The Hia Cost

^ of Accurate Know4edge
4d

V 74
by Kathleen M. Sutcliffe and Klaus Weber
A little knowledge is a dangerous thing? Not necessarily. New data reveal that
the way senior executives interpret their business environment is more important
for performance than how accurately they know their environment.

T
HE KNOWLEDGE ECONOMY IS extraordinarily hun-
gry for information. In their quest for competitive
advantage, companies are pouring increasingly more
money into collecting and organizing information about
the world in which they operate. Indeed, according to a re-
port published by the American Marketing Association,
in 2OO1 U.S. corporations spent $5.5 billion on market re-
search alone-which doesn't include expenditures on soft-
ware or other information technology.
Many business academics and practitioners applaud
such large investments, arguing that the more top deci-
sion makers know about their competitive environments,
the better their organizations will perfonn. Information
improves accuracy, they contend, and accuracy helps com-
panies adapt more quickly and effectively to a changing
marketplace. Such business thinkers believe that the role
of senior managers is to scan the external environment to
monitor contingencies and constraints, and use that pre-
cise knowledge to modify the company's strategy and or-
ganizational design to fit new competitive demands.
But as the editor in Evelyn Waugh's media satire Scoop
liked to say: "Up to a point. Lord Copper." Even executives
who believe passionately in the value of rigor concede
that there are Umits to objective analysis. After all, facts
don't speak for themselves; one has to make sense ofthe
facts, not just get them straight. What's more, when peo-
ple dp apply sophisticated rational decision models to
make sense of data, the models often break down due
to information overload; executives inevitably end up re-
ducing large amounts of information by selectively focus-
ing their attention. Lastly, precision matters little when the
data being examined aren't pure. According to research,
top managers routinely work with facts and figures that
have already been filtered through corporate liierarchies
and work processes.
The truth is, in the complex world in which most busi-
ness leaders operate, information about the environment,
though abundant, is seldom obvious in its implications.
Executives therefore have no choice but to interpret and
intuit the data they receive. In light of that reality, another
The High Cost of Accurate Knowledge
school of pundits contends that it's not the accuracy and
abundance of information that should matter most to top
executives-ratber, it's how that information is interpreted.
As this school points out, the role of senior managers
isn't just to make decisions; it's to set direction and moti-
vate others in the face of ambiguities and conflicting de-
mands. Top executives must interpret information and
then communicate those interpretations-they must man-
age meaning more than they must manage information.
This implies once again that, for senior managers at least,
it's less important to loiow a lot of facts about a situation
than to have a clear and consistent framework for inter-
preting them.
So which of these competing views-accuracy or inter-
pretation - is the right one? In the following pages,
we present research that casts much-needed em-
pirical light on that debate. Our findings and case
studies suggest that how accurate senior execu-
tives are about their competitive environments
can indeed be less important for strategy and cor-
responding organizational changes than the way
in which they interpret the information about
their environments. This, in turn, suggests that in-
vestments in shaping those interpretations may
create a more durable competitive advantage
than investments in obtaining and organizing
more information. But that raises the question.
What kinds of interpretations are most closely
linked with high performance? It seems that the
most successful companies are headed by executives who
are at once humble and optimistic - an almost paradoxi-
cal mix that does not square well with many popular per-
ceptions of what makes for great leadership. We'll begin
by explaining how we obtained the data behind these
conclusions-by no means a trivial task.
Measuring Accuracy,
Performance, and Change
The first step in determining whether someone's percep-
tion is accurate is to identify what that person is trying to
perceive, in other words, what are executives scanning
the environment for? To answer this question, we tumed
to previous research on organizational dynamics. Such re-
search suggests that most executives judge their indus-
tries along three dimensions; volatility, growth trends, and
complexity.
Volatility. This dimension measures the reliability of
forecasts and therefore the amount of risk associated with
a strategic investment. In highly unstable industries,com-
panies typically place a large number of relatively small
strategic bets from a pool of very risky options. For ex-
ample, wide swings in demand lead companies in the con-
struction and fashion apparel industries to shy away from
large, long-term commitments. By contrast, stable and
76
predictable industries, such as most utilities, are charac-
terized by the placement of very large bets, because the
risks associated with any one option are relatively small.
