approach the world with lots of different lenses.
PS
(00:26:46): Yeah, yeah, indeed. That's critical. So the survey that we did just to briefly mention that we had about 12 questions, specifically about an organization's ability to see sooner. And the last question of those 12 was actually about to what extent do you involve your board in scanning and seeing things because they often have a wide experiences. They come from different areas and that it could be a radar, a radar screen that you should look at. And we were surprised that actually people feel that the boards have not much input on those things. Maybe because they don't ask, maybe because they don't volunteer it, or maybe because it isn't orchestrated. I realized the boards are volunteers and may have a certain conception about what their role is. But our sense is that your extended networks, not just boards, but also could be your partners. You may share kiosks or other things you know, in various networks with distributors, all these things, enhance your ability to see sooner what lies around the corner.
So there were 12 questions on seeing sooner. Then we had 12 different questions about your ability to act on signals that you're getting. And these are by definition, difficult signals because they're early signals, right? The sooner you see it, the more ambiguous it is. It's like seeing, you know, somebody coming over the horizon in the old, you know, Western movies, you don't know who it is. Is it friend or foe? Are there more of them? Then you have to decide whether you run out or whether you get your weapons out. So it is a difficult thing to do that and in the [inaudible] and also the best practices on decision making, under uncertainty, there's notion of probing and the really successful companies are very good at not jumping to a conclusion, but to formulate at least two or three hypotheses about how let's say, to meet the printing or what is now referred to as additive manufacturing, how made that change our world? You might say, well, that has nothing to do with credit unions, right?
So that would be jumping to a conclusion. What you would also do is say, let's have three, four hypothesis, and let's read up a little bit on what people are saying. There's a very good book out now that argues that 3D printing is going to be far more important in the next 20 years than artificial intelligence or than blockchain. And you may not agree with that view, but at least you should explore the view to see if that is in fact, the case. And again, the board was, also the one question we added specifically for credit unions, because we gave this survey also to corporations and to foundations, and we report a little bit, as you were mentioning earlier, that credit unions fall in between corporations, for profits. These went to national companies and foundations, which often have a big endowment and are not as under the gun, you know, to deliver maybe as credit unions are et cetera.
So then there was a third section where we had a bunch of questions about how they see the future. Is this going to be tough or easier? And then a set of questions about who are you, you know, your size, your membership, things of that kind, so in the report, we look at all these variables. The big weakness, I would say in this survey for credit unions is not so much the seeing sooner, although that was a lot to be improved there, but it is really the tools and methods for that that I mentioned earlier, such as scenario planning and real options, et cetera, are not as fully used as they could be. And to me, that's a little bit disappointing because I was the academic director of the QCO program that started at Berkeley 20 years ago and I did that portion for 15 years and the whole program was devoted to scenario planning under uncertainty. It was always very well received. So it may be that this is a new generation or that some credit unions use it extensively. So we have a sample here, so we can't generalize to all of the credit unions. We had 34 responses here, but there's a lot more credit unions than that. So, but there was a great upside potential here to be more disciplined in using tools for managing uncertainty, as opposed to managing risk and that's a key distinction. Risk, you know, to probabilities like credit risk scoring, et cetera, but uncertainty, you can put probabilities on it because we haven't been there yet. We haven't seen it yet. There is no extra variable basis for doing it. That requires, therefore much more probing and much more inquisitive, and agile approach to mapping that all out.
HF
(00:30:53): And last question I have for you Paul, before we let you get back to your day, for credit unions who have read the report or are listening to this podcast now, do you have recommended next steps for what they can do with this information to put it into place in their organizations?
PS
(00:31:14): Yeah, so the dilemma is that each credit union is different. So now you're really asking almost a consulting question, what should they do? And that would be presumptuous of me to answer that in general. But I would say that there's a bridge to answering those ultimate questions where that really starts to move the needle. And that would be for the leader to take this report and maybe give the survey to their own executive team or people and especially pay attention to where opinions differ considerably about how good or bad the credit union is in doing those things and where there are great areas of difference or where the scores are low. That would be then a natural area to say, okay, what can we do about that? So for example, the first four questions, just to illustrate this, are about how often have you missed an opportunity from the outside, you missed an opportunity to sell product, to serve members, to team up with someone, to maybe launch a queue that you should have et cetera.
