“Managing the Unexpected” explores how the organization can handle the unexpected.  To do so, Weick and Sutcliffe chose to study organizations that are specifically created with that end in mind, which they call High-Reliability Organizations (HRO):  firefighters, crew of a submarine, the control center of a nuclear plant, etc. What principles do these organizations implement to operate?

Weick and Sutcliffe find that to operate successfully, HROs implement five principles:

1. An interest for failure:  HROs consider any failure, however minor, with interest.  This is because they know that minor incidents can be an indicator of more serious problems to come.  For example, in the Union Carbide chemical accident in Bhopal in 1984, the manuals for the staff were in English, a language that workers generally do not speak in India.  HROs encourage the reporting of errors and problems, however minor, and analyze in order to fuel their learning.
2. A reluctance to simplify:  Senior management is often to focused on a few key summary indicators.  Instead, HROs try to have different points of view, develop different information sources, and are wary of similarities that can be misleading.  In the Cerro Grande fire in 2000 (another initially minor fire that quickly became huge, consuming in the end nearly 20,000 hectares of forest, that needed 1,000 firefighters to extinguish, and caused $1 billion in damage), the post-incident report showed that the field team and the central command did not have the same understanding of the scale used to indicate the severity of the fire, and that this scale was too simple.  As a result, the severity of the fire was not immediately recognized by the central command and valuable time was lost with dramatic consequences.
3. A sensitivity to operations:  The highest hierarchical levels of HROs never lose contact with the operations and do not make the otherwise usual distinction between decision – the privy of top management – and implementation – left to the subordinates.
4. A commitment to longevity and resilience:  Resilience is defined as the ability of an organization to maintain or regain a state dynamically stable for continuing operations after a major shock or stress continuously.  With HROs, resilience is based on the ability to manage events in an active way to learn systematically from their action, to train their staff in continuing to speculate freely on possible problems.
5. Respect for the expertise:  In a crisis situation, HROs empower their experts to make the decisions they deem necessary regardless of any hierarchical level.  Expert here means specialists who have earned the respect of their peers, not self-proclaimed experts. Staff on the ground can make decisions without waiting for approval by the hierarchy.  Going further, one could say that the hierarchy prevails in normal times, but it disappears behind the expertise in crisis.

In summary, Weick and Sutcliffe attribute the success of HRO to their efforts to act in a mindful way.  By this they mean that the HRO are organizing to be able to notice the unexpected when it occurs and to stop its development.  If it is not possible, they contain the impact, and if that is not possible either, they are able to recover and resume normal functioning quickly.

One limitation of the book is that its applicability is limited to certain organizations.  Weick and Sutcliffe try to convince us that managing an aircraft carrier is the same as running a business, but one can be a bit skeptical.  It is rare that your business is threatened by a missile, for instance, and the commander of a carrier does not have to earn a return on capital. In addition, these organizations have different performance criteria:  for a nuclear power plant safety is paramount, as the consequences of an accident can be huge, as we have seen with Fukushima.  In a business, such consequences are usually less severe, and economic performance is the primary objective, security being one of the parameters.  One can also argue that a company faces a  much larger specter of potential unexpected situations than a team of firefighters.  Many elements are unexpected in the life of a firefighter, but the unexpected happens in a relatively limited space of possible ‘knowns’.  HROs face surprises, but not uncertainty or black swans.  In addition, many of these organizations are in a strategic environment that is relatively clear, simple and above all stable.  Hence their focus is essentially operational, including at the higher levels of the organization.  In a more ‘normal’ organization such as a company, management must also focus on strategy, and therefore necessarily can have less attention for the operation.  Rather, it is precisely the balance between the two, and especially their symbiosis, which is the difficulty of managing a ‘normal’ business.

One aspect of this topic that is not mentioned by Weick and Sutcliffe is optimization. “Optimal” for most businesses implies a degree of robustness and resilience that has gotten lost through an obsession with what is easily measured – immediate cost. We can see the dangers of this approach for HRO, but also more generally for more normal organizations. Optimization as cost cutting leaves no room for surprise; one single incident, and the consequences can be catastrophic. For instance, Apple has optimized its supply chain and controlled its costs by having one single factory, located in China. If something happens there, the firm would immediately suffer, with no back-up plan. In the light of Weick and Sutcliffe’s work on surprise, we would therefore argue for a different kind of optimization, one that would take the possibility of surprises into account, and hence take a broader view. Having a back-up in sub-optimal in the best case scenario, but it’s optimal overall, because surprises do indeed happen.

