Mapping Strategy

Perils of Prediction: The Elusiveness of Certainty and the Value of 'Simulated Hindsight'

I'm ten days late in posting on a great short take in The Economist ("The Perils of Prediction"), reviewing Nassim Nicholas Taleb's book, "The Black Swan: The Impact of the Highly Improbable"

...almost all forecasters work within the parameters of the Gaussian bell curve, which ignores large deviations and thus fails to take account of “Black Swans”. Mr Taleb defines a Black Swan as an event that is unexpected, has an extreme impact and is made to seem predictable by explanations concocted afterwards.

Taleb is correct: people like to create (and gravitate to) ex post facto explanations. We usually think of those as being of very little use (unless we're in the business of publishing sensationalist books). By definition, such explanations don't help to anticipate or deal well with the next unprecedented thing--even though people would like to think that they will. Unprecedented means, well... unprecedented. There will never be another 9-11, even though there will probably be other big nasty surprises that kill lots of people that we analogize to 9-11.

That's all by way of background to explain why we use a simple trick in our scenario workshops called "simulated hindsight". Short take: tap people's natural hunger for ex post facto sense-making stories explaining unexpected developments... using hypothetical future 'facts'.

Disoriented yet?   :)

Here's the slightly longer take: Assume it's 2012. Put away this morning's newspaper, as well as all of your assumptions and prognostications about what might happen in July and August, and in 2008 and 2009, and so on. That's all part of 'history' now. It's your job to explain it.

Be in 2012. Assume that the world has already turned out in a certain way that I've spelled out in a tightly-crafted one-page document we call an 'endstate'. Put on your historian 'hat' (or your research analyst 'hat' or reporter/news-anchor 'hat'). Your job is to tell us how the world got to be the way it is now in 2012. What were the major turning points since 2007? What developments led to what other ones? What things didn't happen that some people thought were virtually certain? What were some of the pivotal surprises that drove things to turn out the way they did?

Using a set of 150 discrete, short descriptions of things that might or might not have happened between June, 2007 and "now" (2012)--we call them 'events'--construct a story of how we got "here". Several other teams will do the same with their own separate 'endstates'. Pay no attention to them. They'll get to tell their 'history' stories too and then we'll compare and contrast them and look for the key points of intersection and divergence.

That's simulated hindsight and I've seen it work powerfully to unlock the thinking of hundreds of executives (probably thousands by now, come to think of is), enabling them to contemplate how various kinds of surprises might change their business.

The Economist's review of Taleb's book offers other gems [emphasis and link added]:

...humans have an uncontrollable urge to be precise, for better or (all too often) worse. That is a fine quality in a watch-repair man or a brain surgeon, but counter-productive when dealing with uncertainty... Why, [Taleb] asks, do we take absence of proof to be proof of absence? ...Mr Taleb argues convincingly that the spectacular collapse in 1998 of Long-Term Capital Management was caused by the inability of the hedge fund's managers to see a world that lay outside their flawed models. And yet those models are still widely used today...

...corporate “scenario planners” are better than they used to be at thinking about Black Swan-type events... [Taleb] suggests concentrating on the consequences of Black Swans, which can be known, rather than on the probability that they will occur, which can't (think of earthquakes). But he never makes professional predictions because it is better to be “broadly right rather than precisely wrong”.

All of which helps to explain why--despite their unquestionable value in an organization--financial executives, engineers, and those with talent for managing the details of day-to-day operations tend to be much less comfortable confronting the broad implications of longer-term uncertainties or dealing with the imprecision inherent in potentially sudden, unprecedented change. I'm not that good at the other stuff. Driving across the Golden Gate bridge recently, I gave thanks that we've got our domains of complementary expertise.

UPDATE: One amusing side-effect of Googling "Perils of Prediction" (the title of the Economist article) was the number of other pieces that came up (934), including this general treatment:

Perhaps the most difficult pitfall to avoid is when the predictor fails to take into account a factor that may not even exist at the time of making the prediction.