It would seem to follow that companies that have a more
accurate perception of their industry's volatility would
have a competitive advantage when it comes to creating
a portfolio of strategic options.
Growth Trends. This dimension reveals the quantity of
resources available to companies in an industry. Munifi-
cent industries, such as information technology, sustain
high growth levels. By contrast, less munificent indus-
tries, such as food retailing, grow very slowly. A CEO's
perception of his industry's growth trend would deter-
mine how he would balance his company's investments
Siirvey of Perceptions
and Interpretations
The data we used for our quantitative
analysis were derived from the answers to
this questionnaire. Participants responded
to each question on a standard scale ranging
from one to seven.
between growth and cost control. An accurate perception
of industry grovrth, once again, would seem to confer a
competitive advantage.
Complexity. Like growth trends, this dimension relates
to an industry's resources. But unlike growth, complexity
refers to the distribution of resources - that is, who has
these resources as opposed to how many there are. This
dimension determines how interdependent a company's
strategic moves are with those of its competitors. In rela-
tively dispersed industries, such as biotechnology, re-
sources are fragmented among a large number of com-
petitors. Companies face so many contingencies that they
cannot attend to all of them and are best off focusing on
their own idiosyncratic business models. Conversely,
when resources are concentrated in the hands of a few, as
in the oil business, each company needs to anticipate the
moves of its competitors and strategize accordingly. In
Kathleen M. Sutcliffe (ksutcUf@umich.edu) is an associate
professor of organizational behavior and human resource
management at the University of Michigan Business School
in Ann Arbor. She is coauthor, with Karl Weick, of Man-
aging the Unexpected (Jossey-Bass, 2001). Klaus Weber
(weberk@umich.edu) is a doctoral candidate in organiza-
tional behavior and human resource management, also at
the University of Michigan Business School
HARVARD BUSINESS REVIEW

both cases, one would assume that an accurate perception
of complexity is a source of competitive advantage.
To measure the accuracy of managerial perceptions
along these three industry dimensions, we used both sur-
vey and archival data. The survey, which supplied data on
how top managers perceived these factors, consisted of
a mail questionnaire to the top executive team members
at a randomly selected sample of business units and in-
dependent companies in a diverse set of industries. We ad-
ministered the survey in 1991 and obtained replies from
329 top-management team members in 85 organizations
drawn from 32 industries. The participating companies
ranged in size from 29 to 62,250 employees. (See the side-
bar "Survey of Perceptions and Interpretations.")
Volatility
Over the past year, how frequently
did important changes occur in the
behavior of:
• actual users of your products
or services?
• suppliers?
• competitors?
• distributors of your products
or services?
To what extent is your firm affected
by changes in the behavior of:
• actual users of your products
or services?
• suppliers?
• competitors?
Growth Trends
How accurate are the following
statements?
• Demand for the products or services
of your principal industry is growing
and will continue to grow.
• The investment or marketing
opportunities for firms in your
principal industry are very favorable
at the present time.
• The opportunities for firms in your
principal industry to expand the scope
of their existing products and markets
are extremely limited.*
- Resources for growth and expansion
are easily accessible in your industry.
• In your industry, sales have been
growing and are likely togrow.
' Indicates an item that was reverse scored.
1. This section was preceded by the following: "The next questions ask about changes that have occurred over the past six months or that are currently being instituted ir your firm."
MAY 2 0 0 3
The High Cost of Accurate Knowledge
Our objective measures were derived from Standard &
Poor's indices for sales, capital expenditures, and net assets
across all the industries surveyed. Volatility was determined
by the four-year average of volatility across the three in-
dices. Growth was determined by their average rate of
growth or decline. And complexity was calculated by the
number and relative size of participants in an industry in
terms of sales, capital expenditures, and net assets.
We gathered performance data, also from Standard &
Poor's, two years after the survey answers were compiled.
