Our latest post on Forbes proposes a simple framework for leaders to apply when confronted with a strategic surprise-That 3am call… In short, don’t rush into action, no matter how urgent things seem to be! Read the post here.
Previous Forbes pieces:
Our latest post on Forbes is a reflection on the limits of forecasting after the publication of the National intelligence Council’s Global Trends 2030 report is available here. In short, don’t predict, construct.
Previous Forbes pieces:
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.
In a previous article, we discussed how, when facing an uncertain situation, a deep understanding of the present beats prediction about the future. One tool that Milo and I developed for strategists to think in detail about the present – in other words to answer the pretty basic strategic question “What is going on?” – is a refinement of a framework developed by the historian Ernest May and political scientist Richard Neustadt. We call it the “KPUU framework”. It demands strategists answer and drive towards discussion (and perhaps agreement about) four simple questions about a situation.
Despite formidable developments in business strategy over the last fifty years, organizations keep being disrupted by events they should have seen coming, but didn’t, or by events they saw coming but were unable to avoid or take advantage of. In 1971, NCR was surprised by the rapid rise of electronic cash registers and lost its leadership of the market. In 2007, Nokia was unable to react to the launch of the iPhone, an event the Finnish firm dismissed as minor, and is now struggling to survive. In 2011, the Arab uprising came as a complete surprise to everybody, not just business and governments but the people involved as well. And the list goes on: if strategy is about addressing the key challenges an organization face, then the general lack of preparedness (if not prevention of) the economic and political crises that the world has been facing since 2008 is a massive failure of strategy. Hence it’s no surprise that in a survey conducted in 2011 by consulting firm Booz, fully 53% of senior executives did not think their company’s strategy would be successful. Houston, we have a problem…with strategy. Continue reading
I’m not supposed to be blogging. Philippe and I have a book deadline at SUP this week. We have a Forbes piece due soon, too. And I have a speech to prepare for an Institutional Investor Forum in mid-September. So I’m going to make this quick…
Tonight I went out for dinner with a stack of reading to catch up on. Over indifferent Italian, I read two articles that I have to share. One I want to share because it’s so smart, and the other I want to share because it’s the opposite, but it parrots several popular misconceptions.
Posted in Theory
Tagged Anne Korin, China, commodities, dystopia, economics, energy, extrapolation, forecasting, Gal Luft, Geopolitics, GMO Quarterly Letter, Grantham, jeremy grantham, malthusianism, Minxin Pei, oil, Peter H. Diamandis, prediction, price mechanism, Simon and Ehrlich, SocGen, Steven Kotler, whale oil
As Milo and I have argued before, the environments and issues businesses deal with are more complex than traditional strategy models admit. Business issues today display high levels of uncertainty, they can behave non-linearly, and they can be vulnerable to “Black swans”, i.e. low-probability but high impact events that disrupt even the best formulated strategies. The added difficulty for strategists and managers is that nonlinear environments often appear linear for an extended time period (think US house prices). As a result, some conclude that what seems to be an essentially linear pattern (prices fluctuate a bit around a ‘long term trend’ but always rise), are linear in reality – before a radical change occurs that completely disrupts previously assumed patterns (e.g. prices fall dramatically). In short, people often assume an environment is linear and predictable when in fact the continuity we observe is only a particular case of limited duration. To make matters worse, with many nonlinear systems change is not nicely spread over the years: most of the cumulative change occurs in one, single – often dramatic – occurrence. In the language of engineering, some things don’t “fail gracefully” (e.g. a bridge that breaks suddenly instead of bending slowly).
Not a “graceful failure”.
The goal of strategy is to decide what to do in a given situation to achieve a given objective. Basically, strategic decisions comes down to the question “what to do next?”. In environments characterized by uncertainty (defined as objective lack of information), this is no simple question, and several approaches are possible to address it. Two dimensions characterize these possible approaches: prediction and control.
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.
In an earlier post about forecasting, I mentioned the work by Nassim Taleb on the concept of black swan. In his remarkable book, “The Black Swan”, Taleb describes at length the characteristics of environments that can be subject to black swans (unforeseeable, high-impact events).
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.
Today I was reminded of the perils of forecasting while reviewing a Department of Defense document, the Joint Operating Environment 2010.
“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.
Posted in Case study, Theory
Tagged black swan, China, Defense Planning, DOD, forecasting, France, Geopolitics, Germany, grand strategy, Internet, JOE 2010, Korea, NATO, non-predictive strategy, prediction, strategic autism, strategic surprise, strategy, UK, USSR, Vietnam