Despite these limitations, the five principles outlined in the book are very interesting and can be applied in many business situations. “Managing the Unexpected” is a useful contribution to the theme of managing the unexpected and, to a lesser extent, the uncertain.

The book at Amazon: Managing the unexpected. For more on the topic of surprises and black swans, you can read our post “Welcome to Extremistan“.

While the majority of the research explains strategic surprises (such as September 11) with psychological, bureaucratic or cybernetic (absence of detection of weak signals for example) models, an in-depth research on more than 50 years of the CIA’s history shows that the origin of strategic surprises often lies with the characteristics of identity and culture of the organization.  This research was started by Milo a few years ago, and we now pursue it together.  We show how the CIA was the victim of several strategic surprises, and that these surprises are largely explained by the social construction of the organization: whom it recruits, how it trains agents and analysts, how it develops its culture, etc.  In essence, what an organization is surprised by depends on its identity. After presenting the finding about the CIA, we will discuss what lessons can be drawn from these results for businesses, particularly in the field of innovation and strategy.  We will make the case that here too, the difficulties are often cultural, and results can be improved using this mode of analysis.

If you are interested in the conference, please contact us.

Prediction asks  to what extent does my approach rely on a forecast of the future environment. Strong prediction corresponds to either a planning-type approach - I create a detailed prediction of the future before initiating action – or a vision type:  I imagine the future and I strive to make this vision a reality.  Low prediction corresponds to a more adaptive approach:  I do not try to predict the future environment, but instead I move on and I adapt to changes along the way.
Control asks how I can control the evolution of my environment.  The over-arching assumption of classic strategy is that the firm has little influence on its environment, which is for the most part given (or “exogenous”).  All a firm can do is to find a place in this environment (planning /positioning) or adapt when it changes (adaptation).  Hence the importance of the notion of “fit” that the field insists upon (e.g. Michael Porter in 1996).  On the opposite side of the spectrum, the field of entrepreneurship observes that a firm can change its environment in profound ways, sometimes from an ex ante defined vision, or through the logic of future-agnostic gradual transformation of the environment.  There are many examples of entrepreneurs starting with odds apparently stacked against them and completely transforming their environments:  Michael Dell, Richard Branson, Sam Walton, to name just a few.

So there are four possible approaches, illustrated in the figure below:

What to do next? Prediction vs Control (Wiltbank et al, 2006)

Let’s review these approaches.

Strong prediction, strong control (top right):  in this configuration, I am a visionary, I have a strong vision of the future environment and I am committed to making this vision a reality through my actions because I am able, or I think I am able, to change the environment.  This configuration is assumed by strategy practices that take a vision and mission as a starting point.

Strong prediction, low control (top left):  In this configuration, I develop a strong vision of the future market, but I am basically unable to influence it significantly.  The paradigm is that corresponding to classical strategy, planning, based primarily on the discovery of a possible acceptable position (fit) for my firm in an environment over which I have little influence.  Therefore, the quality of my prediction is essential, and most of the strategic work is devoted to it (this phase is called strategic analysis).  If I get my prediction right, I succeed.  If I get it wrong, then I am in trouble; hence this strategy is also fragile, especially in uncertain and turbulent environments.  Note that for spectacular success, such strategies depend on a unique ability to make an accurate prediction, or you’re simply one more trend-follower.

Low prediction, low control (bottom left):  As in the previous configuration, I am a “taker” of the environment, about which I do not develop a vision or a prediction.  But I can not exert any influence on it either.  It is part of classic strategy, but upgraded to handle the case of industries affected by turbulence, such as high-tech sector.  The paradigm is that of adjustment or trial and error.  The key to success in this configuration is flexibility, i.e. the ability to adapt to a new situation quickly and at low-cost.  While this approach is popular (especially in today’s seemingly unpredictable world), its limitation is that adaptation by definition reactive, i.e. taking the risk of always being late.  This is because most reliable indicators are lagging, and because it takes time to react, however nimble one may be.  Also, being purely reactive means taking the risk of not having the right assets (knowledge, experience) at the right time. As such, adaptation is important, but it cannot be a firm’s sole approach in the long run.

Low prediction, strong control (bottom right):  Most interesting is the final configuration, in which I do not develop vision or prediction of the future environment, but I nonetheless seek to exercise a strong control on its evolution.  This can be done through partnerships, coalitions, influence on standards, etc.  The approach is said to be transformative, because in it I transform (at least in part) my environment, if only to a limited extent.  More specifically, I co-create it with selected stakeholders.  The approach – which has much in common with “integrated strategy” – corresponds to Effectuation, a theory of entrepreneurship.  Effectuation describes how entrepreneurs create new markets when faced with a situation of strong uncertainty.  It is this non-predictive approach to strategy that today offers the most prospects for strategy development, and it also works well for large companies:  they can learn from entrepreneurs who, after all, are the experts in dealing with uncertainty.  We will develop the concept of non-predictive strategy in future posts.