This take on the special problems of forecasting technology evolution:

In 1967, the 100-year-old company Keuffel & Esser was commissioned to study the future. A major failure of its analysis was not seeing that its own flagship product would become obsolete in just a few years. K&E was the country's leading slide-rule manufacturer, and it was blindsided by the product it failed to see, the electronic calculator.

This insanely precise (and internally inconsistent) long-term economic forecast (commentary here):

George Mason University's Stephen Fuller called up a PowerPoint slide predicting that in 2057, the average annual household income for the region will be $1,307,000. Whoo hoo! That sounded great. Then he pointed out that in 50 years, the average Washington area house will cost a whopping $14,061,000.

This description of the "butterfly effect" in perhaps its most classic form:

A little discrepancy in the pattern of air flowing more than 4,000 miles away had made the difference between an accurate forecast and a bust. The change in the winds in Alaska had displaced storms in the southeast by several hundreds of miles-endangering people living near Orlando, not New Orleans.

This semi-prescient August, 1998 assessment of economic models designed to predict currency crashes (right on the cusp of LTCM's almost world-cataclysmic implosion):

Investment banks and academic economists are building complicated models to predict currency crashes. Don't expect them to work.

And finally, this amusing if cautionary catalogue of bad predictions by Cynthia Crossen in the WSJ last January 8th (subscribers only):

"The giant airplane of 300- to 400-passenger capacity, while technically possible," wrote a U.S. aviation official in 1944, "appears to offer little economic advantage and to involve a great sacrifice of convenience for the traveler, owing to the inevitable reduction in scheduling frequency which results from using such large units."
...
In 1937, Hadley Cantril, a psychology professor at Princeton University, studied the relative prophetic ability of various types of people. He sent a questionnaire asking for predictions about world affairs to several hundred people... The two groups who were most confident that their predictions were correct were the bankers and the Communists.

Business or Casino? Is Publishing Really a Crapshoot?

Interesting piece in yesterday's NYTimes (H/T: AT) about what goes into making a best-seller. Answer: nobody really knows. Whether they could if they thought harder about the problem is the question the article takes on.

Eric Simonoff, a literary agent at Janklow & Nesbit Associates, said that whenever he discusses the book industry with people in other industries, “they’re stunned because it’s so unpredictable, because the profit margins are so small, the cycles are so incredibly long, and because of the almost total lack of market research.”...

Calculating the advance accurately would be a prized skill, but no editors claim to have a scientific handle on how a book will sell. Instead, they emphasize the role of intuition and say that while big unexpected losses and gains do happen, somehow it all works out...

Individuals quoted in the article make comparisons between the industry's methods, gambling and lightning strikes, noting that the fundamental business model of the book publishing industry hasn't changed in centuries.

The comparison to gambling probably isn't accurate unless they're referring to the gamblers themselves--and casual ones at that. The casino industry not only knows a tremendous amount about its customers (especially the best ones) but also employs some of the most sophisticated methods known for staying in touch with them and catering to their needs. Here's the "well duh" quote:

Some experts wonder if book publishers might uncover more [winners] if they tried harder to find out more about their buyers and what they want.

The question, of course, is how. For some types of books (and authors) prediction markets might be appropriate. I'm also thinking conjoint analysis... or some combination of the two.

“The Newspaper Association of America has a staggering amount of data on people who read newspapers. The book business has, basically, nothing,” said [Al Greco, a professor of marketing at Fordham University]. “They’re not going into the marketplace and doing mall intercepts and asking people, as they leave the bookstore, ‘What did you buy? Did you find what you’re looking for? What motivated you to choose that book?’ ”

... Most publishers... continue to gather data on sales and not much else, though past performance is certainly no guarantee of future results, even from the same author.

One thing conspicuously absent from the piece is any mention of Amazon. The entire thing appears to have been researched by talking to publishers, editors and academics. I.e., a story requiring only subway fare.

Methinks that had someone from the New York Times bothered buying a plane ticket to Seattle to talk to Jeff Bezos they might have had a different take. Amazon's suggestions for me can sometimes be bizarre, but over time, they've gotten better and better. I can't help but imagine that they work as well in reverse: predicting the type of book--if not the specific title--I might buy more of.

