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Directors’ Discussions: the magic dust

“It’s not the rules and regulations. It’s how people work together.” Jeffrey Sonnenfeld

“Boards should be: seats of challenge and inquiry that add value … the high-performance board … is competent, coordinated, collegial, and focused on an unambiguous goal.” David Nadler

“… build a context in which exciting conversations can occur, so that people can learn something new about themselves or others, discover new insights, hear and make counter-intuitive arguments, and come to creative and novel solutions to problems” Lynda Gratton and Sumantra Ghoshal.

“Conversation … is the magic dust that underpins board effectiveness”. Tomorrow’s Company

Verbal communication is the hallmark of human social interaction; and the product of human interactions determines the behaviour and performance of organisations. Thoughts are exchanged verbally in discussions through conversation (informal exchange), dialogue (formal exchange) and debate (formal contest). Healthy discussion is an opportunity to express thoughts, to acknowledge differences and similarities in thinking, to demonstrate interest in and harness others’ thoughts, to develop both understanding and new thoughts and to arrive at good decisions.

Gratton and Ghoshal’s taxonomy of business discussions is based on the mix of technical authenticity (e.g. analysis and rationality) and emotional authenticity (e.g. belief systems, feelings and meaning). Although they did not explore the application of their taxonomy to boards of directors, each species of discussion has its place among directors and requires appropriate time, space and business context.

Dehydrated talk is neither technically nor emotionally authentic. While it’s dry, and ritualised, it is sometimes appropriate, e.g. for correction and approval of minutes and for declaration of interest in a matter before the board. Dysfunctional dehydrated talk tends to dominate board discussions when rules, usually unwritten, formalise how people are addressed and who speaks when, for how long and on which subjects. It also dominates when the setting is one of constraints and allocation of insufficient time for exploration and discovery.

Disciplined Debate is technically but not emotionally authentic, although debate may generate emotions! Healthy board debate is a Socratic dialectic of thesis, antithesis and synthesis. It is a robust, rigorous routine that directors can use to arrive at decisions, such as investments and divestments. Important ingredients for productive, disciplined debates are access to the same information, fair process and clear decision-making criteria. While useful, debate is constrained to discrete, known options and, therefore, it is not creative. Even after healthy and robust debate, decisions may fall foul of the traps of decision-making, such as bias towards confirming evidence and maintenance of the status quo. Disciplined debate may be followed by creative dialogue.

Creative dialogue is technically and emotionally authentic verbal exchange among thought peers. Its purpose among directors is synthetic, creative and decisional: to develop new insights and understanding from different perspectives; to decide what’s right and good; and, ultimately, what to do and not to do. Its form is captured in a somewhat oxymoronic phrase: structured, but flexible. Creative dialogue requires preparation, adequate time and no distraction. Active, articulate participation is essential for creative dialogue, but it takes time for boards to develop a willingness to ask big, broad and deep questions and for directors to express a point of view, while being open to consideration of different perspectives.

Intimate exchange has low technical but high emotional authenticity. It usually takes place in informal settings. It’s an opportunity for directors to exchange what they stand for, to demonstrate care and trust and for a modicum of humour. Intimate exchange is the portal to a collegial or friendly atmosphere ‘in the boardroom’, to unity of purpose and esprit de corps, which is common to effective boards, but sadly missing from ineffective boards.

Effective boards develop a rich social context that enables healthy discussions, especially creative dialogue. Such a social context makes directorship energising, satisfying and worthwhile; its features include:

Mutual trust and transparency (congruence between what directors think, say and do) that enables candid exchange of thoughts;

Self-disciplined work that delivers on promises;

A moral purpose and clear business goals;

Values that create clear, but wide boundaries for the direction and content of discussion.

Boards usually comprise members who are diverse, well educated, and expert at something. Such groups are prone to become dysfunctional! Some features of a dysfunctional social context in a board include:

Strict form and routines;

Distrust;

Arrogance;

Bad behaviour; and

Threats of sanction.

Dysfunctional discussions such as inappropriate dehydrated talk and hostile debate lead to a dystopia of disharmony, distrust, dissatisfaction, disaffection and dismal outcomes.  

Somewhat counter-intuitively, a board’s most fruitful discussions may be intimate exchange of thoughts because they are an opportunity to demonstrate care, to develop camaraderie (mutual trust and friendship) and to collaborate in getting work done. It also creates the harmonious social environment necessary for Socratic debate and creative dialogue.