So that was one question. Then the other question is how often have you missed a threat? You didn't see a regulation coming soon enough, or that the member satisfaction was low, you didn't catch that quickly enough, this data were not coming through enough. And then those are the questions, but did you miss anything internally? Was it the case that some very talented people were unhappy? They left the credit union because their work wasn't recognized or morale is getting low, but you're not getting on top of that very quickly. So that's on the negative side and more extreme cases where people are inappropriately managing or violating people's rights, or whether it's an outright fraud, that sort of internal threats are being missed. And then there's a fourth question about, have you missed internal opportunities? So if you were to look at a credit union and say, where do you have the most problems?
Is it with external opportunities? Is it with internal opportunities? Is it with external threats or internal threats? And I need to see that profile in order to give really grounded advice on where to focus. Obviously, if all the problems stem from, and it's happened, of course, with Wells Fargo, I mean, they shot themselves in the foot, right? It was all these dubious sales practices and signing up people for credit cards and accounts and insurances that they don't need. And why wasn't that caught? And that is an example, of course, of an internal threats that was festering and festering, and then it exploded. And so that requires a very different remedy from the leadership perspective. So we need, they need to diagnose just like any McKinsey comes into your company or Bain or any of the other ones. The first thing you do is diagnose the past and where have you been strong? Where have you been weakened and apply that. So we offer in the report a fairly broad menu of things that one can do from, and we mentioned some, Taylor mentioned some earlier about how [inaudible] networks are to create, change the culture. I don't think there's one fix that's maybe the closing thought on this one. It is really an attitude about how you manage. If the captain of the ship, how do you steer it? Is it command and control and, you know, very operationally focused or do you view the organization as a learning entity, an open system that adapts to a changing world, and you need to therefore test a lot, experiment a lot, except some degree of failure in the small projects that you do, et cetera. And that's what has to be recalibrated in many credit unions, depending on how much change and turmoil lies around the corner for them.
HF
(00:34:25): That approach makes really good sense. Taylor, is there anything you'd like to add or anything else that we haven't covered that you wanted to mention?
TN
(00:34:32): No, just to thank Paul for a really excellent breakdown of some of the crucial lessons from this report and to add that in many ways, this approach is not only the approach that Paul and George and their colleagues have taken in trying to understand successful, vigilant and adaptive leadership, but also the approach that Filene takes and, the research that we do for ourselves and for credit unions to really think about the future to be, to embrace innovation and experimentation and to help credit unions both on the research and on the innovation side.
HF
(00:35:08): Thank you again so much for your time today Paul, and up next Taylor and I will hear from George Day co-author of this report.
PS
(00:35:16): Wonderful. Thank you both.
HF
(00:35:19): Hey, are you enjoying hearing directly from the researchers and academics that have created these reports for you? Then you'll want to come to our 2019 Research In Action Event, where you will interact face-to-face with these experts as they connect you and your credit union peers to innovative ideas for putting the research into action at your organization. Our next event is called Nature Versus Nurture: How Hidden Influences Affect Your Members' Financial Behaviors Across Their Life Cycle, led by Filene fellow and professor Hope Schau from the Center for Consumer Decision Making on January 17th and 18th in Phoenix, Arizona. This one will be particularly interesting for marketing, lending, and operations leaders. As a marketing professional, I'm excited for the conversation around topics like how our genes affect our likelihood to make risks in stock market investing. How our formative years of education around financial literacy and what we did with our allowances affect our financial behaviors as adults and how the words we use in our marketing materials have a hidden influences around social and political alignments.
We'll have interactive workshops around each speakers presentations as well and I can't wait for the workshop that examines what's hidden in our marketing messages and mission statements. Register now at Filene.org/hiddeninfluences. And now back for part two of today's episode with George Day. George, thank you so much for joining us today as well. We heard from Paul on a similar question about this research, but I would love to know from you a little bit more about what this research is about and in particular, some of the concepts explored within it such as organizational vigilance.
George Day
(00:36:52): Indeed. Paul and I have worked on this topic and been on this shared research journey now for 15 years. We began by inquiring about why some companies were really effective at picking up weak signals from the periphery. Now, a weak signal, as we define it is fairly low amplitude. It's surrounded by a lot of noise, yet eventually if you can detect it and understand it early enough, it's a signal about some change, either a threat or an opportunity that requires attention, but often they get buried in the avalanche of noise and the overwhelming amount of information we're confronted with every day. Just as a sidebar, the consistent result we get is that the amount of information is doubling every year and a half. So no wonder we feel overwhelmed, but the weak signal is an early warning or an early indication of a possible opportunity or a significant threat.