To strip out the performance effects of economic and in-
dustry cycles, we created measures of change in perfor-
mance relative to industry averages. Comparative sales
growth captures the degree to which customers value and
• The total value of assets for the firms • The situations the firm encounters
within your industry are declining and present numerous favorable
will continue to decline.* opportunities.
-Capital expenditures in your firm's • There is a lotto gain from most
principal industry are growing and situations.
will continue to grow. - Losses and not gains are likely
from most situations.*
Complexity
How strongly do you agree or disagree Magnitude of Change^
with each ofthe following statements? To what extent have there been
• Your firm faces a complex environment. changes in:
• Your firm's environment is difficult • work rules, procedures, or processes?
to understand. •the centralization of decision-making
authority?
Controllability • interdepartmental coordination?
How strongly do you agree or disagree • basic products and services?
with the following statements? • major clients or customers?
• Resources are accessible to resolve
most situations.
To what extent have the changes
• The firm has the competencies to required:
address most situations.
• most employees to alter their basic
• Most situations can be controlled. values and beliefs?
• The firm manages most situations • significant reallocation of personnel
instead of situations managing it. and organizational resources?
• The situations the firm encounters • new management titles or managerial
often place it in jeopardy.* functions?
• The firm's responses are constrained • new approaches in how employees
largely by other organizations, groups, do their work?
or individuals.*
• significant turnover in top manage-
ment positions?
Positive ness
- significant additions or deletions
How strongly do you agree or disagree of products or services?
with the following statements?
• major shifts in target markets?
• The situations that arise are frequently
favorable to the firm.
• Most situations are positive for the firm.
The High Cost of Accurate Knowledge
demand the company's products or services more than
those of competitors. Similarly, comparative growth in op-
erating prt>fits indicates the extent to which a company can
sustain or improve an efficiency advantage over its com-
petitors. We also assessed the magnitude of organizational
change as reported by the survey participants. Oxir mea-
sure of change represents the degree to which executives
adapted their organization to changing requirements by
enacting internal changes, such as changes to organiza-
tional structure, work processes, or decision-making au-
thority, or by enacting external market-focused changes,
such as changes in target markets or products and services.
Does Accuracy Pay?
Using a number of standard statistical techniques such
as regression analysis, we then explored the relationships
between organizational changes, the accuracy of manag-
ers' perceptions, and organizational performance. The re-
sults are shown in the exhibit "The Effects of Accuracy."
We had expected that initial investments in improving the
accuracy of senior managers' perceptions would have pro-
duced increasing retums for a while, flatten out, and even-
tually decline. We reasoned that early investments in ac-
curacy would greatly enhance the quality and timeliness
of top managers' strategic moves, thus facilitating changes
and improving performance, but that ever more detailed
analysis would make only marginal contributions. Even-
tually, we posited, the returns would become negative as
the quest for ever greater accuracy consumed resources
and distracted managers from initiating timely actions.
As the exhibit "The Effects of Accuracy" shows, the re-
lationship between perceptual accuracy and the magni-
tude of organizational change did indeed fol-
low this inverted U-shaped pattern. Initial in-
vestments in improving the accuracy of senior
managers' perceptions triggered more change,
but eventually, as improvements in accuracy
began to taper off, so did the magnitude of
change. Eventually, investments in accuracy be-
came, as expected, negatively associated with
change. The relationship between accuracy and
performance, however, confounded our expec-
tations, instead ofthe inverted U-shaped curve
we saw between accuracy and change, the rela-
tionship between accuracy and performance
turned out to be linear and negative. When it
came to performance, it seemed that any extra
effort spent on improving the accuracy of top
executives' knowledge about the environment
damaged ratber than improved performance.
In other words, as accuracy decreased, perfor-
. -^ -- mance got better - a result that seemed coun-
terintuitive.
We conducted a set of supplementary analy-
ses to follow up on that finding. We reasoned that perfor-
mance outcomes depend both on the degree of accuracy
and on the type of information being analyzed. For exam-
ple, it could be argued that executives who overestimate
an industry's volatility or complexity might waste re-
sources on improving their forecasts of many competi-
tors' prospects. On the other hand, overestimations of
growth trends or underestimations of complexity might
propel managers to actively pursue goals that would look
unattainable had they seen the environment in an accu-
rate light. As research has shown, top managers who un-
dertake difficult courses of action with enthusiasm, de-
termination, and confidence often set new rules in their
competitive environments and thereby enhance their
companies' performance.