And there's the rub, isn't it? Predicting in absolute terms the success or failure of tens of thousands of different items is a far far more difficult task than predicting (say) the success of one among a dozen brands of paper towels.

Terrorism, Creative Uncertainty and Rational Prediction

I recently finished "Beyond Fear" by security expert Bruce Schneier. In it, he features a chart showing the number of annual deaths from various causes (e.g., different cancers, automobile accidents, heart disease, stroke, suicide, etc.) Alongside it, he lists casualty figures resulting from specific terrorist incidents over the past century or so.

At the top of the terrorism list, of course is 9-11, accounting for 3,029 deaths. It's followed by several airplane bombings in the 1980's that each cost ~250-300 lives (e.g., Pan Am over Lockerbie, Scotland). Schneier correctly points out that in the context of preventable deaths from other causes, even counting 9-11, terrorism has simply not been that big a deal to date. [Stay with me before rushing to comment...]

The direct and indirect costs of countermeasures the U.S. and other Western countries have taken in response (Schneier argues) are far out of proportion to actual damage and death in the past or the risk of further damage and death in the future. The second part of that statement is utterly flawed.

The  unpredictability of terrorism renders any backwards-looking, purely quantitative, actuarial mode of analysis inappropriate and ineffective. That is, future deaths due to terrorism are something that neither Schneier nor anyone else can possibly predict with any degree of confidence.

Until 2001, the biggest single terrorist incident had caused around 300 deaths. Then in the space of a few hours, that number went up by an order of magnitude. There was no consensus (or even a significant plurality) of expert opinion predicting that that would happen - much less when, where and how.

Yes there were a few isolated voices and even a paper-trail that seem amazingly prescient in hindsight. They don't count. Somebody, somewhere is almost always predicting the future with great precision. Discovering in advance which of those billions upon billions of conflicting and poorly substantiated forecasts is correct is the hard part!

The rub? Nobody can say that the peak casualty figure from a single terrorist incident won't go up again by another order of magnitude (or two, or three) tomorrow morning... or in ten years... or not at all (begging the recursive question of our ability to prevent such a jump by investing prudently in a wide range of broadly geopolitical to highly targeted countermeasures.)

As of the 10th of September, 2001 any rational calculation of the risk and cost of terrorism based on historical data would use numbers in the low 100's for possible deaths and develop countermeasures that were commensurate. After 9-11, the same rational, backwards-looking calculations might use 1000's. Both would be subject to so much uncertainty as to be laughable - because they rely on the same flawed approach to assessing the magnitude of such a risk. (A similar if largely forgotten leap in awareness of the risk occurred in the early '70s)

Terrorism is fundamentally not a forecastable thing. That's especially true during a period of innovation and expansion in that sad, sick "industry". The fact that the peak death number changed so suddenly makes a conservative rational calculation based on past history just as tenuous as any radical emotional guess based on fear. Given that the trend is clearly up however, and that the last jump was by 10X, it is only prudent that we err to the side of assuming high and being wrong than assuming low and waving bye-bye to New York or Los Angeles.

The larger point? What's tough about predicting terrorism is also tough about predicting discontinuous change in business. Applying the same forecasting methodology to discontinuous possible 'left-field' problems as to well-understood, clearly bounded problems with deep actuarial data-sets is like trying to eat soup with a knife. A tool that's extremely precise and powerful for some jobs is utterly misguided for that one.

As we noted last month with regards to "creative uncertainty":

...what was the 'probability' circa 1970 that snowboards (and the as-yet nonexistent entrepreneurial providers who would invent them) would cut into the ski industry? ...Or the 'probability' circa 1980 that digital photography would into silver halide (wet process) film sales?

It is only with a broadly creative process (e.g., scenarios) closely wedded to a structured forecasting methodology (e.g., prediction markets, delphi, etc.) that more reasonable - if still subjective - assessments can be made. In the realm of creative uncertainty, it is the anticipation of entire classes of unconventional threats and opportunities and their rough magnitude, not detailed numerical forecasts that lend strategic power to organizations investing for the long term.

