Mapping Strategy

Sometimes The Best Strategy is Patience

From a recent IBM press release [emphasis added]:

A complex physics calculation that will take [the new] Roadrunner [supercomputer] one week to complete, would have taken the 1998 machine 20 years...

Put that in the back of your mind. Now step back and ponder the following hypothetical situation:

You're a business executive (or government official) facing a big, gnarly problem that absolutely, positively must be solved in ten years. If you don't make the deadline, something bad will happen. You'll go out of business, you'll fail to win re-election, your shareholders will revolt, the Huns will invade. Something bad. You've got to solve this problem. Your career (and maybe more) depend on it.

With current technologies, processes and general know-how though, you know you can't make it in time. Sure, you can reach the goal -- in theory, eventually -- but it's going to be really really expensive. And it's certain you're going to be late. Ten years late, in this case.

The problem will get solved, but the Huns will be running the place by that point. You'll be out of a job, maybe worse: lawsuit, jail, early retirement, HBR case studies that make you look like a complete idiot and laughingstock in hindsight... that sort of thing. Your grandkids will still love you... until they get to business school and read the case. But I digress.

So, you have two choices: 

Start throwing wheelbarrows of cash and thousands of bodies at the problem. Or invest judiciously in innovation -- and, at least as importantly, an innovation culture -- and wait patiently for those to bear fruit. (There's a third option: waiting for others to innovate for you, but we'll leave that aside for now because it only applies in limited situations where you can be fairly certain someone is working on the thing you need and that you'll be able to buy whatever it is they come up with.)

In either case, (#2 or #3, that is) you may have to wait years. You won't have much to tell your shareholders in the meantime, other than "we've hired the best, given them the best resources, incented them up the wazoo and tried not to be too meddlesome -- those creative folks don't take well to corporate bureaucrats, y'know." But when something does come along, you'll be able to really impress them: "You remember that problem we thought would take twenty years to solve? We finally got started on it, and we're targeting completion... next Wednesday." Sounds like promotion material, doesn't it? And your grandkids won't be laughing at you when they get to business school.

The tough part, of course, is all the verbal bobbing and weaving for the first ten years when nothing seems to be happening. No highly visible hordes of minions toting 10-ton blocks of stone up pyramids on wooden rollers (and dying by the dozens, getting you in trouble with OSHA). Just a bunch of folks wandering around in lab coats (or, more likely, surf shorts and goatees, playing foos-ball between all-night stints at the white-board).

Sometimes waiting (and investing) is better than charging ahead, using up all of your cash on old, dumb, slow methods that you know will be a day late and a dollar short.

H/T: Irving Wladawsky-Berger

Thinking Exotically

With air travel on my mind after a West Coast trip last weekend, the following strikes me as positive, (and not just because I'm a marathon runner who tends to pack light). Rather, it's the kind of thinking we do routinely when we help clients develop scenarios. E.g., what if industry 'A' adopted the business model of industry 'B'? Emphasis added:

Imagine two scales at the airline ticket counter, one for your bags and one for you. The price of a ticket depends upon the weight of both.

That may not be so far-fetched.

"You listen to the airline CEOs, and nothing is beyond their imagination," said David Castelveter, a spokesman for the Air Transport Association, a Washington, D.C.-based trade group. "They have already begun to think exotically..."

With fuel costs almost tripling since 2000, now accounting for as much as 40 percent of operating expenses at some carriers, according to the ATA, airlines are cutting costs and raising revenue in ways that once were unthinkable...

Singapore Airlines... is "trying to eliminate unnecessary quantities of extra water" to save weight, Chief Executive Officer Chew Choon Seng said in an interview...

Robert Mann, head of R.W. Mann & Co., an aviation consultant based in Port Washington, New York [said,] "If you look at the air-freight business, that's the way they've always done it... We're getting treated like air freight when we travel by airlines, anyway."

This signals that an industry long characterized by minimal innovation starting to think beyond convention (but... we've always done it that way!) The shock is external and pressing in this case (fuel costs). It needn't be so. Better to do this kind of thinking every day.

Best-practice use of scenarios involves doing this systematically, comprehensively and, over time, making it an ingrained habit of strategic thinking among management. (How could we change the rules to our advantage?) Having several contingent strategies already fully 'baked' when a crisis hits can move one ahead of more flat-footed competition who must do all that thinking while under existential, immediate pressure.

