The topic of our presentation is: What can competitive intelligence professionals learn from the CIA’s intelligence failures? More on our session here.

About the book: Constructing Cassandra conducts an inquiry into the intelligence failures at the CIA that resulted in four key strategic surprises experienced by the US: the Cuban Missile Crisis in 1962, the Iranian revolution of 1978, the collapse of the USSR in 1991, and the 9/11 terrorist attacks. While some of these events may seem distant, these surprises still play out today in US policy. Although there has been no shortage of studies exploring how intelligence failures can happen, none of the prevailing explanations has been able to provide a unified understanding of the phenomenon. Without that understanding, failures will happen again—with dramatic consequences.

The book brings culture and identity to the foreground to present a model of strategic surprise that focuses on the internal make-up the CIA. It also takes seriously those Cassandras who offered warnings, but were ignored. By providing this novel, unified model of strategic surprise—that links terrorist attacks to more conventional failures—this book offers the first deep and systematic exploration of the ultimate sources of the CIA’s intelligence failures, and points to ways to prevent future strategic surprises. For more information about the book, visit Stanford University Press’ site.

Previous Forbes pieces:

• Lady Gaga World President by 2030? Why the Forecasters So Often Get It Wrong
• “Market Armageddon Postponed”: Why Technology and the Price Mechanism will Prove the Scarcity Cassandras Wrong.
• Is Your Company Heading For a Cuban Missile Crisis? Steps to Make Sure Big Data is Working For You, Not Against You.
• What a Caveman Can Teach You About Strategy.
• Brace yourselves for the next banking crash — it’s coming soon!
• That’s All Folks: Why the Writing Is on the Wall at Microsoft.

These problems were recognized early.  Back in 1949, the nascent CIA’s famous Kent-Kendall debate was precisely about the so-called “intelligence-policy divide“. Sherman Kent, founding father of the CIA’s analytic arm, advocated a bright and stark line  between the analyst and the policy maker in order for the former to retain analytic objectivity.  Willmoore Kendall, his colleague, argued the contrary view, that only by being closely involved in the policy making process could the analyst really usefully contribute.  But from the distance the argument seems a bit abstract and one of the merits of Barnett’s reminder is to give a concrete example of the problem created by a purely analytic approach to intelligence.

The CIA’s Sherman Kent (L) and Willmoore Kendall (R)

First, such pretended intellectual virginity weakens analysis, because it compels analysts to describe what every other country in the world will do in response to an unfolding series of events while essentially keeping the United States itself static.  Only if analysts are allowed to imagine possible US moves – and this can only be done with policy makers – can a really dynamic approach to analysis be achieved.  Clearly, in the midst of this one could come close to advocacy, Kent school’s greatest heresy.

Your Holiness, call me a heretic, but I cannot analyze without advocacy!

Second, and more subtly, according to Barnett, all things being equal an illusory intelligence-policy divide leads analysts to imagine the future as a straight continuation of the present. But clearly, all other things are not equal, and analysis should not just be about projecting the trends but about evaluating the possible strategic interplay between policymakers and the objects of their policies.

In the end, Barnett advocates a different approach to thinking about the future, one that is more about shaping than predicting. Whereas most analysts define their professional environment as “futures to be avoided,” he prefers to focus on a future “worth creating”.   He concludes “What I want to do is embrace that future and shape it from within”.

This approach is something Milo and I have also long advocated in this blog and in our teaching:  let’s largely move away from prediction – it doesn’t work anyway – and focus on what we can change.  With their deterministic view and impression of ineluctable trends, forecasting exercises really can be the enemy of human action. Far from enlightening us about possible futures, predictions can cloud our thinking and limit our action. The fact that in most human spheres they almost invariably end up horribly off the mark is an additional reason not to even bother reading them. Instead of predicting, put your energy into shaping.  And should you decide to do extensive analysis first, don’t kid yourself that you’re not embedding advocacy in very line.

Barnett’s note can be found here, it is worth reading. The Kent-Kendall debate is described in Jack Davis’ excellent article available here. On forecasting, see our article “We have met the enemy and he is, er, forecasting.”