Barnetted in NYC

It's been a busy couple of weeks both business-wise and personally, starting with a two-day scenario conference I helped lead near Philadelphia. The following weekend, we got miraculous news that my brother's leukemia has temporarily stabilized. So... I'm making a pledge to be more current on this blog.

First off, I'm desperately remiss in sharing highlights from 24 hours spent in New York City last week with Tom Barnett et al at a conference on financial industry resilience put on by Enterra Solutions and the Association for Enterprise Integration.

I like intimate conferences like this for the interactivity they allow. To whit: Sunday night featured a dinner graciously hosted by Steve DeAngelis (Founder, President and CEO of Enterra) at the delightful Cite on 51st. I was privileged to participate in a fascinating series of conversations with several luminaries, ranging across  national security policy, resilient networks, scenario thinking, law, religion, skiing, social policy, prediction markets, open source software and regulatory compliance - among other things. In short: I was in my element.

Monday's opening presentations featured Congressman Harold Ford, Jr. (D-Tenn), followed by Tom Barnett and a short version of his 'classic' (i.e., Pentagon's New Map) brief. Ford will be interesting to watch on the national stage. At the age of 36, he's already served five terms in the House and is currently running for the Senate. Realizing that in a room full of financial industry and national security types his party affiliation might be a handicap, he handled questions with humor and grace.

Barnett was equally captivating in a different vein. His introduction on resilience featured pictures of his grandfather and daughter - the latter a survivor of childhood cancer. That struck a chord  - because of my brother's situation obviously, but also because of the connections I've been exploring recently between personal and organizational resilience, e.g., via my affiliation with the Global Resiliency Network. If I were to coin a phrase here: resilient organizations are made up of resilient people. Fodder for another post...

Barnett followed that up with a colorful, attention-grabbing lunch presentation drawing from his forthcoming book, Blueprint for Action. Barnett is fascinating not only for his sweeping vision but for his iconoclastic thinking. Liberals think he's a raving neocon. Neocons think he's a flaming liberal. Conclusion: he's intellectually unencumbered. That's a rare and valuable discipline in the waters of national security and public policy these days. His observations and prescriptions carry massive implications for economic scenario thinking over the next 20+ years. Any global organization (i.e., all my clients) would do well to bring him in. Alas, I had to leave just after lunch in order to make an evening meeting back here in Boston.

UPDATE (1PM): Psych!! UPS just delivered pre-release copy of 'Blueprint...' Thanks Tom (and Penguin.) Look for a review here soon - presuming I can grab some quality hammock time this weekend.

Integrated Resilience

I just concluded two and a half head-spinningly rich and insightful days at a small local retreat with the not-local-at-all Global Resiliency Network, a "consortium of consulting professionals dedicated to expanding the understanding and application of resiliency strategies at personal, organizational and leadership levels". I'd been invited to attend via a ridiculously long string of coincidences and connections that I won't go into, but which made it clear that I would certainly have much to learn, and might have something to contribute.

I took a new approach to presenting the interactive scenario planning approach I use, and it went over splendidly - far better than I'd ever imagined. That sparked a rich set of discussions and possibilities around adapting and applying it. To my even greater delight, (bordering on surprise), they accepted my request for membership. It's a non-exclusive commitment, whose benefits and obligations are still  in the "emergent" stage as the group enters its third year of formal existence, (or seventeenth, depending on how one chooses to count... some members have been working together since the eighties.)

To highlight any particular part or person would almost be an injustice to the others... but I'll try. Some had flown in from Europe; others from the West Coast. The retreat was diverse, interesting and useful in ways that such workshops only occasionally are.