Next up: refunds for in-flight diuretics.    ;-)

From Risk to Uncertainty

I don't agree with everything in this piece by Thomas Homer-Dixon that appeared last week in the Toronto Globe and Mail, but this quote is an absolute gem (emphasis added):

Our global financial system has become so staggeringly complex and opaque that we’ve moved from a world of risk to a world of uncertainty. In a world of risk, we can judge dangers and opportunities by using the best evidence at hand to estimate the probability of a particular outcome. But in a world of uncertainty, we can’t estimate probabilities, because we don’t have any clear basis for making such a judgment. In fact, we might not even know what the possible outcomes are. Surprises keep coming out of the blue, because we’re fundamentally ignorant of our own ignorance. We’re surrounded by unknown unknowns.

It's something I've said for a long time:

It's tempting to think that all things are predictable given enough information, enough minds, enough time and enough computing power. It's just not true. (Which is not to say that some things are not predictable... and with incredible precision... a phenomenon that leads to overestimating the scope of problems and questions that lend themselves to such methods.)

Telling which is which is the trick...

I would go even further to say that really smart people who, by life experience know that some things are fundamentally unpredictable still draw an unvoiced sense of emotional comfort in their business life from the idea that some wise expert somewhere has been to the future (for all intents and purposes) and if we could just find him or her things would be OK... and/or that a really sophisticated computer model or prediction market (the 'collective mind') can provide crystal ball-level insights.

Sometimes yes. Often, no.

I liken Mr. Homer-Dixon's observations to those tragically massive car pile-ups that happen a few times of year in fog-prone areas like the Central Valley of California. Everyone is driving along at a reasonable speed, with reasonable spacing between vehicles. People are sipping coffee, tuning radios, maybe talking on cell phones. Slightly distracted, but mostly responsible. All is normal.

Then the first guy hits a fog bank and can't see squat. He taps his brakes. The second guy sees red lights and fog coming up fast and taps his brakes just a little bit harder, and so on. In just a few seconds, hundreds of cars end up in a tangled heap and people die. All because the guy in front was convinced by every one of his senses and not without justification based on experience that the visibility on the next 100 yards of road would be the same as on the last 100 yards of road.

Why Retro is So 'Yesterday'

Wise words from fellow scenario-planner Stewart Brand:

Good old stuff sucks. Sticking with the fine old whatevers is like wearing 100% cotton in the mountains; it's just stupid... The Precautionary Principle tells me I should worry about everything new because it might have hidden dangers. The handwringers should worry more about the old stuff. It's mostly crap. (New stuff is mostly crap too, of course. But the best new stuff is invariably better than the best old stuff.)

Next They'll Ban Thinking...

I find this item in today's WSJ both puzzling and ridiculous
[emphasis added]:

Television's late-night talk-show hosts are set to return to the airwaves next week, but their jokes will pretty much have to write themselves.

After sitting out the first two months of the Hollywood writers' strike, the hosts have agreed, under pressure from their network bosses, to go back to work. But members of the Writers Guild of America -- including the folks who supply the hosts with most of their laugh lines -- are still out on picket lines this week, and no new rounds of negotiations are scheduled...

The guild's strike rules are extremely broad and vague, prohibiting the late-night talk-show hosts, most of whom are guild members, from doing anything that constitutes "writing services." That means the hosts are technically forbidden from writing and performing the traditional opening monologue, plotting out sketches in advance, or creating fictional characters that would perform on the shows...

With all due respect to writers trying to make a living (and I can empathize because, in another sphere of my life, I am one) this is silly beyond comprehension. 

In the brave new Internet world of tens of millions of bloggers toiling for free (some of them reasonably clever, informative and funny) there's little to stop a late-night host from initiating an open contest for the best monologue or character for each night's show.

If no money changes hands, is it the same as crossing the picket line and hiring 'scabs'? What if a third party did the same thing and the host just happened to browse the website? Is finding and printing a volunteer monologue the same as writing? And what is writing, anyway, if not thinking? On what basis do they propose to control that? (Much less justifying their attempts to do so.)

There's nothing like trying to restrict the fundamentally unrestrictable to show how little power the Guild -- and other fluid, information- and creativity-based enterprises -- wield in this new paradigm. The article continues:

anything traditionally written by writers -- David Letterman's "Top Ten List," for example... [would be] unacceptable...

When a rule implies that replacing "anything traditionally done by [fill-in-the-blank*] would be unacceptable", we have approached the very definition of reactionary anti-innovation.

*E.g., as a though exercise, try substituting "typists", "file clerks", "telephone switchboard operators", "blacksmiths" or "horse-and-buggy drivers". Does the following sound Orwellian to anyone else?

Since much of the "writing" on these shows consists of generating ideas for skits and segments, which are loosely scripted and then partially improvised on air, producers say it is unclear how much forethought is technically permissible. [!!]