If you enjoyed this post, why not subscribe to our blog?

Previous Forbes pieces:

• “Market Armageddon Postponed”: Why Technology and the Price Mechanism will Prove the Scarcity Cassandras Wrong.
• Is Your Company Heading For a Cuban Missile Crisis? Steps to Make Sure Big Data is Working For You, Not Against You.
• What a Caveman Can Teach You About Strategy.
• Brace yourselves for the next banking crash — it’s coming soon!
• That’s All Folks: Why the Writing Is on the Wall at Microsoft.

We may be looking for you.

If you’re reading this blog, you’re probably the sort of person that the US Intelligence Advanced Research Projects Activity (IARPA) is looking for:   IARPA is now looking for new participants for its online research study, Forecasting World Events.

The Forecasting World Events study involves making predictions about current issues that you select from various categories, like international relations, global politics, economics, business, and other areas.  If you’d like to try to participate, click HERE.

Once you sign up at the website, they will send you a background questionnaire.   After you complete the questionnaire, they will send you an e-mail to let you know if you have been selected.  The initial questionnaire only takes about 20 minutes, and the prediction study itself is really interesting and quite quick to do every few weeks.

PS To understand the methodological background of the study, we recommend Tetlock’s Expert Political Judgment:  How Good Is It? How Can We Know.

PPS If you enjoyed this post, why not subscribe to our blog?  Thanks.

The Foundations of Lasting Strategy

Demography is the study of human numbers: Population size, Population composition, and trends of change of population.  Auguste Comte, the nineteenth-century French mathematician and sociologist, is widely credited with the dictum “Demography is destiny.” By that, he meant two things:  that demographic forces can alter the realm of the possible, both politically and economically, and that demographic considerations can (but are not always required to) alter the complex strategic balance among, and within, countries.  How does it do so?

Demographic change (i.e. shifts in human numbers, ages and location), affects the long term supply of human capital, influencing everything from labor and pension costs to the availability of creative people (a key component of what economists call Total Factor Productivity). Many of the trends that marketing firms highlight (e.g. obesity, older consumers, etc.) can be traced back to demographic change. Whatever your industry, it doesn’t take long to realize that such trends will affect it on a strategic level.  That’s why such figures are the basis for so many market-entry decisions; what we find in our consulting, however, is that once a market is entered, demographic change becomes an after-thought or – even worse  - gets assumed away for a decade or more!

In the “struggle for mastery” in modern Europe, think of the role of population in the ascendance of Germany over France during the nineteenth century:  In 1801 there were 11 French for every 10 Germans; By 1900 there were 15 Germans for every 10 French.  Likewise, is it conceivable that the United States would exert the economic, political, and military influence of today if its population, instead of surging over 50-fold in two centuries, had simply doubled — as actually happened for France?

On the positive side for the practical strategist, compared to other geostrategic changes — social, economic, political, technological — demographic changes are very slow and exceptionally regular. Demographic change is only sharp and discontinuous in times of utter upheaval and catastrophe. Why? Because everybody who is going to be, for example, over 18 in 2027 has already been born. Migration happens, but rarely in ways that change the fundamental outlook for an economy or country very rapidly (though it has massive impacts over time:  think about the growing Hispanization of the United States).   Even demographic trends rooted in technology (e.g. healthcare, birth control and sanitation), have a quite gradual impact on human populations.

Similarly, demographic trends are very hard to reverse.  The current and impending “graying” of Asia and Europe that we will discuss below is an all but “done deal”:  It is propelled by the basic arithmetic of longer lives and smaller families throughout Asia.  These trends have been developing in these regions for decades if not for generations, and the same is true for population growth projections overall.

If you live in the US or the EU, get used to it!

So what do we know about the demographic strategic context of the future?  Let’s look at near certainties.  First,  there will be more people:  by 2050, the UN Population division expects human populations to stabilize at 9.15 billion, and then start to decline.  But – and this is crucial – this growth will be highly uneven:  there will be concentrations of old people in both the rich and the poor world. We also know that a lot more people will be urban, and everyone will need to eat, drink, and use energy.   Moreover, a lot of these people will move around (immigrate, emigrate and just plan move in search of better lives).