We found significant positive correlations between
overestimations of industry growth and profitability, be-
tween overestimations of volatility and sales performance,
and between overestimations of complexity and sales and
profit outcomes. In other words, overestimating volatility,
growth trends, and complexity generally leads to greater
performance than underestimating them. For instance,
highly accurate perceptions of industry growth are asso-
ciated with the lowest profits. However, underestimating
growth trends improved profitability only slightly while
overestimating them resulted in much greater profits.
To gain a better understanding of the processes that
might underlie these results, we took a closer look at two
companies in our survey. In addition to analyzing their
survey answers, we looked at their annual reports and lok
filings as well as news reports published in the year we
conducted the survey. The two companies. Steady Steel
and Fast Steel (their true names have been disguised), are
HAKVAKU BUSINESS REVIEW

comparable because they operate in the same industry -
steel minimills - but they have very different performance
histories. Fast, as the numbers show, weathered the reces-
sion of the early 1990s much better than Steady did.
Yet this better performance seemed to owe little to the
perceptual accuracy of Fast's top managers. As shown in
the sidebar "A Tale of Two Companies," the survey re-
sponses from Fast's executives indicated that the com-
pany's overall environmental perceptions were only mod-
erately accurate. The only exception was for industry
complexity, which Fast's management overestimated.
The Effects of Accuracy*
The chart on the top shows the relationship between percep-
tual accuracy and organizational change. As predicted, the line
of best fit has an inverted U-shape, suggesting that returns to
accurate knowledge are initially positive, taper off, and then
turn negative. The chart on the bottom plots the relationship
between accuracy and performance. Here, the line of best fit
is straight and its slope is negative, suggesting that any extra
effort spent on improving senior executives' market knowledge
is wasted-even damaging.
high
Magnitude
ofchange
low
low high
Perceptual accuracy
high
Performance
(profit)
low
iOW high
Perceptual accuracy
*AII axes are scaled to reflect the range of values observed in the study and to be compara-
ble across the charts.
MAY 2003
The High Cost of Accurate Knowledge
Overall, Steady's executives were about as accurate as
Fast's, but their inaccuracies were in different areas.
Steady's leaders were more accurate about industry com-
plexity than Fast's executives were, but this was balanced
by a relative overestimation of volatility and a relative un-
derestimation of industry growth. Whereas Steady saw
the market for scrap steel as unstable - "shortages peri-
odically occur" - Fast Steel perceived the supply of raw
materials to be "adequate to operate the facilities." Steady
perceived its market to be "highly competitive," while Fast
saw only "moderate" or "considerable" competition and
therefore a more munificent environment. These differ-
ences are remarkable since both companies identified the
same environmental factors as driving competition: fairly
homogeneous supply markets for raw materials and en-
ergy and a highly cycl ical demand for steel from the man-
ufacturing and construction sectors.
The differences in perception and performance be-
tween the two companies fit well with the predictions of
our quantitative analysis. Fast Steel's overestimation of
complexity in a conventionally well-defined industry is
arguably what propelled it to focus on elaborating its own
business model, explore new technologies, and attempt
expansion into new product markets during the late 1980s
and 1990s. By contrast. Steady's more accurate assessment
of existing industry structures and overestimation of vol-
atility may well have contributed to its shying away from
taking radical steps. It remained confined to its conven-
tional, well-defined market and pursued a less-risky cost
leadership strategy.
Some may object to our findings on the grounds that
what matters most when it comes to perceiving environ-
mental attributes is not whether companies are accurate
about the past or the present, but whether they are accu-
rate about the future state ofthe environment. Logically,
one can only perceive and make sense of what has al-
ready occurred. If, however, accuracy is primarily relevant
for expectations and if industries change rapidly, our re-
sxilts for inaccuracy may mean simply that future expec-
tations are more important than past experience. Al-
though we could not assess this possibility conclusively
with our data, we were able to perform an indirect test.