And from either inside the organization or outside. So we originally focused on peripheral vision as in focusing on the periphery, the fuzzy zone at the very edge of a credit unions, competitors, regulators, customers, and that's what we focused on originally. Then our clients said, look, we have more problems with nasty surprises that come from inside. And of course we have many instances of that, including some of the notorious Volkswagen defeat devices, the Wells Fargo transgressions with their clients accounts and opening inappropriate accounts to meet a high incentive for opening and creating and selling new services. But that is the kind of surprise that the senior leadership needs to know about so they can tackle it because once it metastasizes and gets into the public domain, then the damage is done. So vigilance here means both external and internal. Collecting and understanding, and then acting on these weak signals as they get stronger. Now, this does not mean we're interested in predicting. We just want to detect and understand ahead of anybody else that can use this information either to our advantage or disadvantage.
TN
(00:39:37): George, you mentioned that you began this project with Paul more than a decade ago, maybe 15 years ago. Could you tell us what was the initial spark behind the idea of weak signals? Was there a moment early on, or even maybe even before the research agenda was set that really puts you on this path?
GD
(00:39:57): There's was a number of things that came together. Paul and I have collaborated for almost 20 years, but on this particular topic, it was a convergence of his interests in scenario thinking, which is by the way, another way of broadening the mindset of the organization to think about possibilities and then possible events, trends, and threats, and opportunities, and think much more broadly than just projecting your current operations into the future. So he came with that mindset, which I was very familiar with. I come from a marketing background and to me, marketing is principally characterized by being the organization that interfaces with the environment, competitive customer channel. And so I had actually written on organizational vigilance and what I called outside in thinking, trying to think like a competitor, think like a customer. So the catalyst, however, was a research institute that I began at Wharton called the Mack Institute for Innovation Management, where our partners actually said that one of the critical issues for them is getting a better early warning of technological change in order to position themselves to respond to it.
(00:41:25): So we had those three things come together. It was very fortuitous and we got tremendously excited about it and it started to pull our thoughts together. Which came together in a book that came out 13 years ago now called Peripheral Vision: Detecting the Weak Signals That Can Make or Break Your Company. So, as I say, we've been at this for a long time and then because of the success of that book and the visibility it got, we worked with many, many companies. So they said, okay, can you apply this and help us think through how to become what now we call more vigilant. We didn't call it that 13 years ago, we focused more on how do you have better peripheral vision. Now we realize it's much more appropriate to call it organizational vigilance as in the preparedness of the organization, to sense, detect, understand, and then respond appropriately to threats and opportunities. So it's been a fun journey.
HF
(00:42:33): I think our credit union listeners today might be interested to hear from you a little bit more on your thoughts and expertise on how organizations can perform better and in what ways they can perform better by having a better understanding of the concepts here that you just outlined.
GD
(00:42:53): Indeed, so let me back up a little bit and say why it's become so much more important. There are two things that have converged, and this is particularly the case with credit unions. So organizations are surprised, when on one hand they're vulnerable, but vulnerability is created by a short term orientation, an inside out mindset and a lack of curiosity. And that vulnerability converges with organizational and sorry, environmental turbulence. And you may remember the old book by Alvin Toffler, Future Shock, and he defined future shock as too much change in too short of time, which I think is a terrific definition. And, so you have vulnerable organizations, absolutely overloaded with signals and very confusing signals from digital turbulence in particular. So the vulnerability of organizations is increasing and the way you combat that is by building your vigilance capacity or capability, and you get the performance rewards from anticipating versus reacting.
So it turns out the biggest payoff is to avoid reacting to events, rather you can anticipate. If you anticipate them, see them sooner than anybody else. And that's the title of our book, See Sooner Act Faster, if you see them sooner, you've got a lot more degrees of freedom. Now you can invest in experiments. You can buy what we call real options, take a stake in a small startup and build a capability, for example, for understanding, say blockchains or artificial intelligence. When you do that, you're ready when the time comes. We distinguish vigilant organizations from vulnerable ones. Vulnerable organizations, again, because of their short term orientation, lack of information sharing and weak leadership are forced to react and so they're always, wrong-footed. They're always off balance and reacting and copying, which is guaranteed to deliver a worst performance.