It is somewhat counter-intuitive to realize that in the coming decades, we will simultaneous witness something entirely new:  large, low-birthrate populations that steadily contract, especially in “the West”.  There are already 18 countries in the world with contracting populations. By 2050 there will be 44, the vast majority of them in Europe… As a result, in the words of historian Niall Ferguson, we are about to witness “the greatest sustained reduction in European population since the Black Death of the fourteenth century.”  People ask “won’t immigration counter that?”   The hard truth is that immigration on a scale likely to make a measurable impact on that dimension will likely be resisted, or at least give rise to major social and political friction. From a business point of view, however, a graying population offers tremendous opportunities, in the service business for instance. Old people need specialized services, drugs, and doctors and nurses. They also need medical devices and equipment. They tend to be richer than young people at the beginning of their working life, so they control vast wealth, and hence have political influence (they don’t like inflation, and if inflation control reduces growth, then so be it).

You though PORTER identified the drivers of strategy? Think again!

But ageing is not universal. Some countries are still growing. Saudi Arabia, for instance, where 60% of the population is under the age of 21, but an estimated 35% among young men in their 20s are jobless (The Economist).  Long term consequences of such socio-demographic trends are difficult to anticipate.

While starting in the “rich” world, global aging is occurring almost everywhere. Some countries (most notably China) will become old before becoming rich, which means that funding retirement packages for old people will be an immense challenge. At the same time, Europe becomes old while getting less and less rich, and as a result has a similar problem: unfunded promises, ie liabilities.

China will be old long before it is rich (even by Mexican standards).

Urbanization

In parallel, the world’s population is urbanizing. An important tipping point occurred around 2007. In that year, for the first time in history, more people lived in cities than the countryside. By the 2030s, five billion of the world’s eight billion people will live in cities. Fully two billion of them will inhabit the great urban slums of the Middle East, Africa, and Asia. Most of the urbanization, however, is unplanned, leading to seemingly intractable problems in terms of basic equipment and living conditions, as visitors to Mumbai can attest, for instance. Growing urbanization is a boon for building industries, transportation and services in general but tend to put a strain on natural resources and ecosystems.

Urbanization: planned or unplanned, it is happening.

While slow, demographic developments can be both dramatic and utterly unplanned.  Take selective abortion. In several parts of Asia, India and China, parents prefer to have boys, not girls. Modern technology such as sonograms or ultrasound is used to detect female fetuses, and then abort them. This has been going on for decades and is not illegal in most countries.  Nevertheless, these Asian countries now have badly distorted sex ratios.

Asia: from Trade Surplus to Male Surplus

According to The Economist, there are now 914 girls for 1,000 boys, down from 945 in 1981 in India.  Social consequences have not been long in coming:  China sees more wage inflation among young women factory workers than young men construction workers. More dramatically, girls are now kidnapped or bought from parents by brokers and sent to places short of them to be forced into marriage.  And remember – Today’s bride shortage is tomorrow’s caregiver shortage.

What’s more, in high sex ratio societies, “surplus males” share several characteristics: they have low socio-economic status, little or no bargaining power in the marriage market, are un- or underemployed, live a transient lifestyle with few ties to their community, and live and socialize with other “bare branches” creating a distinctive bachelor subculture. In addition, history suggests that compared with other males in society, bare branches will be prone to seek satisfaction through vice and violence. A way to avoid such situations is to develop immigration, but that is, in such places as in Europe, a sensitive issue.

An important thing is not to consider demographic developments only in terms of threats. Many of them offer tremendous opportunities.

Working-age Populations: not all BRICs are created equal

Take China for instance. As a result of the one-child policy, the number of working age adults is now declining. This decline creates tension on the labor market, resulting in salary raises. This, on the one hand, makes Chinese exports less and less competitive to the point that it now becomes more profitable for US firms to manufacture in Mexico (or even in the US giving rise to ‘re-shoring’) than in China. On the other hand, rising salaries creates a growing internal market and boosts domestic consumption, allowing for a much-needed rebalancing of the Chinese economy. Clearly, the impact on businesses around the world will be huge.  New opportunities for Mexican manufacturers, resulting in more jobs and revenues, and new opportunities for foreign firms to sell to the growing Chinese middle class. India will have the opposite problem: it will likely provide the largest increase to the global labor force over the next decade—Goldman Sachs estimate an additional… 110 million workers by 2020 while at the same time India lacks educated professionals such as architects in large numbers. Unless India is able to sustain a high growth rate over this period, significant social problems may arise. However, a high growth rate in turn creates strains on the fragile Indian infrastructure.