Then again, maybe someone 'gets it' after all:

Other ideas being batted around by producers that they believe don't violate strike rules include man-on-the street and audience interviews [and] clips from YouTube and other video Web sites...

Better be careful lest the YouTube characters display written words... that would be writing.

What Can and Cannot Be Predicted (and Thoughts On Telling the Difference)

I just ran across this post ("Debating the Viability of Terrorism-Prediction Markets") over at the 'Footnoted' blog at the Chronicle of Higher Education discussing the risks of terrorism how best to assess them and whether they can be known at all. (If you've grown weary hearing about war, politics and terrorism, just skip to my non-terrorist business conclusions in the last paragraph.

In a recent interview [PDF] with the Federal Reserve Bank of Richmond, W. Kip Viscusi is asked about the public-policy response to the threat of terrorism and whether we are weighing the costs and benefits in a generally rational way. "The reason this is tricky is we don’t have very good numbers on what these risks are," Viscusi says. "The estimates of the probability of a terrorist attack or the number of people who are going to die in the coming year are all over the map. So if you can’t assess the likelihood of a terrorist attack or how deadly it is going to be, it is really hard to say how much you should spend to try to prevent it." [emphasis added]

Vscusi is characterized later in the article (and not without reason) as "one of the foremost academic experts on risk". His comment is in response to a persistent school of thought that claims, as Bruce Schneier does, that from an actuarial perspective, "terrorism doesn't happen".

Without the qualifier, the idea sounds terribly cold. With all reverence for the families of those who have lost loved ones in terrorist incidents however, it's not. Businesses and governments--not to mention non-profit institutions, individuals and families--all need to assess risks as rationally as possible and take measures to hedge them. Like it or not, the value of a human life can be defined--at least partially--in dollar terms. Anyone who's ever taken a course in economics or statistics (or balanced a checkbook for that matter) has figured out that infinite spending to protect against risk is infinitely foolish and that infinite spending on risk 'A' (and no spending at all on risks 'B', 'C', and 'D') is only a variant on the same wrong-headed assumption.

That's not what's really at issue. What is at issue is the degree to which the political leanings of some lead them to believe that we can know how much to spend combating terrorism and that the 'right' number is obviously much less than we are spending today (e.g., tactical domestic measures, overhead for business, strategic overseas measures, etc.) To which my response is: really? Show me your pre-9-11 white paper predicting the order-of-magnitude sea-change that occurred in that 'industry' on 9-11.

Bryan Caplan is one of Viscussi's critics. The CHE post notes:

"I am frankly puzzled," Caplan writes at EconLog. Citing the work of John Mueller,we have a long experience with terrorism, which has "shown it to be an extremely small problem in the broad scheme of things. How much longer does Viscusi want to wait before he'll conclude that the risk is very low?"

Unfortunately, long experience in and of itself is not sufficient for prediction, even at a macro level. Hold that thought for a quick diversion.

Here's where it gets weird. In criticizing Viscussi, Caplan, an econ prof at famously free-market GMU, ends up in league with Schneier, who as far as I can tell, tends towards the opposite end of the political spectrum. Both conclude, for entirely different reasons, that the future threat of terrorism can be known and condensed to a dollar figure and that rational budgets (both public and private) can be set accordingly. Oh that it were so.

Caplan, in particular "favors the establishment of a prediction market to help assess the likelihood of a terrorist attack". That's something I can conditionally applaud. If the results are used to "help assess", then we're fine. The possibility that a prediction market might help draw in and roll up marginal, highly distributed, even intuitive information that can supplement traditional (and sadly inadequate) intelligence-gathering mechanisms is certainly a good thing.  I've been a huge fan of prediction markets for years. They should be used for more things than they are today. To my delight, more and more are catching on.

But...

...as longtime readers know, I've also concluded that there are some (and arguably many) problems for which prediction markets are not only silly but grossly misleading. I don't have the space to review them all of them here. Thinking that they can precisely predict and quantify particular terrorist threats or even the threat of terrorism generally is a notion that falls into that category. Almost by definition, a successful terrorist venture is compartmentalized, secret and surprising.

In short, Caplan, Schneier and others appear to have an ideologically-induced blind spot that leads them to declare certainty where it does not exist. Let me explain.

Schneier and Caplan draw their essential argument from a backward-looking, actuary-style catalog of terrorist incidents. This many people died. This much property was lost. Productivity was reduced by this much for this long. Etc. Etc. It all sounds very rational. If we had reason to believe that terrorism were a natural, forecastable, perhaps even cyclical phenomenon, that approach would be absolutely correct. We don't.

The main problem, as I've noted before, is that:

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. [emphasis in original]

And that's the problem.