Roger Stewart©

2013, .v 201906

Roger Stewart 20170824-180_cr.jpg

Roger Stewart is a truant from medicine and academia. He has been both an executive and non-executive director of companies in Southern Africa, Europe and the USA. He is a Fellow of the Institute of Directors.  He applies systems and value thinking to complex problems such as governance. He writes on corporate governance in his personal capacity.

Three A’s of Strategy; Absorb, Anticipate and Adapt

Three important questions in strategy.

  • Do we have the buffering capacity and capability to absorb shocks and to respond swiftly and effectively to fleeting threats and opportunities?
  • Do we anticipate change and make innovative moves ahead of the unravelling of the change?
  • Can we adapt quickly to changes in the business landscape, to our errors and to external threats and opportunities?

A cybernetic perspective of strategy.

There are three possible responses to changes in system inputs (matter, energy or information): buffering, feedforward and feedback. In strategy, these are absorb, anticipate and adapt.

Regulatory Mechanisms

Buffering, feedforward and feedback (from left to right)

Buffering is the passive absorption or damping of changes to the state of a system as they occur.  Its source is reserve capacity or capability (‘slack in the system’); its advantage is resilience to unanticipated shocks; its drawback is that it is an investment in capacity or capability in excess of current needs.

Feedback is part of the adaptive response to changes in state that have already taken place (there is usually some delay).  Negative feedback attempts to re-establish a prior state. Positive or re-enforcing feedback increases output of the system. Feedback’s source is systems of information gathering, analysis and decisions. Feedback’s advantage is that responses can be precise. Its drawback is that it occurs after a change of state has occurred; furthermore, unrestrained positive feedback always damages the system; and delayed negative feedback causes oscillations (as in swings in inventory).

Feedforward describes the response of system to input signals before a change in state has occurred in a system.  Feedforward’s source is the same for feedback, but it precedes a change in state of the system. Its advantage is that it anticipates change of state. Its drawback is that it can induce errors that may accumulate, unless corrected by negative feedback.

Implications for Strategy

Absorb

Buffers are spare capacity and capability (the notion of discretionary “resource slack”), a cushion that enables resilient organisations to absorb shocks and to respond quickly to fleeting opportunities, e.g. a cash pile, inventory and spare factory capacity. A danger is that a buffer may become excessive (‘fat’). Strategy choices determine the extent of this form of resilience and resourcefulness.

Anticipate

In Adaptive Enterprise, Stephan Haeckel correctly stated that: “A sense-and-respond organization does not attempt to predict future demand for its offerings. Instead, it identifies changing customer needs and new business challenges as they happen, responding to them quickly and appropriately.”[1]

The feedforward concept is uncommonly used in business (see the confusing entry in Wikipedia: http://en.wikipedia.org/wiki/Feedforward_%28management%29). Feedforward is intrinsic to anticipatory strategic thinking, anticipating change, i.e. deciding and acting before noticeable change occurs – it is about shaping the future change by creating it, not by responding to change that has already taken place. For example, an anticipatory estate agency predicted in 2006 and 2007 that escalating house prices indicated untenable debt in society that would lead to collapse of the banking system and deep economic decline; consequently, it eliminated its own gearing and identified high net worth individuals with cash who would buy up bonded houses that would come on the market when owners no longer could afford to pay their bonds. Some countries noted the COVID-19 epidemic in China, anticipated it would cross international borders, prepared and were ready to act when it did arrive, e.g. Taiwan.

An anticipatory organisation does predict the future, not in a mathematically precise way, but in a statistical way that recognises a range of possible futures.  It moves ahead of clear changes in the business environment, conducting affordable strategic experiments if time allows. This requires anticipation and taking steps ahead of the change. An anticipatory organisation also prepares for the management of erroneous predictions or disadvantageous outcomes, i.e. it prepares for fast failure (i.e. rapidly bring to an end or adapting failing experiments).

Adapt

Feedback is the hallmark of the adaptive organisation, e.g. responses to employee and customer surveys and to macro-economic and market conditions. In fact, much of the common form of strategy practice is adaptive in nature: responses to the outputs of SWOT, Five Forces and similar analytical tools of strategy. Adaptation is fundamental to defensive strategies to maintain competitive position, to correct errors in past strategic moves and it can also spark innovation to grasp emergent opportunities (sometimes dressed up as threats). Successful first responders and “second movers” are to be admired. However, the chance of successive, successful adaptation declines exponentially over time! This latter reality makes enduring success very challenging – and very uncommon.

