(FORTUNE Magazine) – If you were asked to identify the major U.S. companies best positioned for success, you'd probably list Microsoft, Intel, Procter & Gamble, Hewlett-Packard, Merck, GE, and the like. Ask yourself then to construct a scenario that leads each of these companies to the brink of extinction ten years from now. Despite the apparent vigor of the companies on the list, you would no doubt have little difficulty in developing these scenarios--probably with great glee. Some of your scenarios might stretch the bounds of credulity, but most would be frighteningly plausible: a new technology that is ignored until it is too late; a fundamental market shift whose reality is denied; a breakthrough competitor innovation in marketing or service that takes the company unawares; a growing sluggishness and bureaucracy that dampen the fervor that helped create the position of leadership and success.

Now, a third question: If you were an executive at one of the companies in question, what would you do today to prevent such calamitous scenarios from coming to pass? Don't return to the list of nightmares you've just created and identify a set of specific steps to ensure that those outcomes remain fantasy rather than reality: an early investment in the threatening technology, a preemptive strike against the competitor, anticipation of the new market trend. All those measures are predicated on accurate foreknowledge of the disasters lying in wait. Real disasters are not so considerate; they do not telegraph their arrival in advance and allow us to prepare for them.


What we are discussing here is one of the most perplexing problems facing successful organizations: Why is it that they are frequently unable to maintain their success over time? How could Sears have possibly let Wal-Mart steal a march on it? Why is Pan Am, which dominated air travel 50 years ago, today just a memory? Why didn't Howard Johnson's, which in 1965 had sales greater than those of McDonald's, Burger King, and Kentucky Fried Chicken put together, come to dominate the fast-food business? It is not terribly helpful to reply that Sears dismissed everyday low pricing or that Howard Johnson's was too entrenched in its ways to catch on to the new trends in restaurants. The real question is, why?


The answer is that, although successful organizations fail in many different ways, all these failures share one underlying cause: a failure to reflect. Organizations, particularly successful ones, are so caught up in carrying out their day-to-day work that they rarely, if ever, stop to think objectively about themselves and their businesses. They do not ask the probing questions that might lead them to call into question their basic assumptions, to refresh their strategies, to reengineer their processes.

Reflection entails awareness of self, of competitors, of customers. It means thinking without preconception. It means questioning cherished assumptions and replacing them with new approaches. It is the only way in which a winning company can maintain its leadership position, by which a company with great assets can ensure that they continue to be well deployed.

Why do so many organizations fail to reflect? One mundane reason is time--or rather, the lack of it. The daily concerns of managing an enterprise can easily soak up all of management's time and energy, leaving none for the effort that reflection requires. Voice mail, electronic mail, meetings, performance reviews, and all the other paraphernalia of modern business so sap managers' time that there is none left over for real thinking. Reflection must be deeply rooted in a company's day-to-day operations. In short, reflection must be institutionalized as a business process.


Over the past decade, in the aftermath of the quality movement and reengineering, companies have come to recognize the value of managing work as process. A process is a group of activities that together create a desired result: Order fulfillment is a process whose constituent activities include inventory allocation, picking and packing, traffic planning, and shipping. Companies now realize that merely concentrating on individual tasks does not ensure that the desired results will be achieved.

By identifying and managing key business processes--such as product development, order fulfillment, and demand generation--companies can ensure that these are well performed on a sustained basis. When the organization recognizes work as a process and manages it as such, achieving its goals becomes deliberate, rather than the accidental by-product of performing its various constituent tasks.

There are four parts to managing work as a process. The first is clearly articulating the goals of the process; the second is designing the work in such a way that achieving the goals is not left to chance but is a dependable outcome; the third is measuring process performance continually; and the fourth is assigning end-to-end responsibility for the process to a key senior manager. When business processes are managed in this way, they perform well and do so reliably. Processes from order fulfillment to product development have benefited from this discipline; reflection must also be managed as a process as well if it is to deliver its results reliably. The whole reflection process, not just its individual tasks and components, must be performed regularly and carefully.