They’re also unlikely to gain a decisive edge by combining the daily parade of conventional economic data with stale “strategic” frameworks like the BCG Matrix (which dates back to 1968), Porter’s Five Forces (created in 1979), or Value Chain Analysis (introduced in 1985).   Anyone who has studied business in the last 30 years – including your competition – uses these.   They also probably read the same newspapers and buy the same economic data.   In short, the old-school “Business Strategy 101” toolkit is like a white shirt in your closet:  always safe, sometimes useful, but not a decisive business edge.   Face it:  apart from their other limitations (see below), these old strategy models are fully depreciated, and to compete is not to imitate.

Fully Depreciated Thinking

To gain a competitive advantage in today’s world, you have to do more.  In my view, that “more” starts by gaining an understanding of what actually constitutes business strategy, i.e. understanding the deep, structural forces that bear on the long-term success of firms, and how these forces can be engaged and harnessed.  In the classes that I teach at IE, I argue that these deep forces are geopolitical.  The metaphor that I use to explain my approach is that geopolitics shapes the climate of business, whereas the daily news and conventional economics – even macroeconomics – simply address the weather of business.

What makes a truly strategic understanding of business hard to achieve is that much of what passes for corporate strategy is actually tactics.  The same goes for much of the advice dispensed by illustrious strategy consulting firms.  “Strategy” sounds more important than “tactics,” so everyone calls their analysis and recommendations strategy, and then moves on to dispensing advice.  What may sound like a linguistic quibble, however, is crucial because the distinction between these two words bears directly on how you think about building a source of sustainable advantage for your business.

As I related here, we get the word “strategy” from the Greek word strategos (στρατηγός), which has the literal meaning “army leader”.  In the Classical context, however, a strategos was someone who was both a military general and a civilian politician.  In other words, a strategos was expected to employ every aspect of power at his command in pursuit of victory.  He was charged with understanding and harnessing the full gamut of structural forces that affected his city-state’s future.  In contrast, the word “tactics”, comes from the Greek taktike (τακτική); it was a far more narrow term that encompassed only how an army was organized.

To return to today:  traditional business “strategy” largely grew out of Economics departments.  Like a general who thinks only of narrow military matters, economists almost by definition deal in market-based taktike; they treat the larger “rules of the game” as fixed, or at least outside of their purview.  They tend to call anything that disturbs the holy trinity of customers, competitors and suppliers or other market-based factors (e.g. NGOs, new regulations, or even an invention), an “exogenous factor”.  (Exogenous is another Greek word. It is used in Economics to mean “stuff we don’t want to talk about”).  But by taking deep structures for granted, and by assuming away numerous other natural and human factors, much of reality ends up outside a business model!

In my view, if you address only economically-defined market forces, you are by definition engaged in a tactical business discussion.  Sometimes that’s OK – tactics are important!  The problem is, calling tactics “strategy” keeps truly strategic matters from moving to the top of the business agenda while there is still time to craft a long-term response.

So where should one begin to think about strategy?  I suggest that strategic thinking should begin at the level of Geostrategy.  Geostrategy looks at how geopolitical factors inform, constrain, and affect business over the long term.

For convenience, you can place these geopolitical forces into four categories that interact, evolve and change over time:  Demographics, Geography, Technology, and Culture.  It is “climate change” at the level of these geopolitical forces – and especially the interaction among them – that create the economic and political “weather” of your firm.  They’re where true strategy begins.  Let’s briefly look at each.

The Foundations of Lasting Strategy

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.

Geography, the next factor, is not less important for being both pervasive and obvious. By geography, we mean simply the location of resources, and the routes between them and their consumers. Note, however, that “geography” defined in this manner isn’t fixed – the relative importance of different resources and routes shifts over time, and these shifts have economic impacts.  Actual climate change also has an impact on business, and is another reason that we speak of geography as a geostrategic “force” rather than as a constant.  If you’re not sure that this matters to your corporate strategy, ask yourself if energy and commodity prices have an impact on your firm.  If the answer’s yes, then ultimately changing resources and routes should inform your strategy.

The third factor, Technology, is a key and widely-recognized driver for many corporate strategies.  Technology is also one of the reasons why geography can be said to shift, as Technology changes the importance of locations and resources, and the routes between them.   Technology affects demography in unexpected ways, too.  “The Pill” is an obvious example, but how many people anticipated that a device originally developed in the 1950s to find cracks in ships’ hulls (ultrasound) would have a huge impact on the gender mix in Asia five decades later?