Sudden, step-function, order-of-magnitude change, precipitated by a small group that has every reason to keep its plans secret is inherently unpredictable. It can only be imagined. If that sounds familiar outside of the terrorist context, it should. Businesses face this kind of challenge all the time; it is the very nature of business, in fact: snowboards vs. skis; digital photography vs. wet-process; PCs vs. mainframes; VoIP vs. legacy telephony; biotech vs. big pharma. The list is very long. It's harder to name an industry that hasn't been touched by this kind of change at some point (often precipitating the re-invention and re-definition of the former "industry") than it is to come up with a long list of examples of industries that have be altered in this way. Bottom line: it's important to differentiate between problems that lend themselves to forecasting and those that can only be dealt with via imaginative scenarios.

Success Begets Complacency: Germs, Vaccines & the FDA

Wide-ranging and thought-provoking article by Peter Huber in the latest City Journal on vaccines, public health, politics and the economics of drug development for germ-fighting pharmaceuticals:

The FDA... worries that with too few patients tested, statistical anomalies might allow an inferior antibiotic to win its license, and the new one might then become the benchmark for a third even worse one, and so on until the industry slouches its way down to licensed sugar pills. The agency calls this scenario “biocreep.” It’s just the sort of logical but overly theoretical concern that sneaks into government offices where the paramount objective is to avoid mistakes. But nowadays, “no mistakes” means no new drugs licensed until the germs start killing lots of people again...

Enveloped in bureaucracy, the germ-killing segment of the drug industry has lost much of its flexibility, resilience, and reserve capacity—and has become painfully slow in developing what new science makes possible. Short-term economics and federal law have converged to create a systematic bias in favor of the germicidal drug invented and licensed decades ago...

In 1957, five important vaccines were being supplied by 26 companies. By 2004, just four companies were supplying 12. Mergers accounted for some of the attrition, but most of it resulted from companies getting out of the business. More than half of the vaccines routinely given to young children in 2005 came from just one manufacturer; four others had only two suppliers.

Money quotes:

The new infectious diseases... have evolved to be as nimble as we are now institutionally stolid, as flexible as we are rigid...

Germs are terrorists: they let the dead past bury its dead, they are always changing, and the ones you know aren’t the ones that will kill you.

In Control: Bomb-Sniffing Bees

It's hard to believe it's been more than a decade since Kevin Kelly's ground-breaking book "Out of Control" ushered in (at least to my mind) a new popular appreciation for the possibilities opening up as a result of understanding complex systems, chaos theory, swarm dynamics and a host of other cool new meta-ideas about how the world works.

On the cover (in both old and new editions) is a drawing of a swarm of bees, some of them live, some of them digital. Thus it is with fascination, giddiness (how cool is that!) and a sense of time passing much too quickly that we note this new development in the war on terror.

An extraordinary invention by a small British company is being praised by American scientists... Los Alamos sniffer squad trainer Tim Haartman, an entomologist - insect specialist - at the lab, said: "The technology is there. It's just a case of putting it into production."...

Inscentinel showed the Los Alamos scientists that the bees can be trained to sniff out anything from home-made fertilizer bombs, through demolition dynamite to C-4 plastic explosives. Unlike sniffer dogs which require three months training, it takes 10 minutes to train the bees.

After training three or four bees are put in a shoebox-sized "sniffer box", held in position on plastic mountings. Air is sucked by a fan into the box via plastic tubes and wafts gently over the bees. If they detect explosives in the air, the trained bees all stick out their proboscises together.

A miniature video camera in the box is trained on them and is connected to a computer programmed with movement recognition software. As soon as the movement of the proboscises is detected, an alarm sounds to alert the security operator.

Vertical vs. Horizontal Thinking

Zenpundit Mark comments on a post at the Eide Neurolearning Blog, on vertical vs. horizontal thinking. Both are well worth reading for the distinctions they draw between deep expertise and the holistic, often intuitive, cross-disciplinary thinking that comes naturally to strategists and those with "the vision thing":

Complexity in thinking is, strictly speaking, different from the type of reasoning derived from having a high level of expertise in a given field, often referred to as vertical thinking. 

Be sure to click through to Mark's full post at his new Newsvine site.