HF
(00:45:31): I find it interesting that you mentioned that you approached this research with your background in marketing. I work in marketing as well, and we're very used to the clutter and the noise and the space and trying to break through to reach, potentially leaders like CEOs. What is it like on the other side for the CEO? How are these CEOs able to know what to pay attention to and what really matters from all the other noise around them?
GD
(00:46:01): Yeah and then of course, just to repeat and underline, that amount of noise is just going up exponentially. So both the need and the problem are much greater. So the critical question there you're posing is how can the CEO pay better attention? Well, we have found that it's not really only the CEO's responsibility, rather vigilance is a team sport, and it really matters very much about the leadership team, the C-suite, the executive group that they all work in concert. So by acting as a team, they share anomalies, interesting trends that they may see, and they share them openly. And, you know, they may not have much certainty about it, but they say, you know, we got to watch this. So that's mobilizing the whole team. That's step one, then asking good questions is critical. By that, I mean, looking back and say, well, what did we miss in the past?
We find out a terrific question. Then what's going on in the present? So past, present, and future locate, how may the future play out? And that's where scenario analysis and thinking is so critical. So asking good questions in many different ways, and the issue with a tremendous amount of noise coming at you, is you've got to focus on a few things in order to keep track of what's going on. And then finally, I'd say the critical thing is the tone at the top. Is the organization open? Is the leadership team open to people conveying weak signals? One of the things we did find in our original research, which has stood up extremely well, is that whenever an organization surprised, and, it could be a competitor they didn't see, a regulation that surprised them. A where did this come from kind of question. Any instance where a company was surprised, that it should have known, it should have seen it earlier. There were people within the organization that knew all about it, but leadership didn't know, and leadership didn't know what they knew and that sounds almost banal, but, it's a really interesting lever because it says to improving vigilance, it says we have to be open and supportive and encouraging of people at all levels, and including our extended networks to, come forth and express their concerns, their anxieties, without having it tightly documented.
TN
(00:49:02): George one thing that you and Paul talk about in your report in a really crucial recommendation you have is to bring more diversity into your professional and interpersonal networks. Can you reflect a little bit on how diverse contacts and diverse networks can help improve vigilance across an organization?
GD
(00:49:24): So that's a great question because we've definitely found that organizations that have a diverse leadership teams, that is respecting different points of view, different experiences, and I'm glad you called out the networks because one of the attributes of a vigilant leadership team is that they network outside of the normal industry meetings, where they talk to their friends and reinforce their biases. Rather they seek out and they go to unusual places and looking for ideas. They may connect with, for example, the Institute of the Future has an artificial intelligence group and you can join that and listen to how companies are wrestling with the impact of artificial intelligence in three to five years on their products, their operations, and how they deliver a customer experience. So diversity in the team brings different perspectives, brings different experiences and different networks. Whereas if everybody is, and I'm going to go out to the extreme here, very homogenous with respect to background and experience, they're not likely to challenge each other, and it's not that challenging has to be a source of conflict. It just says, you know, I don't understand that just doesn't fit my experience and so you bring in a much richer base of experience with a diverse leadership team.
HF
(00:51:03): Do you have any real life experiences or examples of organizations that have done this work really well, or conversely that ignored these concepts and suffered for it?
GD
(00:51:16): We have any number of companies that have been. Let's start with Facebook, very high profile. They exposed millions of user profiles and shame on them, but what Sheryl Sandberg, the COO says, hey, we were too slow to spot this and too slow to act, that's on us. Barbie, the famous fashion doll was unseated from the toy leadership role that she'd had for many years by the Bratz doll, which appealed to the change in play behavior. Radio Shack is an example of a company that totally missed a trend it actually started. I mean, way back Radio Shack appealed to hobbyists, who built electronic devices, that market went away and they went into reselling mobile phones. But what they missed was that there was a very strong hobbyist interest emerging out there. I mean people were using 3D machining and so forth, imaging. Manufacturing to create all sorts of objects and they needed support for their hobby and so they weren't even in that. One of the worst ones is not well-known, but it's Kobe Steel. Had been manipulating quality inspections for years, and this was serious because Kobe Steel made steel for really high-end Japanese companies and around the world. And so they compromised their quality. And then of course, we've talked about Wells Fargo being slow to respond to the employees sales scams.