Technology also dramatically influences our fourth factor, Culture (including political culture).   People tend to think of culture as relatively fixed and technology as changing, but viewed decade by decade, cultural and political factors move rapidly and the business impact can be enormous.  Think of the recent “Arab Spring”, and then of the role that new social media played in it.  Now ask firms in the region how well traditional business strategy frameworks work to help them make sense of their current business issues!  Alternatively, consider the impact of national culture on business innovation, or even marketing.  Clearly, cultural shifts change economic patterns. As such, your strategies should link to them in sensible ways.

Integrated strategy – also known as non-market strategy – is where these four broad geostrategic factors intersect strategy at the level of the individual firm.  By considering actors beyond the traditional economics-based “market” and putting them into the core of a firm’s business model, Integrated Strategy operationalizes geostrategic factors. This is because non-market issues and actors are the structural “transmission belts” through which geopolitical factors have an effect on firms.  As demographics, geography, technology and cultures change and evolve, non-market actors – governments, NGOs, supranational regulators, etc. – enter a firm’s strategic environment and impact their long-term ability to create and retain value.  That is why the “toolkit” for doing Integrated Strategy draws upon ideas from sources as diverse as Political Science, Sociology, and even the Intelligence Community.  The relationship between Geostrategy, Integrated Strategy, and old-school strategy is illustrated below.

Tactics, Integrated Strategy, and Geostrategy

In short, to do lasting strategy, first consider trends in the four geostrategic forces enumerated above, and then formulate an Integrated Strategy that accounts for and engages the non-market issues and actors that embody those trends.  Anything else is tactics, and won’t endure.

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When we make a forecast, we usually explicitly or implicitly base it on an assumption of continuity in a statistical series. For example, a company building its sales forecast for next year considers past sales, estimates a trend based on these sales, makes some adjustments based on current circumstances and then generates a sales forecast.  The hypothesis (or rather assumption, as it is rarely explicit) in this process is that each additional year is not fundamentally different from the previous years. In other words, the distribution of possible values ​​for next year’s sales is Gaussian (or “normal”): the probability that sales are the same is very high; the probability of an extreme variation (doubling or dropping to zero) is very low. In fact, the higher the envisaged variation, the lower the probability that such variation will occur.  As a result, it is reasonable to discard extreme values in the forecasts:  no marketing director is working on an assumption of sales dropping to zero.

Now, the assumption that a Gaussian-shaped curve’s fit with a potential distribution of outcomes will be the best fit is just that: an assumption.  It is based simply on observation of the past. Never before have our sales dropped by 20%, 50% let alone 100%. 10, 20 or 30 years of data can confirm this (observation of the past on a large number of data). But this is only an observation of the past, not a law of physics. Now, if we reason theoretically, not historically, on sales trends, we must recognize that there are many situations in which sales can vary widely. A sudden boycott of our products, for example (Danish dairy products in the Middle East after the Muhammad cartoons), a tidal wave in Japan, which deprives us of an essential supplier, a technological breakthrough that makes our products obsolete (NCR in 1971), the collapse of the Euro, etc. Suddenly deprived of oxygen, our sales are collapsing.

This is the black swan.  The reason is simple: sales, like many statistical series, do not follow a Gaussian distribution. The probability of a large variation may be relatively low, but the reality is that in fact it cannot be calculated, because the distribution is unknown and cannot be estimated (this is what economist Frank Knight calls true uncertainty). We can thus be in a year in which the extreme value radically changes the historical distribution. We are in the domain of “fat tails”, ie unlike normally distributed series, high values can have a high probability of occurring. For example, in finance, Taleb noted that 99% of the total variation in the value of portfolios of derivatives between 1988 and 2008 (20 years) occurred in one day, when the European Monetary System collapsed in 1992. Taleb calls environments prone to black swans “Extremistan”.

Extremistan is the area in which a value can change dramatically the sheer scale of the distribution (mean, standard deviation). For example, if you take 10 people and calculate the average of their wealth, it is very likely that if you add a 11th person, the new average will be very different. If you add Bill Gates, a billionaire, the average literally explodes to the point that the other values ​​become negligible, and the standard deviation also explodes. If you do the test at the Davos summit, the standard deviation will be lower. If, on the contrary, you measure the average height of your subjects, adding a new subject will only change slightly the calculated average. The height, in contrast to the wealth, belongs to Mediocristan, the universe of small variations of standard deviation.