Absorb, Anticipate and Adapt

Consider the rapid uptake of iPads. Within 9 months, unit sales reached 15 million units; then sales doubled every 6 months for two more periods! The rate of sales could never have been realised had Apple only “identified changing customer needs … as they happen”. It anticipated a rapid uptake, prepared its supply chain by building capacity ahead of the need – the buffer – and, as market information became available, Apple gave positive feedback to participants in its supply chain, which made possible the rapid, exponential rise in production and sales.

http://iphoneindiablog.com/wp-content/uploads/2012/02/Apple-Device-Sales-ipod-iphone.png

Now consider the sales of notebooks. Some competitors anticipated the development, launch and likely impact of the iPad on notebook sales. They prepared by developing competing products and built capability and capacity ahead of the market. They were able to respond quickly to Apple’s success by launching their competing products and were able to ride the tablet wave.

http://www.bigcitypix.com/image/chart-notebook-sales-negative-computer-apple-ipad-launch-units-2010-data-mobile-gadget-device-gizmo-cosumer-electronics-fortune-business-graphic-image.png

Companies with excessive buffers are squandering assets; those that eliminate their buffers become vulnerable to shocks and might not be able to respond quickly to fleeting opportunities.  Companies that rely only on anticipation, i.e. moving ahead of the market are prone to ‘error catastrophe’ when they pursue too many opportunities. Companies that only adapt are always playing catch-up, while those that do not adapt are likely to become victims of ‘complexity catastrophe’ – the strategic sluggishness that follows re-enforcement of existing dynamics and ‘active inertia’ (busily staying the same).

Most enduringly successful companies have good, current business intelligence (the key input); they use anticipatory strategy techniques such as of scenario planning, game theory, real options and they conduct of affordable strategic experiments; they invest in the future and move ahead of the market; they build capacity and capability in prudent excess of current needs; and they also adapt quickly to the market dynamics … and their unsuccessful strategic experiments ‘fail quickly’.

Getting the right mix of absorb, anticipate and adapt is about business acumen[2] and good luck.[3]

Roger Stewart ©

October 2012, v 2015


[1] Haeckel, S. The Adaptive Enterprise. Boston: HBS Press; 1999, p3

[2] Charan, R. Sharpening your business acumen. Strategy and Business. 2006: Reprint No. 06106. http://www.strategy-business.com/article/06106?pg=7

[3] Makridakis, S. et al. Dance with Chance. Oxford: Oneworld; 2009.

Dealing with dilemmas in business

“The internal administration of each line of thought seems to be impeccable, but their diplomatic relations with one another seem to be internecine.” Gilbert Ryle in Dilemmas

Dilemmas are propositions in apparent conflict.  We think of them as irreconcilable solutions to a single problem.  We experience dilemmas with discomfort – we are caught “between a rock and a hard place”.  Some examples of dilemmas in business include: enterprise vs. prudence; short-term vs. long-term; centralisation vs. decentralisation; investment vs. cost-cutting; innovation vs. standard procedures (best practices); economic value vs. social value (i.e. the ‘business of business’ is profit vs. social benefit).

Dilemmas often cause intense and lengthy debate, discord, competition for resources, organisational impasse and missed opportunities – the result being corporate inertia.  Effective directors and executives identify dilemmas, understand their nature and, somewhat paradoxically, reconcile them.  Their companies realise economic benefit and some become icons in society. 

Gilbert Ryle was concerned about the body – mind and other dilemmas that have troubled philosophers.  Over half a century ago, he suggested that dilemmas are fallacious: they are not rival solutions to the same problem; they are possible solutions to different problems.  Consider the innovation – standardisation dilemma: innovation is a way of solving the problem of having new products to sell, while standard procedures ensure consistent quality of products; logically, innovation and standard procedures are not at odds with each other.  Nevertheless, they are real issues that can create conflict in business.  For example, they compete for resources; innovations induce variation, while standard procedures reduce variation; people who innovate usually are quite different from those who prefer to implement standard procedures.  Companies need innovation and standardisation, but they also need to eliminate their internecine tendencies. These are the challenge and an opportunity for creative thinking.