But lest you think that demographic change is the be all and end all of geostrategic thinking, remember too that demographic factors blend into and impact other Geopolitical drivers.   Consider, for example, the link between rising populations, food and energy.  Consider arable land, energy and the demographic trends above:

• Energy is needed for processing crops into food, and then for transporting more food to growing cities
• Energy is also needed for increased refrigeration in cities
• Biofuels compete for the same land and water as food, but growing populations demand more fuels
• Cities also strain local ground water supplies, etc.
• Fertilizers may make land more productive, but also require energy
• Energy is needed for irrigation, crop drying, and heating

These are only a few elements from which we try to deduce possible consequences of the demographic changes above. Of course, these are not predictions.  Demography is a tricky science because people tend to change behaviors when not expected, with consequences 10 or 20 years down the road.  But because these consequences are often massive, it is essential that they are integrated into your strategy.

In the next post of this series, we will look at geography, the second geopolitical driver of strategy.

These four questions are:

• What do we know for sure – What is Known (K)? In particular, one of the things you want to look at is the origin of the issue: when and how did it start?  When did it become an issue for you? If the information is about a new technology or a scientific discovery, ask what is really known, not what seems to be known. Agreement even about what one actually knows can prove surprisingly difficult to achieve, in particular if you read a breaking news story.
• What can we safely Presume (P)? These are the assumptions that we can safely make about the issue. We presume competitor X will sue us for patent infringement if we introduce our product. We presume there is strong customer demand for the product.
• What is Unknown (U1)? These things that are unknown by us but are “knowable” in a real sense by someone.  They may be  secrets that somebody is potentially trying to hide from us (We don’t know if competitor X will introduce their own version of product Y), or simply some category of expert knowledge (can our product be produced with a 3D printer?)  You can unveil these by finding the right person or source.
• What is Unknowable (U2)? These are the mysteries which nobody can know how they will evolve, e.g. consumer acceptance of chemically-enhanced language learning, China next year’s GDP, or a the decision of a monetary policy committee next week.  This is a particularly critical area to explore with regards to market uncertainties. No amount of market research can tell us whether consumers will indeed adopt chemically-enhanced language learning, because this has never existed in the past and market research is essentially backward-looking. Here the difficulty is not that we cannot find information, or that someone is trying to keep that information from us, but that information simply doesn’t exist. It is called true uncertainty in a reference to the work of Nobel Prize winner Frank Knight.  They are the “known unknowns” (though you will always find apostles of false certainty).

An open debate about what data goes in each column – especially what is Unknown versus what is simply Unknowable at this moment – uncovers a huge number of assumptions and also exposes strategists’ differing rules of evidence.  In our experience with students and clients, the most productive debate often occurs about the Known column, which is in theory the easiest to pin down.  This effort to understand more deeply the present is, in our view, more valuable than most efforts to plumb the depths of uncertain futures. It is extremely important at this stage to make all assumptions explicit. Any time “lost” at this stage will be recouped later when decision time comes and doubts surface.

But the KPUU framework is more than a process or tool for thinking.  It also creates an audit trail, an explicit, shared inventory of knowledge about the present, including embedded assumptions.  As you work with KPUU, you’ll realize that people disagree about what goes in each column, and that’s OK! In fact, the value of creating the framework also lies in the discussion that takes place among the team. The idea is not to strive for perfection, for that is an elusive goal, but, again, to have an explicit process for sharing of knowledge, including on things the team disagrees about. In fact, we recommend that people first do their own draft KPUU entries alone and then compare and debate their entries among the team.