Taleb gives another example to explain the phenomenon, that of the turkey. Every day, the farmer takes care of the turkey: he feeds it, pampers it, and ensures its good health. For the turkey, everything is getting better by the day. Every day confirms the feeling that the farmer wants the good of the turkey, and this feeling is based on a statistical series that is longer and longer, with a clear trend: a steady improvement in the variable “weight”, which equals “living conditions”. Tomorrow will be better than today, which is invariably confirmed the next day. One day in late November, the situation changes radically, and the variable “living conditions” drops to zero, completely upsetting the trend of the series. Black swan for the turkey, Thanksgiving has arrived. This example may be funny (except for the turkey) unless when you realize that most of financial experts think just like turkeys. The U.S. real estate has always increased in value, so it will do forever. The Tunisian regime has always been stable, so it always will be. We use Gaussian reasoning in environments that are not Gaussian. We believe we live in Mediocristan while in fact we live mostly in Extremistan.

But Extremistan escapes prediction, even though black swans do not happen that often. So what to do? One approach recommended by Taleb is to minimize the consequences of black swans: if you cannot avoid prediction, maybe you cannot prepare for their occurrence, and at least take steps to reduce their impact should they occur. Raise a Nuclear Power Plant enough above sea level if it is in the area of ​​tidal waves, don’t have a single plant, but two in different geographic areas, etc.

Another approach, only partially helpful however, was mentioned by my colleague Milo in an earlier post on Gresham’s law of strategy, is modeling with Monte-Carlo simulation software and employing explicitly non-gaussian curves.

These models show, however, that reducing the impact of disturbances often involves the development of redundancies, which goes against the quest for optimization (which actually means “optimization for a stable environment”) that is required in modern management. It is as such difficult to accept by the leaders that will always be tempted to favor immediate return at the expense of the resilience of the business. More generally, building redundancies will not be enough. If forecasting really is not possible, we must accept and implement strategic tools that are not based on prediction. We call this non predictive strategy, a concept we will develop in future posts on this blog.

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“JOE 2010″ as it’s called, is designed to provide the various branches of the US Armed Forces a joint perspective on likely global trends, possible shocks and their future operating environment.  If you’re interested in geopolitics and strategy, I recommend that you take a look.

Apart from its inherent interest, JOE 2010 opens with a defense planning timeline that business and financial strategy practitioners – and anyone who consumes their work  - would do well to bear in mind.  I have reproduced it verbatim here:

1900 If you are a strategic analyst for the world’s leading power, you are British, looking warily at Britain’s Age-old enemy, France.

1910 You are now allied with France, and the enemy is now Germany.

1920 Britain and its allies have won World War I, but now the British find themselves engaged in a naval race with its former allies, the United States and Japan.

1930 For the British, naval limitation treaties are in place, the Great Depression has started, and defense planning for the next five years assumes a “ten year” rule – no war in ten years. British planners posited the main threats to the Empire as the Soviet Union and Japan, while Germany and Italy are either friendly or no threat.

1936 A British planner now posits three great threats: Italy, Japan, and the worst, a resurgent Germany, while little help can be expected from the United States.

1940 The collapse of France in June leaves Britain alone in a seemingly hopeless war with Germany and Italy, with a Japanese threat looming in the Pacific. The United States has only recently begun to scramble to rearm its military forces.

1950 The United States is now the world’s greatest power, the atomic age has dawned, and a “police action” begins in June in Korea that will kill over 36,500 Americans, 58,000 South Koreans, nearly 3,000 Allied soldiers, 215,000 North Koreans, 400,000 Chinese, and 2,000,000 Korean civilians before a cease-fire brings an end to the fighting in 1953. The main opponent in the conflict is China, America’s ally in the war against Japan.

1960 Politicians in the United States are focusing on a missile gap that does not genuinely exist; massive retaliation will soon give way to flexible response, while a small insurgency in South Vietnam hardly draws American attention.

1970 The United States is beginning to withdraw from Vietnam, its military forces in shambles. The Soviet Union has just crushed incipient rebellion in the Warsaw Pact. Détente between the Soviets and Americans has begun, while the Chinese are waiting in the wings to create an informal alliance with the United States.

1980 The Soviets have just invaded Afghanistan, while a theocratic revolution in Iran has overthrown the Shah’s regime. “Desert One” – an attempt to free American hostages in Iran – ends in a humiliating failure, another indication of what pundits were calling “the hollow force.” America is the greatest creditor nation the world had ever seen.

1990 The Soviet Union collapses. The supposedly hollow force shreds the vaunted Iraqi Army in less than 100 hours. The United States has become the world’s greatest debtor nation. Very few outside of the Department of Defense and the academic community use the Internet.