Meg Wheatley, visionary and author, (e.g., of Leadership and the New Science), plus a host of other things, helped to ground the discussion in the practicalities of choices we face as a group of professionals, as well as offering a grand vision for the future, quite literally of the world. From others that might seem grandiose; but she's earned the right to be taken seriously in such matters. Some of her models for the change and renewal of large institutions and systems, juxtaposed against Tom Barnett's more particularized framework for understanding globalization, conflict and change seems like a productive yin-yang line of inquiry that I have yet to fully explore. More on that if and as it comes to me. I.e., 'hold that thought'.

We were also privileged to have with us professor, author, (e.g., of The Resiliency Advantage), and just plain nice guy Al Siebert. In addition to some fascinating conversations at the breaks, he presented some of his observations from his lifelong body work interviewing survivors of the "Bataan Death March... Nazi Holocaust; ex-POWs and Vietnam veterans; survivors of cancer, polio, head injury... of rape, abuse, alcoholism, co-dependency and addictions; parents of murdered children; survivors of bankruptcy, job loss, and other major life-disrupting events." What does that have to do with the resilience of organizations? Everything, it turns out. The meat of the meeting was in pushing me to formulate something that I'll call "Art's Law". (Please, somebody stop me if this has been published elsewhere already!):

"An organization’s overall function, (and even its very existence!), is only as resilient as its least resilient component."

Those components include individuals obviously, but also business units, functions and infrastructure. Perfectly architected data network within a rigid, hierarchical management structure and culture? Good luck. Highly self-aware and enlightened management team with a sole source of supply or a critical data network that can easily 'break'? Same boat. Each type of organization may recover through sheer luck or hard work, but the price of that recovery will be high and the chances of achieving it much lower than if all components are in synch from a resilience perspective.

I'll stop there, but certainly add more in subsequent posts. On a final, personal note, I was glad to have been around this group of enlightened resilience-savvy individuals for two days in light of the news I received as I left the conference: my brother's leukemia has relapsed for the third time in as many months. If blogging is sporadic over the next several weeks, that's why.

Blue Ocean Strategy - A Book Worth Owning

I’ve grown weary of an endless stream of business books that “give great cover” (snappy title, heavily promoted, a promising dust jacket), then fizzle after a chapter or two. I’m doubly skeptical of business books out of Europe, where clear business writing is too often mixed with social theory, doing justice to neither. Thus it was a pleasant surprise to pick up 'Blue Ocean Strategy' (see right sidebar), by W. Chan Kim (of BCG and Insead) and Renee Mauborgne (of Insead.)

Published just last April, ‘BOS’ is a gem of a book, presenting what I’m betting could become the definitive unified field theory for so-called ‘reconstructionist’ strategy. (More on that in a moment.) What do I mean by unified field theory? In this case, without stretching themselves too thin, (as I at first suspected they might), the authors manage to weave together tools and insights for, among other things:

• Visioning
• Strategy-setting
• Systematic innovation
• Intrapreneuring
• Outside-in marketing
• Predicting strategic success
• Strategic pricing
• Focused, rational cost-cutting
• Organizational behavior
• Change management (aka, ‘tipping point leadership’)
• Sustainable competitive advantage

Too often these topics are atomized in business training and literature, making it difficult for managers whose job it is to integrate them. BOS by contrast, is theoretically ‘tight’ but also practical: citing dozens of examples from a wide array of organizations (e.g., Cemex, Cisco and Cirque du Soleil), alongside a toolkit of clear analytical steps, all packed into just 190 highly practical pages. In my line of work, this is the kind of book that begs underlining and highlighting. I expect it will grow a forest of sticky reference tabs as I re-read it and dog-ear the pages.

What is reconstructionist strategy? It’s easier to start with what it’s not. Reconstructionist strategy rejects the conventional wisdom of most strategy writing, scholarship and consulting that starts with industry definitions as ‘givens’ and focuses on competition and how to beat it by following a low cost or a differentiated strategy. Inspired by, but not wedded to Joseph Schumpeter (of ‘creative destruction’ fame), reconstructionist strategy focuses instead on customer-centric value (not to be confused with technology) innovation, and creating new aggregate demand in virgin product/market space where no competitors currently exist and mass pricing makes it hard for them follow. The authors note that:

“…a process of creation can occur in any organization at any time by the cognitive reconstruction of existing data and market elements in a fundamentally new way… Recognizing that structure and market boundaries exist only in managers’ minds, practitioners who hold this [reconstructionist] view do not let existing market structures limit their thinking… Redefining the problem usually leads to changes in the entire system and hence to a shift in strategy, whereas recombination [e.g., of technologies] may end up finding new solutions to subsystem activities that serve to reinforce a strategic position.”