There are six tasks involved in the reflection process: developing deep customer insight; conducting broad environmental monitoring; developing competitor intelligence; performing honest self-assessment; engaging in ongoing mind expansion; and questioning fundamental assumptions. The first four of these are information-gathering activities, the fifth entails changing the dynamics of the company's thinking, and the last integrates all the others. All six need to be accomplished for the reflection process to perform effectively. While many of these activities may sound familiar, combining them into a process produces results that go beyond what they individually achieve.

--Customer insight. In order to avoid being surprised by shifts in customer behavior, it is necessary to understand your customers better than they understand themselves. This goes far beyond reviewing customer-satisfaction surveys. It means appreciating your customers' unstated and unmet needs, knowing their businesses or lifestyles in ways that extend beyond their use of your current product or service.

The calculator division of Texas Instruments, for example, focuses on making TI calculators the de facto standard in high schools. To this end, managers work closely with mathematics teachers to see how they incorporate calculations into their teaching. TI creates simulated classrooms to understand both how mathematics teachers teach and how people learn mathematics--and how improved calculators could help them do so.

When Tom Kasten, a vice president at Levi Strauss, was a merchandiser responsible for developing Levi's Jeans products for the teenagers of America, he used to drive down weekly to the Fillmore Auditorium in San Francisco, where every Saturday kids would line up early in the morning to buy tickets for that night's rock concert. Tom would get out of his car, talk to the kids in line to determine what they were looking for in a pair of jeans, and observe what they were doing to their own jeans to customize them. Even now Tom takes more than his share of carpool turns each week driving his son and his friends to high school. This extra duty affords him additional opportunities to study the latest in teenage thinking and fashion. "The kids love to talk about where they shop, what they like, and what they hate," he says. "This is where it all begins, so this is what I do to learn, by watching consumers in their natural habitat."

Developing insight entails meeting with customers' customers in order to recognize opportunities to add more value; modeling and analyzing your customers' operations to identify opportunities for cross-company integration; engaging customers in your own improvement programs and becoming engaged in theirs; and having a broad cross-section of your organization establish relationships with their counterparts in various customer organizations.

--Environmental monitoring. Major shifts in a company's environment rarely (if ever) happen overnight--nor do they happen very often. The signs of fundamental shifts are always there for those who care to look for them. Even such seemingly dramatic changes as the end of the Cold War or the emergence of the Internet were many years in the making. There is no excuse for being caught unawares by new technologies, geopolitical shifts, regulatory changes, demographic trends, and the like. The trick is to notice a phenomenon while it is still emerging and to begin to prepare for it before it is upon you. Shell's scenario planning, which helped it deal with the "unanticipatable" oil shock of 1973, is a well-known case in point.

The great danger in this context is to look for signs that things are changing in all the familiar places. This is rarely if ever effective; by definition, "surprises" come from unexpected directions. Those involved in environmental monitoring need to avoid this mistake. To that end, for example, an effort to identify new directions in information technology should not be left to the information systems personnel. They are usually so close to the existing order that they will not look at what is truly new or recognize it as important; the only people who understood the significance of the PC later than mainframe vendors were their best customers, corporate information departments.

--Competitor intelligence. To prevent being blindsided by competitors (old or new), it is not sufficient to know what they are doing today; it is necessary to surmise what they might be intending to do tomorrow. At Oxford Health Plans, one of the country's fastest-growing managed-care companies, members of the senior management team spend a full day each quarter in an intensive competitive review. They analyze the bids submitted by Oxford and its competitors at key accounts in the preceding quarter. Their goal is to read between the lines of competitor actions to understand their strategies and plans. As Bob Smoler, CEO of Oxford Health Plans New York, says, "It all comes down to watching the chess moves they are using to drive their top line--whether it's product, price, or broker commissions." By analyzing these bids, Oxford can divine who is commoditizing their business and who is specializing their offerings, who is underpricing to buy share and who is underpricing because they are in trouble, who is raising broker fees to sweeten a deal and who is introducing what new products. Oxford uses these reviews to quickly identify new entrants into its markets and to assess how well the merger of its major competitors (US Healthcare and Aetna) is going. In this way it avoids being caught flat-footed by new developments.