2000 Warsaw is the capital of a North Atlantic Treaty Organization (NATO) nation. Terrorism is emerging as America’s greatest threat. Biotechnology, robotics, nanotechnology, HD energy, etc. are advancing so fast they are beyond forecasting.

2010 Take the above and plan accordingly! What will be the disruptions of the next 25 years?

If you work for a firm that’s more than a decade old, you might consider making a similar timeline for your business.  If you don’t, try it for your industry.   The sharp shifts and reversals in strategic perspective that such an exercise highlights is precisely why I consider many so-called business “strategy” frameworks (e.g. the BCG Matrix, Porter’s Five Forces, et al) little more than tactical aides-memoir.  (For a discussion of the difference between strategy and tactics, see “The Three Faces of Strategy“).  In its place, Philippe and I tend to advocate non-predictive, integrated strategy.

JOE 2010 also contains a nice sidebar on what they call “The Fragility of the Future”; quite wisely, they use as a prelude to a discussion of Grand Strategy:

JOE, Page 11

As Philippe wrote in June, if not treated with care, sometimes the worst enemy of your strategy is your own (either explicit or implicit) forecast.  Therefore, I recommend that the next time you create or review your corporate or financial strategy, step back to ask some vigorous "What Ifs", and make some of them as improbable as the shifts recounted above. 

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Why then, is the opposite so often true?  In a world in which surprise, disruption and the unanticipated are rife, why do strategists who promise to make calculations easier rather than harder often succeed?  I think a phenomenon that I call of “Gresham’s Law of Strategic Advice” is at work.

E pluribus unum

As my friend Dylan Grice at Société Générale recently reminded us in an issue of Popular Delusions, Gresham’s Law is an economic term which proposes that when two currencies are in circulation side by side, bad currency – that which is debased – tends to drive out sound, pure currency.  Dylan summarized why:  when two currencies are in circulation together, one stable and the other falling in value, consumers choose to pay for goods and services with the declining currency while hoarding the stable one.  Over time, only the depreciating currency is left in circulation:  sound money “disappears”, bad money drives out good.   While the law is named for Sir Thomas Gresham, a Tudor banker who witnessed Henry VIII’s debasement of the coinage, the phenomenon was noted as early as the fifth century BCE in Aristophanes’ play The Frogs.

Similarly, let us imagine two strategists have been invited to present to a Board how they would prepare a long range (say ten-year) corporate strategy.  Our first strategist might open by holding up a copy of a business bestseller from a mere five years ago, The World is Flat.  He could say that when this book came out, “Skype was a typo, Facebooks were paper, Twitter was a sound birds make, 4G was a parking spot, and Linkedin was something that happened at college parties.  None of these phenomena are even in the index, and this is a book about how technology is going to change business in the future!”  (Friedman made the same point in a radio interview I heard promoting his newest book).

This first strategist stresses that even without technology undergoing rapid change, complexity, uncertainty and surprise will confront the firm in the next decade.  They always have.  This poor, naïve soul might even point out that in such a world, the firm won’t succeed by applying stale “strategic” frameworks like the BCG Matrix (which dates back to 1968), Porter’s Five Forces (created in 1979), or Value Chain Analysis (introduced in 1985).   Anyone who has studied or done business in the last 30 years – including the competition – uses these!   Like it or not, this strategist might say, your firm is likely to face a world in which an integrated, adaptive, and non-predictive strategy is likely to work best.  Such a strategy can be formulated and executed consistently, but the outcomes are hard to determine, and impossible to quantify.  “At best”, he concludes, “We might use some Monte Carlo simulation tools like @risk to specify a range of outcomes.”  This strategy consultant has the intellect, the experience and the the integrity to admit that no amount of PowerPoint can overcome the inherent complexity, uncertainty and surprises of the future a decade ahead.

Now the second consultant comes in.  This fellow also makes the decade ahead sound dangerous.  He also talks about complexity, uncertainty and surprise.  But then, using the tempo and rhetorical tricks of a revival preacher, he lays out a clever, clear chain of cause and effect-based actions the Board can take that will carry the firm’s profits along a steady Newtonian “trajectory” to new heights.   Risks are not merely acknowledged, they are even quantified (each Risk gets a bubble on a grid whose size and position indicates some combination of likelihood and impact).  This fellow shows the Board Hell, but then offers a clear strategic path to corporate salvation:  ”Use this part of the Value Chain to pull yourself into this part of the Matrix, and by 2023 you’ll be the master of all Five Forces - Hallelujah!”

