ACH helps overcome the predilection to notice only “confirming” facts by insisting that we systematically search for evidence that disconfirms our views.  It begins by constructing a matrix with the Y axis labelled “Evidence”, and the X axis listing mutually exclusive (indeed, “competing”) hypotheses that would drive your decision; in later steps, you fill in the resulting matrix by noting which

The observation of the Sun’s rotation is compatible with both geocentric and heliocentric hypotheses

evidence in the Y axis disconfirms each hypothesis in the X axis. In practice, things are more complicated, because generating hypotheses is difficult. It is also difficult to self impose the discipline of disconfirming hypotheses, especially for things that seem obvious (like the sun revolves around the earth).

The workshop will focus on an assessment of the electric vehicle market. The idea is to go beyond the clichés and good intentions to define strong hypotheses on this issue. It brings together 25 executives and researchers. The workshop will take place at the Learning Lab, the center of educational innovation jointly created by EMLYON Business School and Centrale Lyon engineering school.

For more information, see Milo’s post on ACH.

To understand the culture of risk, we must first distinguish between two types of risks.  Type One risk is where you do something that leads to an error or a bad result.  It’s a reasonable assumption that the majority of our time in school and in higher education is designed to teach us how to reduce such risks.

Type Two risk is the opposite, it is the risk of not doing something that could be valuable.  Of course, the two are linked:  the more one reduces the risk of doing something, the more one increases the risk of not doing something valuable.  The trick, unfortunately, is that we tend to focus more on the Type One than Type Two risks.  On one level, this makes sense:  after all, failure is very visible – a disaster, a lost war, a failed product launch, etc.  In contrast, forfeited opportunity is invisible:  we do not see what valuable things our caution has prevented us from doing, and no one is punished for not having invented something.  Our education, liability laws and corporate governance structure push us towards a culture of Type One risk avoidance, i.e. to reduce the risk of failure (Sarbanes-Oxley anyone?).  This obviously is a problem for innovation in the long term, but it doesn’t even reliably protect us.   If it did nothing else, the financial crisis that began in 2008 has demonstrated that those institutions entrusted to manage risk failed to do so properly.  In short, we focus on risk avoidance at the expense of opportunity creation, and we don’t avoid even risk very well!

Second, we must address the risk globally.  In his book The Black Swan, Nassim Taleb showed that one of the fundamental errors of financiers was the assumption that their environment is governed by a so-called “normal distribution”, or bell curve.  A real risk assessment, on the other hand, requires a complete understanding of an organization and its environment.  One of the examples that Taleb offers is that of a Las Vegas casino.  One would think that the very essence of running a casino is risk management, and that they would have a well-developed appreciation for risks of all types.  Instead, Taleb relates a tale in which a tiger show, a hotel, a restaurant and of course the gaming tables all formed a magnificent business model.  All went well for many years until one day the star tiger (raised by the trainer from an early age, who had given performances for ten years without any problems), attacked its trainer on stage and almost killed him.  The casino naturally cancelled the show, its gaming revenues dropped dramatically, and the casino management thus realized that a key dimension of its business model lay outside its risk model.  The casino saw itself as a gaming center offering a show, while the reverse was true:  people came to see the show, took advantage of a cheap hotel room, and incidentally were lured into playing the tables.  The enterprise risk was completely misjudged because the firm misunderstood the core of its identity.

Am I a part of your risk model?

Finally, it is important to distinguish between risk and uncertainty. This distinction was first made by Frank Knight, Nobel Prize winner in Economics, and author of the famous book Risk, Uncertainty and Profit.  Knight distinguished between risk and uncertainty using concepts of probability. Risk characterizes a future with a known distribution or a distribution that can be estimated by the study of events over time.  For instance, car insurers know how many 20-year old male drivers have accidents in Sweden each year. Uncertainty, on the other hand, characterizes a future whose distribution is not only unknown but objectively unknowable, even in theory.  It particularly applies to entirely new, unexpected events, i.e. Taleb’s ‘black swans’.  The probability of the collapse of the Euro,  or of the invention of teleporation, can be imagined but cannot be computed in a meaningful way.