We calculated a measure of "prospective accuracy" by
matching the perceptual measures from the survey with
archival measures for the years following the survey. We
found no significant correlation between prospective ac-
curacy and the profit or sales that followed. Clairvoyance,
it seems, does not guarantee future performance.
If Accuracy Doesn't Pay,
Then What Does?
Having shown that accuracy does not guarantee compet-
itive advantage, we tumed our attention to the effects of
top executives' interpretive frameworks. In our analysis.
The High Cost of Accurate Knowledge
we focused on interpretive orientations, or, in sim-
ple terms, mind-sets. We define an interpretive ori-
entation as a propensity to frame new situations
in a particular light. As psychologist Karl Weick de-
scribes in his 1995 book, Sensemaking in Organiza-
tions, a generalized interpretive orientation is a
"minimal sensible structure," consistent enough to
filter information and focus attention but loose
enough to allow improvisation and speedy adjust-
ments. Interpretive orientations can be compared
along a number of dimensions - for example, the
degree to which events are interpreted as threats
versus opportunities. For our study, however, we
have chosen to compare orientations along two di-
mensions that seem to underlie the categories of
threat and opportunity: high versus low controlla-
bility and positive versus negative expectations.
High Versus Low Controllability. Along this di-
mension, executives' attitudes toward situations
depend on the degree to which they feel these sit-
uations are inside or outside their companies' con-
trol. Their sense of controllability derives from
opinions about their companies' competencies
and available resources. Executives' control orien-
tations may have many efrects. On the one hand,
a strong sense that the environment can be con-
trolled might lead executives to believe that they
can afford to experiment and exploit new opportunities.
On the other hand, that sense of control might encourage
inactivity and decline, because executives may not recog-
nize opportunities when they come knocking or be will-
ing to change outdated mental models.
Positive Versus Negative Expectations. A positive ori-
entation implies enthusiasm about possibilities and a
sense of optimism in the company's abilities to overcome
challenges and obstacles. Events are seen as opportunities
rather than threats. As with controllability, the expecta-
tion orientation can play out in many ways. Top execu-
tives with a positive orientation may be more willing to
take risks and consider new and creative solutions. On the
other hand, those v*ntb negative expectations might be
more willing to assume risk because they feel they have
less to lose.
We obtained measures of control and expectations
through survey questions. (See again the sidebar "Survey
of Perceptions and Interpretations") We then explored
the relationship between the two types of orientation,
performance, and organizational change. The results
were striking. Of all the dimensions we investigated, gen-
eral interpretive orientations emerge as the strongest and
most consistent predictors of change and subsequent per-
formance. It seems that executive teams equipped with
the right interpretative orientations, and working with
only partly accurate perceptions of their environment,
are able to make decisions and act in a timely manner
SO
A Tale nfTwn
Companies
This table looks at the performance, environmental
perceptions, and interpretive orientations at two steel
minimill companies, which are considered comparable
insofar as they operate in the same industry. The com-
panies have radically different performance profiles, but
the accuracy of their executives'perceptions is similar.
The more important difference, it seems, is how top
executives interpret information. A bias toward positive
expectations and less controllability seems to have put
Fast Steel's performance ahead of Steady Steel's.
Survey response labels:
Very low = 5th percentile or below
Low = 6th - 25th percentile
Medium = 26th - 74th percentile
H igh ^ 75th - 94th percentile
Very high - 95th percentile or above
while maintaining a consistent strategy. In other words,
an interpretive orientation-unlike accurate intelligence-
can be a source of competitive advantage.
As the charts in the exhibit "The Benefits of Humble
Optimism"show, the less top executives in our sample felt
they were in control of their environment, the more likely
their companies were to change, and the better they per-
formed. We suspect this happened because leaders who
see inadequacies in their companies' competencies are
likely to pass that sense on to their employees, triggering
specific actions that counteract inertia and that increase
vigilance on the part of the entire organization. At the
same time, however, leaders who feel less in control should
not fall into the trap of pessimism; we found that positive
expectations were strongly associated with both increased
performance and change. This supports the theory that
systematically more positive interpretations ofthe com-
petitive environment add to a general sense of enthusi-
asm and persistence. Positive-minded leaders may also cre-
ate a context that fosters learning and encourages creative
solutions.