Carlos Ghosn, who famously turned around Nissan, rose to this challenge, saw the opportunity and realised benefit for Nissan.  He actively sought out differences between people in the conviction that their differences create business opportunities: “seeing issues from someone else’s perspective can be very instructive.”  Ghosn suggests conditions for realising benefit from differences or apparently opposing views: recognition of and respect for the differences, together with a keen interest to learn from the differences and to create business advantage.  He admits that the processes involved are difficult; but he contends they are worth the effort because of the potential for benefit and advantage.  Therefore, he created and supported cross-functional and cross-cultural teams in the turnaround of Nissan.

Charles Hampden-Turner and Fons Trompenaars have considered dilemmas in the context of different cultures.  To them, people from different cultures tend to lean towards one horn in a set of dilemmas and, consequently, they appear to be in conflict.  Like Ghosn, they view dilemmas as opportunities.  Their steps towards business benefit from dilemmas are similar to those of Ghosn. They have developed formal processes for reconciling culture-related dilemmas and for the development of reconciling actions that, when implemented in the company, realise benefit.

Their novel contribution is to view the apparently conflicting lines, not as polar solutions, but as two axes between which there is a space for new thinking and novel opportunities.  Their latest thinking is a step ahead of the more common search for win-win solutions, i.e. accepting both lines of thinking. They try to add value to each line of thought through the other, thus creating new thinking and new opportunities.  Their reconciliation of the innovation – standardisation dilemma is illustrated below.  

REVLOGO

Of course, this is two steps ahead of compromise, i.e., a lose-lose solution.

Rosabeth Moss Kanter studied 350 companies on five continents (Transforming Giants – the large companies that make the world a better place”; Harvard Business Review; January 2008).  She concluded that they:

  • “Standardize and innovate, endeavouring to prevent consistency from becoming stifling conformity.
  • Globalize and localize, deriving benefits from the intersections.
  • Foster a common universal culture, but also respect for individual differences, seeking inclusion and diversity.
  • Maintain control by letting go of it, trusting people educated in the shared values to do the right thing.
  • Produce both business value and societal value”.

Clearly, these “transforming giants” successfully dealt with dilemmas.  Some sought ‘through and through’ creative reconciliation. With regard to the example of the standardisation and innovation dilemma, she wrote that “standardization does not mean that no enhancements can be made … people versed in universal standards are often most innovative when they apply those standards to local situations … it is critical that the standards be open-ended and aspirational, not constraining or restrictive”.  This is in consistent with the reconciliation approach proposed by Trompenaars and Hampden-Turner.

The challenges for directors and executives are to avoid being impaled by the horns of business dilemmas but to harness the opportunities they bring.  This approach requires a departure from taking polar positions and debate on false dichotomies. It also requires a willingness to consider the ‘excluded middle’ … the creative space between the horns that provides opportunity to overcome compromise and gain more than win-win.

Success usually means finding innovation out of the creative tension (i.e. energy) that emanates from differences, particularly different mindsets. It requires what Sumantra Ghoshal referred to as creative dialogue that occurs in a healthy climate for conversation.

Roger Stewart

Notes on Company Design A challenge of aesthetics in practice

Design & Performance

The purpose of organisation design is to achieve integrity (wholeness) and productivity. A company’s philosophy, business model and strategy are the convergent framework upon which the company is designed.  Design is a concept of structure and function: so that people, processes and resources or assets operate together to create a capable whole that harmoniously pursues and achieves the company’s purpose, objectives and goals. 

Integrity of organisation design means the parts are arranged and function as a whole, harmoniously and productively towards common goals: this is about coherent structure (logical fit of the parts) that enables congruent function (efficient and effective flow of matter, energy and information between the parts).  The part are sub-systems comprising people, processes, tangible and intangible resources or assets.  Organisation integrity means that all the parts belong in and contribute to the whole, with the consequence that the behaviour of the whole is the product of congruent interactions of all the parts – more than the sum of the parts.

The aesthetic challenge of management is to ensure the harmony of the interactions of the parts (absence of conflict and other barriers), which efficiently & effectively co-produce outputs that contribute to the pursuit of the purpose and achievement of the goals of the whole. Ultimately, the whole pursues a purpose so that contributes value to the containing system (i.e. society).