This means that for such entirely new phenomena, there is no historical data on which to extrapolate into the future.  This novelty makes it difficult to rely on our knowledge, as such knowledge always relates to past experiences.  Hence, “learning” cannot work.  Like an Army officer, managers face normal, predictable risks in a lot of the their activities (routine tasks, repetition of events which, even if they differ, still belong to the same category of events, broadly known as the standard business environment).  When uncertainty appears (combat against an hitherto unknown enemy, a disruption, “Black Swan”, etc.), an entirely different way of thinking must be adopted. Are we training our managers, civil or military, to manage risks?  In my view, a little, but not very well – witness the failure of concepts such as Value At Risk, etc.  Do we train them to manage uncertainty?  Not at all, and this bodes ill for the future.  It implies that they will do well in normal environments, but they will fail in uncertain ones or when faced with an intentionally novel adversary.

Develop a culture of uncertainty

More than a culture of risk, therefore, it is a true culture of uncertainty that we must help managers develop.  In this area, we can learn much from entrepreneurs, because uncertainty is their daily lot.  The first thing we must do (and that I do in my classes), is to show that uncertainty is not necessarily dangerous, it is also a source of opportunity.  As noted by Peter Bernstein in his remarkable story of risk, uncertainty makes us free:  it assures us that we are not prisoners of a future written in advance, or of a cyclical world where everything is only repetition.  In the words of Gaston Berger, founder of the French futurology, “Tomorrow will not be like yesterday. It will be new and will depend on us.  It is less to be discovered than invented.”  This is the culture of uncertainty that we need to lay the foundations for. It is based on a creative design of actions and decision-making in the face of acknowledged uncertainty.  The traditional paradigm of decision making is indeed that of choosing among a number of options.  But in uncertainty, the role of the decision maker is not so much to choose among pre-existing options but to create these options.  The paradigm of decisions under uncertainty becomes the creation of options and their implementation under uncertainty.

We educate managers mostly about how to choose among what is;  in my vie, we should educate more to get them to design what could be.

More on the black swan here.

If you want to know what business can learn from entrepreneurs in the management of uncertainty, post your question now!

More info on the FT’s Web site here.

As I said in an earlier post, there are certain key books that point you towards how to think like an intelligence analyst.  Because the skills of an intelligence analyst and a geopolitical investor overlap so much, I would also say that investors interested in geopolitics start with those key books.  In particular, if you haven’t mastered the critical thinking and the basic analytic  techniques described in Thinking in Time, Essence of Decision and The Thinker’s Toolkit, you are still in kindergarten as far as intelligence analysis is concerned.    Heuer’s Psychology of Intelligence Analysis (downloadable free from the CIA’s site here) is also immensely valuable.  None of these books will teach you geopolitical analysis per se, but they will give you a solid foundation in non-quantitative analysis.

One Investor gets a grip on Geopolitics

Some former MIAF students have now come to me and said “OK, we have done those:  where next?”  This post is at least a partial answer to their question.

In my view, the first port of call for investors who already have this foundation is to practice the techniques and ideas they describe while reviewing investing books that touch on geopolitical themes.  In other words, cast a skeptical eye over books such as The Education of a Speculator, Practical Speculation, and Trade Like a Hedge Fund.  See how often the fallacies and biases explored in Heuer’s work might have bearing on some of the techniques these books suggest, or ask how Allison’s frameworks would provide depth and nuance to standard investing approaches.