Our quantitative findings on interpretive orientations
are at least partly borne out in our case examples. As the
sidebar"A Tale of TWo Companies"reveals. Steady Steel's
leaders exhibit a greater sense of controllability than do
Fast Steel's, which surfaces, for example, in the claim by
Steady's CEO tbat be expects the business to remain strong
"regardless ofthe economy." The difference between the
HARVARD BUSINESS REVIEW
 Steady Steel
Performance at the Poor
Time ofthe Study • Profit trend 67% below the industry average
• Sales trend 12% below the industry average
Top Managers' Medium Accuracy
Perceptual Accuracy •Overestimation of volatility (high)
• Underestimation of growth (high)
• Underestimation of complexity (low)
Top Managers' Very High Controllability
Interpretive Low Positive Expectations
Orientations
Comparison "The purchase of scrap steel is highly competitive and.
of Statements shortages periodically occur." (lok, 1989)
on Volatility
on Growth Trends "The demand for steel products in the United States
sofLened during 1990 as a result ofthe steadily weakening
economy. Demand and selling prices fell off sharply..."
(Annual Report, 1990)
on Complexity "The Company competes in the [primary] market
primarily with several domestic minimill companies
within its market area."(iok,i989)
on Controllability "[CEO's name], president and chief executive officer,
said he expects the business to remain strong'regardless
of the economy!" {Wall Street journal, 1988)
"[CEO's name]:'We run full out and adjust the selling
price, so from our standpoint there are no changes in
)'5,1989)
on Posftiveness "...the severe recession in the industry in the northeastern
United States caused twoof our competitors to close
obsolete facilities in our home market area. However,
when operations were discontinued at each of these
locations, they sold off their existing inventories, further
exacerbating price erosion in an already weak market."
(Annual Report,i99i)
Companies' During the period of this study, Steady Steel used a
Emergent Strategies bundle of traditional cost-reduction strategies. The
company negotiated a discount on energy costs from
local government, increased the use of subcontractors,
renegotiated labor contracts, and modernized existing
plant equipment.
The company considered introducing radically new tech-
nologies butfirst decided to postpone their introduction
due to quality issues, eventually concluding that the
benefitsdid notjustify the risks.
Steady Steel sought to expand saies through pushing ex-
ports of its existing products and through offering addi-
tional products to its clients in the construction industry.
Steady Steel was depicted in the press as an efficiently
run, traditional minimill, aggressively focused on cost
leadership in its market segment
MAY 2003
Fast Steel
Good
• Profit trend 9% above the industry average
•Sales trend at the industry average
Medium Accuracy
• Underestimation of volatility (low)
• Underestimation of growth (low)
• Overesti mation of complexity (high)
High Controllability
Very High Positive Expectations
"Supplies of raw materials and energy have been, and
are expected tobe, adequate to operate the facilities."
(10k, 1990)
"Currently, with slower economic activity, we have
seen a lower demand for all of Fast's products"
(Annual Report, 1990)
"Considerable competition exists from numerous domes-
tic manufacturers and foreign imports." (lok, 1990)
"In spite ofthe large expenditures on plant and equip-
ment. Fast has maintained a strong financial position"
(Annual Report, 1990)
"These guys work, and I don't mean pushing paper
around...there is an incredible senseof humility and
cooperation right down through the ranks here,"
(Wall Street Transcript, 1989)
"We're going to take whatever the market can give us.
It will take some time until we're a real threat to the inte-
grateds.'adds fast's cha'nman" (Wall Street Journal, 1989)
"We're tenacious,'[manager's name] bragged in an
interview.'We're predators; we'll go after business like
piranhas!" {Toronto Star, 1993)
Fast Steel's trademark organizational strategy was ex-
treme decentralization of decision making. The goal was
to improve efficiency and quality by encouraging individ-
ual initiative and creativity at all levels. Local managers
enjoyed high autonomy and were encouraged to take
risks as long as things were moving in the right direction.