The framework also elicits suggestions and initiates actions to “Drive data to the left”, in other words move things from the Presumed, and Unknown columns into the Known columns. You can also try to move things from Unknowable to Known by breaking information into smaller bits. For instance, consumer-acceptance of chemically-enhanced language learning might be unknowable, but laws related to the issue might be known or knowable.  We are always surprised by how often people from different disciplines (e.g. Engineers versus Finance versus Marketing) can collaborate to think of ways to make the “Unknowable” at least “Unknown” and to nail down stuff that starts as “Presumed” into “Known”.

Where to go from here, then? Once you’ve filled the table, here is how you can look at the result.

• For the Known information, ask the following question: what does it mean to me? For instance, you know that competitor X has hired an expert in a particular technology. When trying to gauge competitors’ motives based on available information, make sure your don’t fall prey to identity bias:  take the competitor’s perspective, not yours. Understanding how a fact is likely to impact you can be very complex, as it requires you to establish lines of causality on several levels. How would your business be affected by a major earthquake in Istanbul? By a tripling of the price of aluminum? By exploding piracy in the strait of Malacca?
• For the Presumed information, which really is a set of assumptions, ask: how do we go about examining these assumptions? This should not be conceived of purely as an intellectual exercise:  part of how you test assumptions is about taking action. For instance, run a market trial, develop a prototype, study analog situations, etc. More generally, one should be very careful and make assumptions explicit.
• For the Unknown information, assess if it is important to you, and if so, ask how to discover it:  who has the answer? How can you get to them? Note that your values are important in defining what you are prepared, and not prepared to do in the case of secrets.  For instance, would you be comfortable in engaging in illegal espionage or bribing to find out what the “opposition” is up to for this secret?  In the world of intelligence analysis, any method of collection is valid, but in business this is obviously not the case.  Just ask the former Chairman of McKinsey.
  

  Rajat Gupta knows now that some things are better left Unknown

• For the Unknowable information, you may decide to either work around or to actively shape the situation. For instance, the rise of social networks is a mystery in the sense that nobody knows where it’s going, but it is nevertheless affecting of millions of people’s actions. Hence the question is not to ‘discover’ the secret about social network, but to determine how you fit in this process and how you can influence its evolution to your advantage (or at the very least work around its effects if it is harming your business). In other cases, such as so-called Emerging Markets, nobody knows where they are going, the option is to actively shape them. That is where strategists can learn from entrepreneurs:  entrepreneurs deal with uncertain environments by shaping them through a logic called ‘effectuation’: they take their available means and create ties with stakeholders to control where the environment is going. Hence, taking a cue from entrepreneurs, you might think of working through unknowable environments by tying up with partners. For instance, instead of trying to guess whether electric cars will finally take off for good (they’ve been around and trying since 1838), work with a partner who has a national network, say a supermarket, to make charging stations available.

What the steps above suggest is that the KPUU framework, despite its simplicity, will move you towards combining thinking and action. Indeed, KPUU is really strategic thinking in action. Instead of seeing strategy as a sequential process of thinking, then acting, it sees thinking and acting as interwoven.  Assumptions and embedded hypotheses are being tested through action. Unknown information triggers action to learn. Unknowable information leads to design activities to shape the environment. These actions generate information and feed the framework back in return. And it is social: The KPUU works best as a team effort, especially with a diverse team.

In our view, only when one can clearly answer in detail “What is going on?”, followed by the question “What does it mean?” can the various options for “What should we do?” be considered.  What we often see is immense efforts put into prediction instead of a detailed understanding of the present.

Finally, note that the only forward-looking question in this framework for non-predictive strategy is the final one, and it is focused internally:  ”What should we do?”, not “What will happen?” or  ”What will the world be like?”, etc.

If you enjoyed this post, why not sign up for regular updates of our blog?

Big data evidence hiding in plain sight

The rise of big data – the ability to gather massive amounts of information about both environment and operations – rests on the assumption that having more data gives organizations better control and the ability to avoid nasty surprises. It doesn’t. To understand why, consider the Cuba missile crisis that started exactly 50 years ago today.

Read more on our latest Forbes piece here.

For regular updates, why not subscribe to our blog?