To be effective, it is not sufficient to apply this discipline to one's existing competitors; nascent and potential competitors deserve the same kind of attention. A suitably broad definition of competitors is a prerequisite for success at this endeavor. At the very least, your competitor list must include everyone who might be able to solve the same customer problems that you do. Current industry boundaries are increasingly transient in nature and can be more harmful than helpful. To a customer, distinctions between a discounter and a department store and between a PC and a minicomputer are not nearly as significant as they are to players in those industries.

--Self-assessment. Internal decay, unabetted by external change or competitor depredations, is a common form of failure. Companies can simply start operating on autopilot and thereby lose the edge that propelled them into success in the first place. This rot often sets in without executives' noticing: first, because they are too far from the day-to-day operations of the business to sense it, and second, because their attention is preoccupied on those notorious lagging indicators, financial results. By the time "the numbers" start to decline, it is often very hard or even too late to deal with the underlying causes.

The beginning of the answer is to listen very carefully to the sounds of operating performance. How well is the company doing at the blocking and tackling level? What is the cycle time of order fulfillment? What fraction of customer inquiries are being resolved on the first call? Managers need to know whether the company is still performing at least as well as it has in the past relative to customer expectations and competitor capabilities.

A second area to which attention must be paid is that of cultural alignment. An important leading indicator of future failure is a weakening of the cultural values that root employees in their company and inspire them to extraordinary performance. Cynicism, indifference, and defensiveness are attitudes that eventually and inevitably destroy even the strongest organization. Company leaders often seem to think that merely repeating pious homilies or printing noble slogans on laminated wallet cards will maintain a strong company culture. Close observation of actual behavior, confidential interviews, and "cultural audits" can all help determine the real spirit of a company. For instance, Consumers Power, a large Michigan utility, retained a cultural anthropologist to develop an objective assessment of the real values and attitudes that governed employees' behavior. They discovered that people obeyed such rules as "good news goes up, bad news gets managed," rules that would lead to problems if allowed to persist.

--Mind expansion. The activities we have described so far all center on acquiring various kinds of information. But information does not carry its own interpretation; that must be supplied by those who evaluate it. The danger is that the real meaning of potentially significant information will be missed because those looking at it will view it through traditional lenses. To prevent this, company leadership must ensure that people throughout the company are able to perceive information from a fresh perspective rather than filtered through their current mental models.

There are no cut-and-dried procedures for expanding managers' minds; the best advice is that practice makes perfect. People need experience at "getting out of the box" if they are to do so when it matters. One interesting approach is that practiced by CEO Lou Gerstner at IBM. Every six weeks he takes his top 40 managers off-site for a two-day retreat. But these are not typical operating reviews. Rather, they are dedicated to management learning in nontraditional areas. Each session features an outside speaker who addresses a topic that is peripheral to the immediate concerns of IBM's leadership. These speakers may be academics, executives from other industries, or even representatives of the art world. Gerstner personally leads these sessions; his objective is to give his executives practice in stretching their thinking and developing new perspectives on IBM's business.

--Assumption breaking. The last of the components of the reflection process, this one brings all the others together. The seeds have been gathered by the four information-gathering activities, and the ground has been turned over by mind expansion. What remains is to plant and harvest the crop, to turn information into ideas for action. The goal is to surface real insights--likes the ones we tried to imagine in the exercise at the beginning of this article--to prevent future disaster: investing in a new technology, shifting the company's direction, addressing new markets, redesigning modes of operation, and all the rest.

The hardest part of undertaking radical steps like these is reaching the conclusion that they must be taken and summoning up the fortitude to carry them out. This is done by identifying and questioning the business' underlying assumptions. Every business floats on a sea of assumptions that shape its view of the market, its strategy, and how it operates. We compete with other manufacturers on the basis of price; every new product we develop must be unique; our people are the best and most highly motivated in the industry--these are but samples of such assumptions. It is natural and necessary for companies to have them. They provide the basis on which a company designs its operations and makes a broad range of decisions. When change causes assumptions to lose their validity, while the company persists in its old ways of doing business, disaster is inevitable.

Assumption breaking is the most arduous of all the steps in the reflection process, because identifying and questioning assumptions goes against the organizational grain. Many people in the organization have strong interests in the status quo, and asking unsettling questions causes them anxiety. Yet, without this step, all the others are purposeless. Collecting new information by itself leads nowhere; it is in the nontraditional thinking of assumption breaking that its value is realized.