Next, move on to specifically “geopolitical investing” books like  If It’s Raining in Brazil, Buy Starbucks, World Event Trading, The Rise of the State and Trading Catalysts.  Frankly, if you’ve done your homework up to this point, you’ll be a bit disappointed with these volumes.  They offer some interesting anecdotes, but a sound knowledge of intelligence analysis will have inoculated you pretty thoroughly against their relatively naive “follow the news” methodologies.  Successful investors discount the obvious, and if you’ve come this far, you’ll whip through these volumes pretty fast.   On the positive side, you might later use these books to think through event cascades or as a source of productive historical analogies.

Of more abiding interest are two types of books.  The first type is intended to further refine your thinking  and intelligence analysis skills.  In this category I would include Taleb’s best book (no, it’s not The Black Swan),  and Structured Analytic Techniques for Intelligence Analysis.  The latter volume can be supplemented with the companion book of cases, though be aware that the cases have absolutely nothing to do with investing.

To this list I would also add Physics for Future Presidents if you’re uncomfortable with any aspect of advanced technology, and The Quest on energy.  If you’re interested in gaining a strong command of the basics of the economics of commodities generally (as opposed to commodity investing itself), A Handbook of Primary Commodities in the Global Economy is an outstanding place to begin.

The second type of book I recommend for advanced readers interested in geopolitics and investing are broader works.  Here, you might start with War, Wealth and Wisdom,  and George Magnus’s two recent volumes Uprising and The Age of Aging.  You might then move on to deeper historical perspectives on the rise and fall of world powers.  In this category, Mokyr’s The Lever of Riches in unmatched, and The World Island, Great Powers and Geopolitical Change and Geopolitics and the Great Powers in the Twenty-First Century will round out your perspective.  (Many will chide me for not recommending Kennedy’s The Rise and Fall of the World’s Great Powers; I find his data useful and his anecdotes interesting, but his methodology is deeply flawed).

Thomas Cole beat Paul Kennedy to it by about a century… but we’re still waiting

Finally, for those who like to be on the cutting edge, it looks like a legend in the strategic affairs and geopolitics community, Edward Luttwak, has a new book on China due out soon, The Rise of China vs. the Logic of Strategy.  I, for one, have pre-ordered it.

All of these lists could be much longer (and I may do future posts rounding out other geopolitical themes) but this list should give most people plenty of fuel for thinking, and generate a lot of interesting questions about your investing and the assumptions underlying it.  Suggestions welcome!

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

According to Nye, whereas “hard power” grows out of a country’s military or economic might, soft power, “Arises from the attractiveness of a country’s culture, political ideals, and policies.”  In the Future of Power Nye examines what it means to be powerful in the twenty-first century, and how the US might set about retaining its place in the world.  he thinks soft power will be an important part of the mix, and I tend to agree.

But while I’m generally optimistic about the future of America’s place in the international order , one historical parallel related to soft power disturbs me:  the degree to which the threat of terrorism has led the US to create embassy buildings that appear to cower before contemporary threats.

The US Embassy on Calle Serrano

In Madrid, for example, I frequently pass the US Embassy on Calle Serrano.  Like most contemporary US embassies, it could easily be mistaken for a medium-security prison.  As a former Marine, I always hope to see a proud Marine embassy guard somewhere in view.  All I’ve ever seen are Spanish rent-a-cops.  As a result of the 1961 Vienna Convention on Diplomatic Relations, the US Marines who guard it are kept deep inside, behind bulletproof glass, intercoms, and high counters.  Still, it would be nice to at least glimpse them.

Visitors who enter such structures are stripped of all electronic devices for the duration of their visit and then put through a search and x-ray process that makes the average airport experience seem casual.  One need not underestimate the threat to US facilities to admit that the process as a whole conveys the very opposite of confidence and might (i.e. soft power):  it reeks of fear.   One might even ask if those who designed these measures feared the next 9/11, or simply the next 9/11 Commission, in which all but the most extreme security measures would leave people in Washington vulnerable to criticism.  Of course I worry about the safety of US diplomats and the Marines who guard them.  I also worry, however, about the messages that these facilities and procedures send  to the 99.9% of visitors who mean the US no harm.