The ‘Blue Ocean’ in the title refers to this kind of wide-open wealth-creating (as opposed to wealth-shifting) market space. It is contrasted with more common ‘Red Ocean’ market spaces where shark-toothed competitors churn the water bloody in a zero-sum feeding frenzy.

Readers forming the impression that this is a ‘big picture’ book are right—and wrong. The book unapologetically urges managers in the initial stages of strategy formulation to move beyond the confines of numbers, (either historical or projected), on the simple premise that such numbers exist by definition only within market spaces that someone else has already noticed. Having started there however, the book provides a framework for analysis that brings the visionary down the practical details of execution.

The book has sparked my thinking on a number of subjects, but especially scenarios. The authors don’t mention them directly, but I was excited to make what I think may be some profound connections between the processes they use for getting groups to envision new futures and some scenario process innovations I’ve used with clients… the subject of another post at some point. I’ll close with this quote from the book that I thought was particularly on point:

“Encouraging refutation [of alternative futures or strategies] sharpens everyone’s thinking and builds better collective wisdom.”

Indeed. Read the whole thing. Full disclosure: I have no financial interest in the book and have never met the authors.

Assessing The 'Blogosphere'

Trying to kick a persistent book-buying habit, I visited my well-stocked local public library last week, looking for 'Blog' by Hugh Hewitt. The electronic card catalog noted 219 (!) requests outstanding for the library's two copies. I've never seen anything above ten outstanding requests for any other book. My interest piqued, I gave in and ordered a copy from Amazon.

Those of a blue-state mindset will find 'Blog' irritating in the extreme, even as Hewitt acknowledges the role that blogs of all political persuasions (including the apolitical) are playing in public and semi-public discourse. And Hewitt's grand historical analogies (to Luther and the Protestant Reformation), as well his sometimes hyperbolic rhetoric (e.g., "No matter what you do or who you are, the information delivery system in the United States just experienced a revolution.") can sometimes interfere with what is otherwise a worthwhile and informative read.

After hearing ten years ago that the Internet would change everything (including basic rules of economics and prudent management), I'll reserve judgment on 'revolutionary' - even as blogs are unquestionably making a significant impact on how information is produced and consumed. (For perspective, when web browsers started to become popular, the majority of current bloggers had not yet reached the fourth grade.)

On page 68, to my great surprise and delight, I re-discovered an old friend and colleague: Jeff Henning, COO of Perseus Development. The Perseus' blog survey (from which Hewitt quotes), reveals some interesting statistics about hosted blogs (which represent the vast majority of blogs out there):

• There were over 4 million blogs in existence as of late 2004
• Two thirds of those were abandoned (dormant >2 months)
• One quarter of the total were abandoned after just one day
• Over 90% are written by those under 30
• Only 1.7% are written by those of us over 40
• 2.6% are updated on average at least once a week
• Only 1.2% are updated daily

It's unclear how many non-abandoned blogs, written by the over-40 set are updated 3-5 times a week (as this one is). But with a base of 4-million plus, it's still a large number. I'll check with Jeff on the detailed cross-tabs.

Library of Babel... or Enlightenment?

The New York Times this morning reports on what could be a watershed event in the history of information availability: an agreement between Google and major world libraries to put the text of books online. How far this extends beyond what the bootstrapped Project Gutenberg has already done with many out-of-copyright works is unclear. (As a side note, the Gutenberg site has been a wonderful resource for finding obscure, ethnic fairy tales to read to my kids.) This is the kind of development that's been talked about in both technology and library circles for over a decade. Apparently, in the copyrighted realm, excerpts from books will be accessible via Google, bringing it closer to what Amazon is already doing with its 'Search Inside' program.

