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
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”.
Recently I had a discussion with a friend who is a colonel in the Army about the culture of risk among senior officers and, by extension, in management. The culture of risk is an important question for any organization.
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!
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.
Near the end of a seminal essay on strategic surprise, Richard Betts writes, “The intelligence officer may perform most usefully by not offering the answers sought by authorities, but by offering questions, acting as a Socratic agnostic, nagging decision makers into awareness of the full range of uncertainty, and making authorities’ calculations harder rather than easier.” I believe that the same should be true for corporate strategy consultants: often their job is to make long-range calculations harder rather than easier.
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
Posted in Theory
Tagged BCG Matrix, Betts, Cicero, complexity, forecasting, Gazit, Gresham, Integrated Strategy, non-predictive strategy, Porter's Five Forces, prediction, strategic surprise, strategy, uncertainty, Value Chain Analysis
I have discussed the topic of the use of history for decision makers in a previous post about Richard Neustadt and Ernest May‘s analog framework. Historian Francis Gavin gave a very interesting speech for the Longnow foundation on the same question, but from a different angle. Gavin lays out five key concepts which, if properly understood and employed, should provide a firmer grasp on how historical analysis can be of benefit to decision makers. I would also argue that they can benefit not just the policymakers but also the public at large. These concepts are vertical history, horizontal history, chronological proportionality, unintended consequences and policy insignificance.
China has long been touted as the next leading power, and for many it seems that the question is no longer if China will overtake the US but when. Recently, however, a number of dissenting opinions have started to be heard. Economists point to the strong imbalances in China’s economy; political analysts observe that the political and social structure is unstable; human right activists warn of increasing censorship and repression, while historians suggest that, like the USSR in the late 80s, China’s communist regime has run its course and is on an unsustainable path. Indeed, “hard landing” stories about China have started to appear, by Roubini or by Gordon Chang.
Like any such debate, or lack of debate (instead, it is a series of proclamations), positions are often taken being selective about facts, based on false analogies, shallow extrapolations, ideology, or just plain ignorance. This is problematic because regardless of what we think about China, the country does matter to us in many ways. What can we do about this, then?
The fog of war, a long 2003 interview of Robert S McNamara, shows that how one frames an issue has an influence on how a question can be solved. As soon as they got engaged in Vietnam, the US presented the conflict as a fight between freedom and communism. This happened in the late fifties, after China had become communist and right after the Korean war, in a context in which the communist world seemed to progress inexorably. The domino theory, introduced by the Republican US president Eisenhower in 1954, stated that once a country fell and became communist, neighboring countries also would. Hence it became crucial to defend any country facing a communist insurgency. As David Halberstam mentions in his book “The best and the brightest”, the US national context also played a role later in the Vietnam process: Harry Truman, Eisenhower’s Democratic predecessor, was accused during the cold war to have “lost” China in 1949 and to have been weak against the communists, particularly during the Mccarthyst period. A longstanding reputation of “Democratic weakness” persists to this day as a result. In the early 60s, the democrats were still traumatized by these accusations that were systematically used by their Republican adversaries. This is the initial cognitive frame with which the Vietnam question was analyzed by President Kennedy’s administration. Right from the beginning then, the administration was prisoner, without being aware of it, from a frame that was in effect imposed by their adversaries. Despite their doubts and mounting skepticism, they would remain unable, right until the very end, to get rid of it.
Posted in Theory
Tagged decision making, disruption, framing, GM, non-predictive strategy, Robert McNamara, Sarah Kaplan, sense making, strategy, turbulence, uncertainty, vietnam war