HF
(00:53:21): How can credit unions learn from these mistakes from other organizations and help make sure that they are not similarly getting surprised by things that come up in their industry or in their organization?
GD
(00:53:35): What we've found is there's four elements to becoming vigilant. And so in our work, and in our report, we call out what you have to do to become more vigilant. And as Paul has already suggested, there's four elements to that leadership posture. And that's the tone at the top, the involving diverse networks and so forth, but also an openness to challenging assumptions. So without leadership commitment to vigilance, not much is going to happen, but that leads to how they think about foresights and their investments in foresight, just going out and, running experiments. So I think increasingly credit unions are going to have to experiment more or learn from other's experiments and invest in working with Filene, for example, and connect into your work on what's coming over the horizon, searching for new services and possibilities to provide your clients. Then a third lever, we found is quite influential is to start focusing on thinking from the outside in. A simple definition of outside in thinking is you stand in the shoes of your customers, competitors and if you have any partners, you look at the world through their eyes and you realize that the customers have rapid changes. We'll go back to Mattel. They were very much an inside out, they had a great product and they focused on keeping it at the cutting edge of fashion, but they weren't paying attention to how their customers were changing. They weren't looking at the world through their eyes. And similarly, I do a lot of work on the competitive intelligence, and it's really hard to get leadership teams, to think like a competitor and realize that the competitors are asking the same questions, but maybe moving faster. And you have to define competitors fairly broadly as competing in technologies as well as competing financial institutions. So outside in thinking is, it turns out to be one of the pivotal differences and outside is thinkers, also innovate better.
They innovate faster, and they're more open to experimentation and trying a lot of different things. Inside out is, by contrast is very much about, we want to leverage our resources and it's a various efficiency approach tends to be operational and more short run. And then the last one, we see that a credit unions could use is improving accountability and information sharing. To go back to the observation I made that, Paul and I found that whenever a company was surprised, there was actually someone in their organization that knew a lot about it. And so you have to eliminate the barriers to that information flowing, and of course you have to make it a priority and nothing like incentives or rewards or recognition for the organization to take it seriously.
HF
(00:57:25): That sounds like a fantastic list of characteristics that I think any organization would strive to have in place on the inside and Filene has done a number of research reports on, I think all of those, those elements that you, that you detailed, do you want to mention to our listeners how they might find more on some of those specific concepts?
GD
(00:57:50): Well in the report we have a number of links to the studies so, that's an easy way to do it, but the report pretty much lays out step by step, how you might think about applying these. But yeah, I do want to emphasize that Filene is exactly the kind of organization that the credit unions set up in order to improve vigilance.
TN
(00:58:18): Absolutely and I would just say that this report builds on a long tradition at Filene and also more broadly, and thinking about balancing exploitation and exploration, the present with the future and structurally within organization, building in capacity for looking outside and assessing threats from the inside and building pathways for communication, for knowledge sharing, within different departments and then hierarchically up and down the organization.
GD
(00:58:52): Yeah, so this is another strand in the web of knowledge that you're creating. And I think the one contribution that readers will really appreciate is that we have a lot of research and we can show which ones have the most influence for credit unions.
TN
(00:59:13): Speaking to that, George, could you tell us a little bit about what makes credit unions different from the other companies that you've studied and maybe tell us a little bit about, you know, as you have brought your extensive experience in studying these issues, from a variety of perspectives and industries, what was the aha moment for you in studying credit union specifically?