A visit to the embassy was the same when I lived in Brussels after 2002, but somewhat better when I lived in London in the 1990s.  In fact, the US Embassy in the UK that I knew in Grosvenor Square then is soon being moved because it’s deemed too vulnerable.  Among other features, this new beacon of US power in the London will have a moat.

I understand the reasons for these designs.  The threat of terrorism is real and omnipresent.  I am glad that it is not my responsibility to keep US diplomats safe.  Indeed, on one level I can accept that the fortress-like appearance and prison-like bearing of the US diplomatic presence in the world.  It simply reflects the reality of our age and the falling cost, both economic and operational, of mass violence directed against symbolic targets.  But does the US have the balance right?   Has anyone considered what is lost in the long run when embassy buildings evolve into prison-fortresses?   One historical analogy may contain a warning for the United States.

I, for one, am haunted by an historical  parallel that  I discovered in the The Grand Strategy of the Roman Empire by Edward N. Luttwak.  It is a superb book that I cannot summarize here, but wholeheartedly recommend.  Here, I simply want to highlight Luttwak’s illustrations of the evolution of Roman fortifications from the 2^nd century to the late 4^th century.

In the second century, a Roman fort had multiple, open gates, thin walls, observation (not fighting) towers, and a spacious interior with colonnaded streets.  Apparently, when  a fort’s gates were elaborate, they served only to make a grand impression and had no overt defensive purpose. (A few years living in Italy convinced me that such grand-looking but otherwise useless gates had survived into our own times on Italian farmhouses).

Roman fort, second century

Second century Roman forts were located on flat, open ground:  it was Roman soft power that afforded security.  Certainly, as Nye would have it, much of this soft power consisted of the attractiveness of Roman civilization.  If we are honest, however, another element that ensured that Roman forts of the period could do without closed gates and thick walls was the degree fear that Roman soldiers inspired.  Roman legions possessed a ferocity, discipline and ruthlessness that was unmatched by her enemies.  In other words, contra Nye, I believe that fear balances attraction in soft power, and that the Romans well-understood this (Caligula used to say:  Oderint dum metuant).

The 2nd century Roman balance – attraction and raw fear – was  efficient.  As Luttwak writes, “Perceived power is not consumed by use”.

About one hundred and seventy years later, in the late third century, the walls of Roman fortifications had grown much thicker; the berms of forts were wider, and their towers were now for fighting.  Fortress gates were no longer only proud monuments to a distant civilization that one might aspire to join:  they had been closed and drafted into a tactically defensive schema.  The fearsome reputations of Rome’s legions had declined, too:  for a variety or reasons, they were no longer universally feared.

Roman fort, late third century

One hundred years later, by the late 4th century, Roman forts had become proto-castles.  They had been relocated to higher, “more defensible”, ground.  The once proud and welcoming Roman gates had dwindled to one elaborately defensive structure, plus a postern gate (i.e. a narrow slit valuable for quick counter-attacks and for receiving informers).  Towers on these forts had multiplied, but only to ensure enfilading fire against besiegers.  The spacious interior colonnades of of the Roman fort of two centuries before had become cramped troop quarters jumbled in irregular shapes.  It is clear from this design that what was once called the Dark Ages had begun.

Roman fort, late fourth century

In short, in civilizational terms castles that resemble prisons convey weakness, not strength.  A truly powerful civilization does not cower behind walls, it simultaneously invites and seduces while it truly terrifies those who would do it harm.  The next time you pass a US Embassy, draw your own conclusions.  Alternatively, look at the design of new US Embassy in London, pictured below.  Note its up-to-date Vauban-fort-style defensive perimeter.

But from the point of view of US soft power, what does the moat portend?

US fort, Londinium, early twenty-first century: defensive location, enfilading fire capability, and defensive moat.