Now the board isn’t dumb.  The second strategist, however, has made their job easy, neat and tidy.  The company is publicly traded, and the CEO has a conference call with analysts tomorrow.  She knows which story she’d rather tell.  And there are structural factors at work – big organizations need forecasts, even when they’re known to be wrong.  Kenneth Arrow, the Nobel laureate in Economics, worked as a statistician during the Second World War. When he discovered that the Army’s month-long weather forecasts were worthless, he tried to warn his superiors. In response, he was told, “The Commanding General is well aware the forecasts are no good. However, he needs them for planning purposes.”

Look into my crystal ball and see what the future holds for you!

Gazit may stress the differences between intelligence officers (and by extension, strategy consultants), and Fortune Tellers, but my experience highlights the similarities.  Given a choice, the analyst or consultant promising illusory certainty is likely to carry the day with most Boards.  If you understand the basic techniques of Cold Reading, you’ll find them used by many strategists and prediction services who offer long-range strategies and forecasts; some substitute the internet for a crystal ball, but the game is the same.

Dylan quoted Cicero, and so will I:  “Human nature being what it is, all men prefer a false promise to a flat refusal.”  That is why I propose “Gresham’s Law of Strategic Advice”:   in a world of complexity, uncertainty and surprise, you can bet that most of the time, bad strategic advice (predicated on clear predictions) will drive out good (non-predictive) strategic advice.

Philippe and I will be offering some ideas on how to craft non-predictive strategy in the next few  posts, so if you’re interested, please subscribe to this blog.

French version of this post here / Version française de ce billet ici.

Certainly, critics have a point and many of the articles that academics write are pointless variations on an obscure topic full of equations and encyclopedic ignorance. Some are so clearly written yet so devoid of any interesting insight that you can only applaud the perfection of the skills. Some defend results that are so pathetically unrealistic that anybody who has spent half an hour in a firm would laugh at them. I’ll grant that. So maybe half of the academic work is useless, but the other half, in which you often find gems, is rather useful. Some articles are superb, and they are referred to again and again. In my field, broadly innovation and entrepreneurship, ground breaking work includes Sarasvathy’s “Causation and effectuation” in 2001 – that if you want to understand how entrepreneurs think -, Hargadon and Douglas’ “When Innovations Meet Institutions: Edison and the Design of the Electric Light” – if you think technological innovation is about technology, again in 2001, Hill and Rothaermel’s “The performance of incumbent firms in the face of radical technological innovation” in 2003, and Christensen’s “Innovator’s dilemma” in 1997 (all his books in fact). I could list maybe 20 to 30 more of these.

Indeed, theory is important. Theory in business grew out of the recognition that accumulating recipes and anecdotes told by old-timers could not amount to a business education. There had to be some scientific method to it. At the core, scientific method only says that you cannot state a rule unless you are able to prove it – somehow. The fact that academia went beyond that and decided that a scientific method meant abstraction, distance from the field, and extreme formalization by youngsters with zero business experience is unfortunate, but it is not per se due to a scientific approach.

Theory is important for several reasons. One, as innovation scholar Clayton Christensen observed, is that we use theories in our daily lives, whether we want it or not, and whether we are aware of it or not. As Keynes, yet another theoretician, put it: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” All decisions we make, from the simplest to the most complex, are based on some theory we hold about what we decide about. When consequences are important, one might as well be rather explicit about the theory one uses in making the decision. For instance, if I refinance my house in 2006, it is because I assume that house prices always go up. Why do I assume that? Because I look at the price history, I see that they have always gone up, even in recessions, and I assume that because they have always gone up, they always will go up. So I take a new mortgage on my house. Now if Nassim Taleb happens to have coffee at my place that day, he might tell me that the price of houses is subject to black swans, and therefore just because prices have always gone up doesn’t mean they always will. He might then detail a bit more the statistical underpinnings of his claim – which I’ll skip here but they are fascinating and tell me about this thing called a bubble. Etc, etc. So unless we are explicit about the theory we use, we will use it at our own peril.

Another reason why theory is important is suggested by Herbert Simon, another of those supposedly useless academics. It also has to do with statistics and the occurrence of rare events. Rare events are usually evacuated from our statistical models, but when they occur they can have  a high impact. Simon observes that because these events are rare – one housing bubble per century? – we do not have samples that are large enough to use statistics, even assuming that the distribution would make it possible. Deprived of statistics to observe, we can only think about these phenomenons using theory. The fact that many parts of our environments are subject to random variations makes the use of theory even more important. Put otherwise, if you don’t have a rare-event-proof theory of how your environment evolves, you’re in trouble. Think Fannie Mae, Fukushima, Mubarak, 9/11, etc.