The company became a technology leader and trans-
formed the industry by introducing an innovative, untested
production process in the late 1980s. The move was risky,
as it required large investments with uncertain returns
and the threat of swift imitation by competitors if success-
ful. The technology had quality problems at first, but
Fast Steel found pragmatic solutions relatively quickly.
Partly as a result of technological advances. Fast Steel
entered new markets in the manufacturing sector that
were not traditionally served by minimills. It also started
an international expansion program by setting up sub-
sidiaries in low-cost countries.
Fast Steel was widely seen as the industry's technology
and cost leader, a company that revolutionized the
industry by thinking outside the box and by exploiting
opportunities earlier than others.
The High Cost of Accurate Knowledge

positive and negative expectations of the two executive
teams is even more marked. Steady's leaders score at the
low end of our sample while Fast's top management team
is among the five most positive. Steady consistently men-
tions more challenges and difficulties in its reports to
shareholders and often seems to interpret events nega-
tively. The closings of two competitors provide a good ex-
ample. Steady portrays this not as a positive opportunity
of reduced industry overcapacity but rather as a negative
The Benefits of Humble Optimism*
The chart on the top tracks the relationships between the
two types of interpretive orientations and change, while the
chart on the bottom tracks the relationship between the inter-
pretive orientations and performance. As shown, optimism
has a positive linear relationship with both change and perfor-
mance, while a senseof controllability has a negative linear
association. A high sense of controllability seems to have a
strong negative impact on change.
controllability positiveness
high
Magnitude
of change
threat of short-term pressure on prices. By contrast, Fast
seeks new opportunities in expansion and technology,
taking "whatever the market can give us." The emerging
pattern: Steady's executives, with a greater sense of con-
trol and low positiveness, remain reactive, sticking to the
existing strategic repertoire of cost leadership in a con-
fined market. Fast's leadership, with a lower control ori-
entation and a positive mind-set, aggressively seeks and
pursues new opportunities, both internally and in the
marketplace.
The cases suggest one way in which positive interpre-
tations come about. Fast Steel may have been more posi-
tive because it had experienced a number of past suc-
cesses and had received much pubUc attention for its
innovative style. By contrast, Steady had just emerged
from a long period of financial underperformance. But
the idea that past success affects interpretive orientations,
which in turn affect future performance, does not imply
that interpretive orientations become unimportant.
Steady posted a profit in the year the survey was con-
ducted, and Fast Steel posted its first two quarters of
losses in the following year, without any obvious change
in either executive team's interpretive style. One impor-
tant quality of interpretive orientations is that they are
"sticky" and do not change quickly with situational de-
mands. They can thus serve as a source of resilience that
helps maintain momentum amid intermittent setbacks
and difficulties. Equally important, desirable interpretive
orientations can be fostered, for example, by creating op-
portunities for early "small wins." Such early successes
create positive momentum that is then carried forward
and reinforced.
• • *

We don't mean to suggest in this article that accuracy

does not matter at all. Certainly, a company must have
a clear knowledge of the industry it operates in. What
low we question here is not the general value of perceptual
low high accuracy but rather its importance to a company's top
Interpretive orientations leadership as opposed to middle or junior managers. Our
findings suggest that perceptual accuracy at the very top
executive levels is actually a source of competitive disad-
vantage for most firms. The task of leaders is to manage
high
ambiguity and to mobilize action, not to store highly ac-
curate knowledge about their environment. The more
Performance effective way to improve the performance of a company
(profit) is to invest in how leaders shape their interpretive out-
looks. And therein lies a paradox. On the one hand, lead-
ers should be positive about opportunities. On the other
hand, they shouldn't be overly confident in their ability
low to control them. Perhaps the secret of good leadership
low high lies in how you manage that curious blend of pessimism
Interpretive orientations
and optimism. ^

*AII axes are scaled to reflect the range of values observed in the study and to be compara- Reprint R0305E
ble across the charts. To order, see page 131.

82 HARVARD BUSINESS REVIEW

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