Integrity of organisation design means the parts are arranged and function harmoniously and productively towards common goals

Integrity of individual people is about ethics. It means that individuals honour their words by achieving agreed goals, which are in line with their capability, the circumstances, and the needs of the organisation.  The ethics of the system (company) reflect the effective ethics of all its people, of their interactions within the company and with people and organisations in the containing system. Interconnected people contribute to the efficient and effective working of the whole organisation/ system. Productivity declines when individual or organisation integrity is compromised.  Crucial to integrity are congruent purpose and goals (individual and company); clarity of roles; coherent structure; horizontal and vertical trust and co-operation of and mutual benefit to all who are within and transact with the system. 

The arrangement of the parts often is illustrated by vertical layers of parts and the connecting lines.  Vertical lines define the hierarchical arrangement of responsibility and authority to decide and act.  The higher the vertical level, the greater is the complexity of individual work. In order to support the goals of the layer above, the incumbents of each ‘box’ define the work to be done in that layer and they provide the context and goals of the connected people in next layer below. Horizontal lines indicate the people who must collaborate, so that they may co-create and co-produce valued outputs in line with individual and common goals. The wider the horizontal span, the greater is the complexity of goal achievement and the need for collaboration for efficiency, effectiveness and productivity.

The quality of relationships amongst the parts is more important than the quality of the individual parts (this assumes the individuals have sufficient capability to do their work).  Trust is at the heart of productive and enjoyable relationships.  A trusted vertical or horizontal relationship between people means that one person is confident that the other will deliver a promised goal within a shared value system.  Productivity of the whole is compromised by distrust. 

When a person in a higher vertical level is doing any of the work assigned to a person in a lower level, then higher level work is being sacrificed to the detriment of the whole. When the productivity of a person is compromised by inferior inputs or outputs from another in the horizontal plane, the productivity of the value creation system of the whole is compromised: value is lost or destroyed. It is the responsibility of the person in the superior level to ensure this problem is resolved.

A trusted relationship between people means that one person is confident that another will deliver a promised goal within the restraints of a common value system.

“Silos and slabs” are the potential barriers to effective horizontal and vertical relationships respectively.  They foster dis-integration and, therefore, loss of productivity. The challenge is to dissolve the barriers; to catalyse synergy in value creation through effective vertical interaction and seamless horizontal collaboration.  Loss of organisation integrity deals a double blow to productivity.  It causes the productivity of the whole to tend towards the sum of the parts and, usually, it also causes the productivity of the individual parts to decrease.  

The goal of governance is delivery of goals through the harmonious, efficient and effective interaction of the parts (people). This æsthetic function primarily is integrative; those at superior/higher levels must provide the context for lower levels; work with them in setting the goals for those levels; ensure that the required people processes, and resources are in place; ensure that the individual people have the requisite capability to achieve their goals and that the vertical and horizontal working interactions are harmonious, mutualistic and also congruent with the intent of the whole.

The goal of management is delivery is to synergise the efficient and effective interaction between the parts in pursuit of the purpose and goals of the whole.

The process requires self-development throughout the organisation; a core function of senior personnel is to encourage and enable self-development at lower levels. The parts of an organisation should be measured in terms the productivity of each part and its contribution to the success of the other parts and of the whole. It is the responsibility of the most senior personnel to ensure that the organisation is a productive contributor to the containing whole of which it is part (i.e. society). When interconnected parts are encouraged to be independently successful and not co-successful, the success of the whole is compromised.[*]

An analogy: African wild dogs form packs because the individuals are small, vulnerable and incapable of achieving what a pack potentially can. The alpha pair provides ensures integrity of the pack.  All the dogs in the pack know their roles and there is a high degree of collaboration. The packs are formidable coalitions that are the most successful group predators: eighty percent of the pack’s hunts are successful and deliver rewards that are disproportionately large relative to the size of the dogs. 

Roger Stewart © 2009/10/12; v2020/06/03           

Glossary

Aesthetics: branch of philosophy concerned with perceptions & associated judgments on appreciation and value.

System: system of inter-related elements

Dynamic system: a system the state of which changes due to the interaction of the parts

Harmonious: pleasing freedom from disagreement, dissent or dissonance

Congruent: coincident; in agreement, compatible in character

Coherent: fit well together

Integrity: honest; true to self; strongly principled

Mutualistic: beneficial to interacting parts

Consonant: in harmony

Resonance: reverberating; synchronous & reinforcing

Synergy: combined effect of interacting parts is > sum of independent effects

Purpose: will; intent; goal; determination; object of / reason for existence


[*] A conglomerate is not really an integrated system: the parts are connected to the holding company but not between each other. The challenge for the holding company is be worth more than the sum of the parts.