GD
(00:59:36): I love that question, thank you. It wasn't so much aha as, oh, aha. If I can draw that distinction. And so just for the listeners to appreciate how we got to that, we created an instrument that was in the survey format, and we give it to leadership teams to assess their vigilance coefficient. That is whether they're vigilant or vulnerable. So, the measure of vigilance coefficient basically creates about 40 questions getting at their level of vigilance on each of the four elements, leadership, investments in foresight, strategy making and coordination. So we gave that to a sample of about 130 corporations in mostly global markets and that took place over about six months. We had to be really careful about who responded to the questionnaire, because as you can appreciate when a leadership person in a very senior position in a credit union is asked to fill out a survey, they probably ignore it, but if they decide it's worth answering, they will give it to a subordinate and we know all about those kinds of problems. And so we avoided it with the global organization sample by actually sitting with leaders and getting them to fill it out. So it was a very tedious approach to collecting data. We then had enough data to estimate the relative importance and contribution. If you liked the four key variables to the vigilance quotient, how vigilant were they? So that model fitted extremely well. We had some problems with collinearity, but, those were manageable. Then we gave an adaptation of the survey. Then without maybe 90% overlap, to a sample of senior leaders in credit unions. And we got great cooperation and support all the way through. We estimated the model didn't fit very well. So think of this as cross validation, we have a model here with the parameters we've estimated, and we're not getting nearly that level of fit with credit unions. Well, the aha moment was when we realized what a significant difference there was between large and small. So we did essentially a cup of sample in two parts, large and small, and the small were 1/10th, the size on average of a large, and they behave totally differently. When we re-estimated the model, we had a computer, it originally for the global organizations, we found that the larger credit unions looked almost like large global corporations. In other words, complex environments, fast changing geographic diversity, and so forth.
HF
(01:03:05): Is there anything else that you found out in the course of doing that research that you feel like credit unions or their boards could use to become more vigilant in their organizations?
GD
(01:03:19): Well, this is one of those issues where when you do research, you learn a lot. And unfortunately in our global organization, or sample of global corporations, we did not have a question on boards. And we put that into the credit union study and found they have a really varied role, but they contribute substantially to vigilance. And I think that was an important conclusion that the boards of credit unions, if they're diverse, let's go back to the question about diversity, if they're diverse and they have different networks and different experiences, they can add a huge amount to vigilance. And we've since done much more work on the role of boards of directors in improving vigilance. And that's proven out in all kinds of organizations that most boards are not leveraged nearly sufficiently and having served on perhaps 10 different boards, I can think of a couple where I didn't enjoy as much, because it was just updates reports on compliance and operations and results and capital spending, all important, but very little spent on what's coming over the horizon. And yet the best boards spend most of their time thinking about, well, I've had this experience over here, how can I apply that? Or one of the, the lights above being a member of board of directors is that you can push the leadership team to challenge their assumptions and give them different perspectives, but that needs to be encouraged also the chair and the CEO. So I'd say that was the one area where we really strengthened our understanding of the role of vigilance.
TN
(01:05:30): George, thinking about the different models, organizational models, and ownership models between corporations and credit unions, which of course, you know, member owned and, you know, cooperatively managed, do you think that there's a different role for the board and those two different models?
GD
(01:05:49): You know, I originally thought so, but, in terms of what I appreciate that they have an important role in representing the members, but beyond that, to the area we're interested in, I don't see a difference. I think they have a responsibility to challenge leadership to bring in diverse perspectives and ask that well, what if this happens, or did you see that, so-and-so regulator is doing the following? What does this mean for us? So I've kind of gone around the circle on this, and I conclude to, in answer to your question, no, I don't see a difference.
HF
(01:06:35): George, I really want to thank you for your time with us today and and lending your expertise. I know this has greatly expanded my knowledge on this topic, and I hope it has for our listeners as well before we let you go, are there any last thoughts or any points that you wanted to make that we haven't covered yet?
GD
Well, I do want to echo what Paul said, how greatly we appreciated the partnership with Filene and the opportunity to help Filene support the credit unions in their mission. So that's been a marvelous partnership.
HF
Great to hear. Thank you.
GD
Well, thank you both for a really enjoyable conversation.
HF
Taylor, anything from you?
TN
Thank you very much, George. We have learned a lot from both you and Paul. You're both legends in marketing and strategy and the business academic world, so we very much appreciate your time.
GD
Thank you so much. It's been been mutual.
HF
(01:07:35): All right, that's it for the Fill-In folks. Thanks again for listening. This episode of the podcast is endorsed by our research team to give Filene members and listeners an opportunity to dive deeper into our latest report on how credit unions can remain vigilant and adaptive. I want to, once again, thank George, Paul, and Taylor for sharing their insights with us. I know I learned a ton more about this research, and I hope you did, too. If you liked this episode, please do rate us on Apple Podcasts, so more people can find us and make sure you're subscribed to the Filene Fill-In podcast, so you can keep up with what's going on at Filene. You'll find us on Apple Podcast, Stitcher, SoundCloud, Google Play, or wherever you get your podcasts. If you want to get in touch today's show, email me at [email protected], or find us on Twitter at @Fileneresearch. Until next time. Thanks everyone.