Tag Archives: uncertainty

Geopolitics, Investing, and the Little Book of Psychic Cold Reading

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Milo’s latest advice for investors and business people trying to come to grips with geopolitics is now available on Forbes.com.  It’s called “Geopolitics, Investing and the Little Book of Psychic Cold Reading”.

Risk, Uncertainty and Black Swans: Theoretical Differences and Practical Implications

Every time Milo and I teach about how organizations can make sense of their environments, we are confronted with the difficulty of explaining why uncertainty is so different from risk and why understanding that difference matters to entrepreneurs and managers. In this article, we address those questions and discuss the practical implications that flow from them.

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Constructing Cassandra Now Available

Our new book on strategic surprise, Constructing Cassandra:  Reframing Intelligence Failure at the CIA, 1947-2001, is now available for pre-order worldwide.

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Interested readers in North America can read reviews and order it via  Amazon.com or Barnes&Nobel;  in the UK you can use Amazon.co.uk; in the rest of the EU, you may wish to use Amazon.fr or Amazon.de; and in Asia you may wish to use  Amazon.jp.

If you do order it thank you.  Naturally, if you have any questions about the book, please ask us.

Crafting Non Predictive Strategy, Part III: Acknowledge the Nature of the Problem

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

Crafting Non-Predictive Strategy, Part II: Start with who you are

In the first part of this series, Milo and I examined the complexity of nonlinear environments and tried to show how, when confronted with such an environment, energy spent on a deep understanding of the present beats attempts at predicting the future.  Hence our call for a non-predictive approach to strategy.

Nonlinear systems can be found in nature, but they are particularly common and problematic when they involve human issues.  While such human nonlinear systems can display regularities over long time periods, most major political, economic and business issues are essentially nonlinear and permeated by social facts.  What such human-centered, nonlinear systems have in common but which is often overlooked is that one cannot deal with them as if they were natural science problems.  For one thing, and as we have argued in a recent Forbes article with the example of Usama bin Ladin, how you define the issue you’re dealing with depends on who you are.  This is also the reason that “genius” fails.

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Crafting Non-Predictive Strategy, Part I: Deep Understanding Beats Prediction

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”.

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Culture of risk vs. culture of uncertainty: a crucial management issue

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!

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