Organisation Inertia

Business strategy is about moving an organisation from its present state to a future state that is qualitatively and quantitatively different. While Michael Porter described five external forces that shape the competitive context of strategy,[1] two other strategists separately identified five internal forces that seem to prevent managers and directors from responding or responding appropriately to the external context. This is important, since 95% of cases of organisation decline are due to internal factors. Furthermore, 70% of strategies under-deliver even though managers consider them to be good.

Rumelt’s Five Forces of Inertia

Richard Rumelt identified five internal forces of inertia that impede organisational change of state.[2] 

  • Distorted Perception of the changing business environment has its roots in one or more of myopia, hubris, denial and group think.
  • Dulled Motivation to change is an inappropriately dampened emotional response to the situation, even if it’s correctly perceived. Some causes are direct costs of change, cannibalisation costs and comfort with cross subsidisation.
  • Failed Creative Response is an inability to find a way out of the problem, even if it is correctly perceived and the management is sharply motivated. Some of the underlying causes are rapid change and associated complexity; the mindset of this too shall pass or of inevitability; strategically destitute.
  • Political Deadlocks tie up time and energy in wrangling about change, usually because of vested interests or ties to the past, to projects or to relationships.
  • Action Disconnect is the inability to execute and bring about the intended and agreed upon change; the underlying problem being one or more of inaction, embedded processes, dysfunctional culture and inadequate capabilities or resources.

Sull’s Five Sources of Active Inertia

Inertia is not only resistance to starting to move, it is also resistance to being shifted from a particular course of action. This is why many strategies are a continuation of the past, perhaps with some non-fundamental adjustments. Sull coined the term ‘active inertia’: companies take action in response to the changing context, but it’s inappropriate; they cling to established ways of thinking and working. ‘Instead of digging themselves out of a hole, they just deepen it.’ [3]  Sull identified five common sources of active inertia.

  • Strategic frames: how managers view the business, become blinders;
  • Processes: the way things are done, become routines that are ingrained and unquestioned;
  • Resources: prior investments in tangibles and intangibles, become millstones.
  • Relationships become shackles that prevent companies from forging new, more appropriate relationships (with suppliers, for example)
  • Values: beliefs become dogmas that no longer resonate or invigorate

Reconciling Rumelt and Sull

 In essence, both Rumelt and Sull described lock-in: entrapment in ways of thinking about the business, in ways of doing things and/or in relationships that are not really working. Sull focused on the kinds of lock-in, while Rumelt identified some of the reasons for ineffective execution. When confronted with reality of their organisation’s inertia, many managers may go into defensive routines such attributing ignorance or misperceptions to the person or people conveying the reality; blaming others; or intellectualising in order to suppress painful feelings. All of these defensive routine routines result in behaviours destined to maintain the status quo.

Overcoming Active Inertia

Successful strategy requires a company to overcome inertia that prevents new ways of thinking, doing things differently or doing new things. The external landscape readily is more readily viewed from the outside, a crucial role for mentors, consultants, customers and suppliers.

The starting point in the painful process is to examine Sull’s sources of active inertia. The next step is to ask questions or have someone make observations in respect of Rumelt’s five forces. Then ask: are we struggling to find a creative solution? Are we motivated to make the shifts it seems we must? Are we taking positions and debating points of view or defending the status quo, instead of entering into dialogue with the intent of understanding different perspective and finding novel solutions? Finally, are we prepared to allocate the right resources and people and to execute with vigour and precision?

Significant change brings temporary uncertainty, instability and risk. If the first attempts to find solutions to challenges are not working, the temptation is to return to where one started instead of finding other possible solutions. All strategic moves are experiments; they can’t all work and this is means instability and uncertainty; but the risk is probably less than staying too long on the path that took the company to past success and that will, eventually and certainly, take the organisation to future failure.

Strategy is not for the faint-hearted!