"It may be only a step on a long road toward the long-predicted global virtual library. But... the goal is to expand the Web beyond its current valuable, if eclectic, body of material and create a digital card catalog and searchable library for the world's books, scholarly papers and special collections... The Google effort and others like it that are already under way... are part of a trend to potentially democratize access to information that has long been available to only small, select groups of students and scholars."

The fact that Google is doing this helps put to rest fears that the Internet is somehow unmanageable, hostile, or not to be trusted, a la Borges' Library of Babel... the problems with Wikipedia notwithstanding.

Friction and Institutional Survival

For completely recreational purposes, I recently finished reading "Deep Survival: Who Lives, Who Dies, and Why" by Laurence Gonzales - a fascinating exploration into how the human mind works (or fails to work) in extreme wilderness survival situations. To my great surprise, the book is chock-full of insights with strong implications for strategic planning under risky and fast-changing circumstances (i.e., how and why do organizations 'live' or 'die'?).

I'll highlight just two of Gonzales' rich observations. He has plenty more that our readers should find fascinating. In describing the dynamics that led to a massively fatal climbing accident a few years ago on Oregon's Mount Hood, he writes:

"...there is a tendency to make a plan and then to worship the plan, that 'memory of the possible future'.  But there is also a tendency to think that simply by putting forth more and more effort we can overcome friction. In the case of the Mount Hood accident, both happened... Separate teams couldn't discuss and modify their plans as conditions changed each person had his own friction, each team had its own friction, and the cumulative effect put everyone on the same slope..."

Sound familiar to any executives out there? He goes on:

"Experience is nothing more than the engine that drives adaptation, so it's always important to ask: Adaptation to what?  You need to know if your particular experience has produced the sort of adaptation that will contribute to survival in the particular environment you choose. And when the environment changes, you have to be aware that your own experience might be inappropriate."

Managers take note...

Thinking About Industry Evolution

In anticipation of her forthcoming book (‘How Industries Evolve’), Anita McGahan of BU’s School of Management penned an excellent piece for the October issue of the HBR (subscription required). Excerpt:

"The need to understand change in your industry may seem obvious, but such knowledge is not always easy to come by. Companies misread clues and arrive at false conclusions all the time... To truly understand where your industry is headed, you have to shut out the noise from the popular business press and the pressure of immediate competitive threats to take a longer-term look at the context in which you do business..."

I couldn't agree more. Such long-term thinking is an endangered species in a business culture obsessed with quarterly results and competitive tactics, making it tempting to conclude that nothing can be anticipated with any accuracy beyond a year. But that would be going too far.

Ms. McGahan goes on to describe four archetypal ways in which industries evolve, based on the degree to which their core assets and/or their core activities are threatened with obsolescence. (She defines core assets as, "the durable resources including intangibles, that make your company or efficient and performing core activities". She defines core activities as, "the recurring actions your company performs that attract and retain suppliers and buyers".)

It is when core activities are threatened - she maintains - that disciplined long-term out-of-box-thinking is most important:

"...companies operating in an industry [where core activities are threatened] must perform a balancing act... only with unconventional thinking - beyond standard market research and advertising plans - can [such companies] find answers to these questions... [Threats to core activities] also call for new ways of dealing with competitive threats..."

Continuing the commentary on threats to core activities, she concludes:

"...it is also important to interpret conflict within your organization in a new way. 'Civil Wars' can emerge within an organization as divisions with exposure to different segments of the business develop opposing views about the nature and pace of change.  It is uncanny how frequently this happens."

This closely mirrors my own firsthand observations on how strategic thinking and decision-making works (or fails to work) within large organizations experiencing  conditions of rapid change and high uncertainty. To put it another way, it's a natural human impulse under stress to rely even more heavily than normal on deeply trusted 'mental models' of how the world 'works'. Such models are rarely made explicit, much less shared and normed for relevance against a rapidly shifting external environment. Interactive scenario planning can be a powerful tool for organizations finding themselves in such straits.