UPDATE: Readers can find more thoughtful commentary on this concept over at Steve DeAngelis' Enterprise Resilience Management blog:

If I understand the Eides correctly, some complex thinkers create a mini-Medici Effect in their minds... We normally think of creating a Medici Effect by bringing vertical thinkers together in a group to generate innovative solutions to a particular problem or to generate entirely new thinking. I would be willing to bet that individuals who successfully facilitate those gatherings are, more often than not, horizontal thinkers. [link and emphasis added]

That works for us! Even better is this comment by DeAngelis:

Horizontal thinkers see and understand horizontal scenarios better than other people. What does this have to do with resiliency? A lot... Most businesses have intentionally set up vertical organizations. By that I mean they have separate siloed departments that deal with specific, specialized functions. As I have argued repeatedly, however, today's paradigm requires horizontal sharing of information across department boundaries...

By no means does that denigrate the importance vertical thinking (which furthers knowledge), vertical organizations or industries (which promote efficiency), or vertical action (which responds to vertical scenarios), but it does underscore the fact that within and between organizations more (not less) horizontal interaction needs to take place. Every organization needs a horizontal thinker who can make sense of these relationships and help establish a proper balance between them. Why? Because, if the Eides are correct, horizontal thinking may be a capability that is either learned early in childhood or is simply innate. [emphasis added]

The ERM blog has occasionally put its founder's business (Enterra Solutions) overmuch in the spotlight for our taste. (The line between a corporate website and a blog is a fine, subjective and constantly evolving one.) With this post however, DeAngelis seems to be breaking out and finding his blogging 'voice'. His passion for the underlying concepts and deep knowledge of the unmet needs shine through without the 'pitch' getting in the way quite as much.

In any case, given that Steve is a dedicated and highly successful serial entrepreneur, we'll take the pitch as passion. He's building it and they are coming. Again.

I share with Steve a strong conviction that out there in the larger world, understanding of resilience (much less resilience management) is still very much a concept in its infancy, even as the term has come into widespread use since 9-11. Much remains to be done before organizations truly "get it" up and down the 'stack' - from infrastructure, through people, all the way up to long-term strategy (e.g., portfolio and innovation). That's another post altogether...

Next Generation KM: Internal Market Engines for Innovation Selection

A big H/T to a reader and longtime colleague for this article in yesterday's NYT about internal prediction markets applied to the problem of innovation selection (the topic of a panel I chaired last year at the Conference Board's Innovation event in NYC):

"We're the founders, but we're far from the smartest people here," Mr. Lavoie, the chief executive, said during an interview at Rite-Solutions' headquarters outside Newport, R.I. "At most companies, especially technology companies, the most brilliant insights tend to come from people other than senior management. So we created a marketplace to harvest collective genius..."

According to Tim O'Reilly, the founder and chief executive of O'Reilly Media, the computer book publisher, and an evangelist for open source technologies, creativity is no longer about which companies have the most visionary executives, but who has the most compelling "architecture of participation." That is, which companies make it easy, interesting and rewarding for a wide range of contributors to offer ideas, solve problems and improve products?

...At Rite-Solutions, the architecture of participation is both businesslike and playful. Fifty-five stocks are listed on the company's internal market, which is called Mutual Fun. Each stock comes with a detailed description — called an expect-us, as opposed to a prospectus — and begins trading at a price of $10. Every employee gets $10,000 in "opinion money" to allocate among the offerings, and employees signal their enthusiasm by investing in a stock and, better yet, volunteering to work on the project. Volunteers share in the proceeds, in the form of real money, if the stock becomes a product or delivers savings...

Mr. Marino, 57, president of Rite-Solutions, says the market, which began in January 2005, has already paid big dividends. One of the earliest stocks (ticker symbol: VIEW) was a proposal to apply three-dimensional visualization technology, akin to video games, to help sailors and domestic-security personnel practice making decisions in emergency situations. Initially, Mr. Marino was unenthusiastic about the idea — "I'm not a joystick jockey" — but support among employees was overwhelming. Today, that product line, called Rite-View, accounts for 30 percent of total sales. "Would this have happened if it were just up to the guys at the top?" Mr. Marino asked. "Absolutely not. But we could not ignore the fact that so many people were rallying around the idea.

...one of the most valuable stocks on Mutual Fun is the stock market itself (symbol: STK). So many executives from other companies have asked to study the system that a team championed the idea of licensing it as a product — another unexpected opportunity. [emphasis added]

There are several things I find interesting here. The internal market delivered tangible financial results within just a few months and and generated immediate interest by others. As I've said for about a year now, prediction markets are poised for hockey-stick growth. They are no longer simply experimental or academic, nor are they of interest solely to Fortune 500 organizations whose right and left hands don't know what the other is doing. As interesting is the fact that the very innovation the market picked facilitates the rehearsal of complex, time-dependent decision-making - a topic I spoke about just last month at the Intelligence Summit. We are witnessing no less than a revolution - the simultaneous open-sourcing and simulation of management decision-making. The whole article is definitely worth a read.