Roger Stewart

End Notes


[1] Porter, M. How Competitive Forces Shape Strategy. Harvard Business Review 1979; March – April. Reprint 79208

[2] Rumelt R. Précis of Inertia and Transformation

http://www.anderson.ucla.edu/faculty/dick.rumelt/Docs/Papers/berkeley_precis.pdf

[3] Sull D. Why good companies go bad. Harvard Business review 1999; July-August. Reprint 99410 and a slightly different version at http://www.donsull.com/downloads/ingrained_success.pdf

Précis: Chain of ‘Mistakes’

Whether it is a physical disaster, a political blunder, a corporate misstep, or a strategic mistake, there’s a unique set of compounding errors that leads to every disaster. However, there’s a common pattern in the crises that end in disaster.

First, there is an initial problem, often relatively minor in isolation, which goes uncorrected.

Second, there is a subsequent problem that compounds the effect of the initial problem usually in conjunction with an inept attempt at correction.

Third, there is disbelief at the accelerating seriousness of the situation.

Fourth, an attempt is made to hide the truth about what is going on, while corrective efforts get under way.

Fifth, there is a sudden recognition that the situation is out of control, or “in extremis.”

And finally there is the play-out of the ultimate disaster involving significant loss of life, financial resources, or both … followed by recriminations.

A recurring theme is failure to acknowledge that there’s a problem, failure to investigate and get to understand the problem and failure to learn. A series of bad judgment calls leads to a series of interrelated, harmful consequences … and disaster.

What should you do as a manager of a complex organization, or part of it?

The first step is to acknowledge that most classic disasters are the result of an unbroken chain of ineffectively managed events; a single mistake seldom results in disaster.

Second, understand that the benefit/cost ratio of breaking the mistake chain early in most cases is almost infinite.

Third, create an atmosphere/culture that allows mistakes to be discovered and corrected in a positive fashion.

Fourth, use case studies and examples to educate others to the danger of not managing multiple mistakes.

Fifth, make it the personal responsibility of every individual in the organization to identify mistakes/failures and “stop the production line.” It’s a valuable opportunity to learn.

The goal is not for companies to be mistake-free, Mittelstaedt says. “If you do not make any mistakes, you may not be taking enough risks, and failing to take any risks at all may be the most dangerous type of mistake a business can make.” The objective instead is to “find ways to stop mistakes quickly once they are made, and to learn from them in the process.”

http://knowledge.wharton.upenn.edu/article.cfm?articleid=1068; http://knowledge.wharton.upenn.edu/article.cfm?articleid=1021 

Will Your Next Mistake Be Fatal? Avoiding the Chain of Mistakes that Can Destroy Your Organization (Pearson Prentice Hall, 2004) by Robert E. Mittelstaedt, available at

Roger Stewart.  April , 2020  

Theory of the Business

By Peter Drucker in Harvard Business Review 1994 (Sept. – Oct.): 95 – 104; Reprint 94506

Research on the value of Drucker’s thoughts in his seminal paper was reported here.

A clear, consistent, and focused theory of business is extraordinarily powerful. Successful companies are theories that work; troubled companies are theories that do not. A common trap is to identify the symptoms of the trouble, not the cause: a theory that does not work.  

Like Cicero’s Gaul, the assumptions in the theories of business are divided into three parts: 1) The business environment: society, the market, customers and technology; 2) the mission of the organisation: what it wants to become and 3) the capabilities and resources required for achievement of the mission. These assumptions influence the organisation’s behaviours, decisions, and the definition of success. So, when is a theory of business valid?

  1. The key assumptions fit reality.
  2. The assumptions are coherent and congruent, i.e. they fit and work together – they do not conflict.
  3. The theory is understood by everyone in the organisation.
  4. The theory has been tested constantly. Given the flux in the business environment, it is unlikely that any one theory will fit reality forever, although some may last a long time.

Prevention: Every 3 – 5 years, a company should go through a process of abandonment. If these products, services, channels, customers, policies were not here now, would we start with them again, now? If the answer is no, an investigation into the reasons is pursued until there is a deep understanding. Failure to follow this process and to respond appropriately means that scarce resource will continue to be invested in what is not consistent with the current reality. The next preventative measure is to develop a profound understanding of non-customers … why are they not customers and what will convert them?

Early diagnosis: Testing the theory is painful, but necessary. Defensiveness is a common reaction. Early diagnosis is possible by regularly monitoring lead indicators (early warning signs, such as loss of customers). Always try to understand unexpected success or failures, one’s own or one’s competitors … they reflect the success of the business theory.