So theory is important and not just for academics. It is immensely practical, and my experience is that when students and participants to executive programs open their mind, they really enjoy it. In fact, while HR departments always brief me to be practical and avoid any abstract topics for their executives, I ignore this briefing and these invariably tend to comment that the part they appreciated most was the theory eye-opener. They leave the program with their assumption challenged, and that is already a lot.  And again, students and participants seem to enjoy it, despite what I read around.

So if don’t like theory, try to do without, and you’ll see, eventually.

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The first two “tools” are actually articles.   Like most important subjects in management, the topic of self-management attracted the attention of Dr. Peter Drucker.  In his classic 1999 Harvard Business Review Essay “Managing Oneself”, Drucker posed a series of key questions to ask in pursuit of better self-management.   For those new to the idea of self-management, I recommend starting with Drucker’s article, which is built around a series of questions that you can use to structure your goals.  Even if you know Drucker’s piece, however, I find that like most classics it is worth revisiting periodically as your life changes.

To Drucker’s classic I would add the more recent article by Donald Sull and Dominic Houlder, “Do Your Commitments Match Your Convictions?”  Like Drucker’s piece, Sull and Houlder offer a series of questions to create a systematic process for clarifying your priorities, goals and resource commitments.

The third tool is a simple acronym (I’m told that all aspiring management gurus need them) that I came up with working with a tool I’ll discuss in a moment, Goalscape:  HIWR (pronounced “High Wire”).  HIWR is a mnemonic device to categorize the four main areas into which I believe most professionals’ goals should fall.  The H stands for Health:  what are your goals for diet and exercise?  The I stands for Intellect:  what are you doing to educate yourself and improve your knowledge of the world?  The W stands for Wealth:   what are your financial goals?  And the R stands for Relationships:  what are you planning to do to stay connected to and caring for those dear to you?  To stay on the high wire of any demanding professional career, none of these categories can be out of balance for too long.

The final tool that I recommend is some relatively new software called Goalscape.  Developed for Olympic athletes,  Goalscape is simply the best way that I’ve encountered to define in detail not simply what your goals are, but exactly how you will reach them.  It’s easy and intuitive to set up and maintain, and it makes a great tool for project management and communicating team goals as well.  You can try it out free here.

Have a great summer (or winter, depending on where you are).

PS  On a more philosophical note, for those interested in deep self-examination about the purpose of life and deciding goals, I recommend Seneca and Epictitus.

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Therefore, I thought I’d try a different approach and offer a summer watching list rather than summer reading list.  This list recommends three videos that you might consider for your travels or during your “down time”.   All address different aspects forecasting, uncertainty, strategic surprises and decision-making.  When you feel like a break from reading, give them a try.

The first video  is the famed psychology researcher  Philip E. Tetlock introducing the key ideas behind his book Expert Political Judgment: How Good Is It? How Can We Know?  (which I also recommend).   In about an hour and 15 minutes, Tetlock borrows Isaiah Berlin’s distinction between Foxes and Hedgehogs (who know many things or just one thing well, respectively), and discusses which animal (i.e. which mode of thinking) makes better forecasters.  You can download it or watch it for free on Fora TV here.

The second video to which you might give an hour of your summer is Paul Saffo on “Embracing Uncertainty and Forecasting”.  I assign Saffo’s Harvard Business Review article “Six Rule for Effective Forecasting”  in some of my classes.  Rather than sum up Saffo’s presentation, however, I’ll let Fora TV do the talking:  “A movie star as governor? No way! Planes hitting skyscrapers? The stuff of horror films! Forecasters struggle to anticipate an ever-stranger geopolitical reality. In this moment of unprecedented uncertainty and change, says Paul Saffo, it is tempting to conclude that forecasting is as dangerous as it is futile. In fact, connecting short-term policy to long-range forecasting is surprisingly easy — and absolutely crucial to meeting the challenges before us. All it takes is a simple shift in perspective and a few common-sense heuristics.”  You can download it or watch Saffo for free here.

The final video that you might consider is one that Philippe has mentioned before, Historian Frank Gavin speaking about “Five Ways to Use History Well”.  Philippe does a fine job summarizing Gavin’s argument, but it is worth hearing it straight from the source if you haven’t already.  At just over an hour and a half , Gavin’s talk is a little longer than the others, but it is certainly worth your time.   You can download it or watch it free here.

I hope that you enjoy at least a few of these videos, and of course that you have a great summer break (or winter break if you’re in the Southern Hemisphere).  Naturally, I’d welcome suggestions for my break, too!

PS If you find our perspective interesting, why not subscribe to our blog?