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”.
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
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
Many people are either beginning their holidays or are already in the midst of them. If you’re the type of person who reads a blog like this, you probably already know what you’re hoping to read on your break.
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.
Posted in Methodology & Tools, Theory
Tagged forecasting, foxes and hedgehogs, Gavin, Geopolitics, intelligence, judgement, non-predictive strategy, Saffo, strategic surprise, strategy, Tetlock, Use of history
There is no doubt we are terribly bad at forecasting. Even the smartest among us are. Even the best and the brightest, whom we have tasked to save the world from financial annihilation, are. Take Ben Bernanke, Chairman of the Federal Reserve. In 2004, he declared, in a speech ominously titled “The Great Moderation”: “One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility. This […] makes me optimistic for the future.” You might want to read the full transcript of the “Great Moderation” talk here because it is for a fascinating reading on how wrong experts can be at forecasting. And it’s not just Ben. In fact, political, economic and business histories are littered by forecasts and predictions that turned out to be ridiculously wrong. From the commercial potential of the Xerox machine or of Nespresso, from the possibility of heavier than air flight to the market for mobile phones, from prosperity at the corner of the street to Japan as number One. Our hopelessness at forecasting is a confirmed fact.