Some firms try to detect the planned entry of a competitor in their market by monitoring the purchase of land to build a factory or the filing of patents.  American journalists closely watch pizzerias around the White House: a sudden order announces a sleepless night and therefore that something important going on.  Roberta Wohlstetter, an American scholar, investigated the attack on Pearl Harbor by the Japanese in December 1941, the archetype of a strategic surprise.  She sought to understand how it was that the U.S. military failed to capture weak signals despite its already impressive technical means at the time.  The results of her research came as a surprise:  in fact, the US had a considerable amount of information on the Japanese, whose secret codes had been broken.  She writes: “At the time of Pearl Harbor the circumstances of collection in the sense of access to a huge variety of data were (…) close to ideal.” You read it well:  ideal.  The U.S. military had captured so many weak signals that these were not weak anymore.  Her conclusion? The analytical problem does not stem from lack of data, but from the inability to extract relevant information from mere data.  She concludes, “the job of lifting signals out of a confusion of noise is an activity that is very much aided by hypotheses.”  With that, she redefines the problem from one of accumulation of weak signals, which often is not difficult, especially nowadays with the Internet, to one of knowing what to do with this mass of signals.  What to do, or what to search for, means having a hypothesis, a starting point.  Indeed, the data never speak for themselves. In fact, Peter Drucker himself remarked: “Executives who make effective decisions know that one does not start with facts. One starts with opinions… To get the facts first is impossible. There are no facts unless one has a criterion of relevance.”  Therefore, it is hypotheses that must drive data collection. In short, you can collect all the data you can and still make no progress at all in anticipating surprises. Therefore, the vast literature on weak signals, (for instance, Day and Schoemaker’s Peripheral Vision, which is typical) while not entirely useless, will not help you much solve the real problem, that of having good hypotheses, or opinions, to start with.

It’s not a question of quantity of data, but rather it is an epistemological problem:  a purely inductive approach can not work, or worse, can be misleading.  This observation was made by researchers Kahneman and Tversky with the “belief in the law of small numbers”.  Too much data, and we do not know how to sort the wheat from the chaff.  Not enough data, and we make erroneous inferences.  In his book “Black Swan”, Nassim Taleb reformulated this problem recently with the Thanksgiving turkey (This is Bertrand Russell’s famous example of the chicken modified for a North American audience):  every single feeding firms up the bird’s belief that it is the general rule of life to be fed every day by friendly humans.  On the Wednesday before Thanksgiving, after hundreds of consistent observations (and following each of which, its confidence grows) the turkey has reached, unaware, the moment of maximum danger.  “What,” Taleb asks, “can a turkey learn about what is in store for it tomorrow from the events of yesterday? Certainly less than it thinks.”

Of course, there are other issues raised by the weak signals approach.  One of them is that it is easily subject to disinformation.  We know that Bin Laden, who knew he was watched and listened, used to constantly send signals he knew his opponents would catch.  Often, when he had a visitor, he would hint that “something important is about to happen.”  And nothing happened.  This leads to the classic syndrome of “warning fatigue”.  In the same vein, too much attention to weak signals can also generate false positives and reinterpretation.  For instance, Egypt is about to invade Israel.  Israel learns about it, goes on full alert, which deters Egypt. The invasion does not take place and the whole thing is treated as a “false alarm”.  Next time, warning signals are dismissed as yet another false alarm, and this becomes the Yom Kippur War: Israel is completely taken by surprise.

In conclusion, monitoring weak signals is necessary and useful in the toolbox of competitive intelligence and strategic surprises prevention, but it will not replace an active approach and active engagement with the environment.  The monitoring of one’s own assumptions and hypotheses is as important – and we would argue more important – than the monitoring of weak signals.

Note: if you want to read more about how to discuss hypotheses in strategic decision-making under uncertainty, you can read Milo’s post: Business and Intelligence Techniques: the Role of Competing Hypotheses.

“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.