Cure: The appropriate response to diagnosis is deep thought about the three fundamental assumptions, early diagnosis, changes to the assumptions and then decisively to give effect to these (it is a re-invention of the business). Patching here and there does not work.

Comment: Drucker’s insights are as valid today as they were two decades ago. Strategies emerge from the convergence of the three circles of influence: 1) the company’s world view, in particular the paradigms of its business and of success: its value in society; 2) its business model (the narrative and numbers about delivering its value proposition and making an economic profit in a way that resonates with society; and 3) its understanding of the environmental context (transactional and contextual) within which it operates.

Effectuation: a précis

The Successful Entrepreneur’s Way of Starting New Ventures

http://www.strategy-business.com/article/12203?gko=72b74

https://www.effectuation.org/

Effectuation is the process that successful entrepreneurs use, and others may learn, in order to start new ventures. It’s planning while executing and executing while planning. Effectuation is radically different from classical corporate strategy: bold envisioning of a clear future, planning, projecting future cash flows and proceeding if the net present value is positive.  The successful entrepreneur does not predict the future; successful entrepreneurs shape it!

The Principles

Start ASAP, with the means at hand. Don’t wait for the perfect opportunity. Start taking action, based on what is readily available to you: current resources, knowledge, experience, skills, relationships and passion for the venture.

Set the affordable loss: Ask: “what am I prepared to throw in to shape my future and also prepared to lose if it doesn’t work out?” Take the plunge, provided the downside is acceptable and, should the venture crash, fail fast and take an affordable loss. Learn and start another venture.

Leverage contingencies: This is about the “dance with chance”; unforeseen developments, even apparent problems, are opportunities to learn and to be leveraged for growth and gain.

Form partnerships: This is about co-evolution and co-production with customers, suppliers, financiers and with others willing to make a commitment jointly to shape the future.

Successful entrepreneurs bootstrap the venture as soon as possible, starting with the means at hand. They strive towards initially modest goals that evolve as the venture takes shape.  They keep the risk of possible loss as low as their appetite for risk allows – always keep it affordable. They quickly secure revenue from customers, and, through serving them, they gain intimate knowledge and understanding as they proceed.  They foster relationships that not only provide new means, but also reduce the risk, by distributing it amongst partners. Once the venture has gained momentum and becomes a viable business, they gradually start using more conventional approaches to growing the business.

Effectuation is about the conviction that human action can influence and shape the future (Path Creation vs. the fatalism of Path Dependence). It is strategy as exploration, an acceptably risky “adventure” into an unpredictable, fuzzy future; it’s not a planned “journey” into the known or an envisioned, clearly conceived future.

Roger Stewart

October 2020

PRECIS: Followership

A huge part of business management is about effectively dealing with interactions between people; these are line and not HR functions!  If you do not consider leadership as part of management, read Henry Mintzberg on the subject.

The evidence is convincing and clear: companies gain significant financial benefit when they build an enabling, enjoyable workplace and nurture mutually rewarding relationship among employees: Return on invested capital 3 – 4 times greater than in companies that do not. 

 “Management isn’t about supervision & control … while managers may be nominally in charge, they are rarely in control of everyone’s performance … making joint performance possible and superior is one of management’s greatest challenges.”  (next précis)

This quotation is from Joan Magretta in What Management Is.  Joan Magretta, previously editor at Harvard Business Review, wrote this excellent, no nonsense, non-guru, short book on the essence of management – find it at www.abebooks.com (a superb site for finding difficult to obtain or out of print books); enter the title under key words (lower case) and, if you wish, just her surname in the author space.  It will cost more to ship than purchase! 

 “There can be no leaders without followers.  People seek, admire, and respect – that is, they follow – leaders who produce within them three emotional responses. 

The first is a feeling of significance.  Followers will give their hearts and souls to authority figures who convey, “You really matter,” no matter how small the followers’ contributions may be.

 The second emotional response followers want from their leaders is a feeling of community. Community occurs when people feel a unity of purpose around work and, simultaneously, a willingness to relate to one another as human beings.

Finally, followers will tell you that a leader is nearby when they get a buzzing feeling. People want excitement, challenge, and edge in their lives. It makes them feel engaged in the world.” 

Extract from a powerful 1 page article: Followership, Rob Goffee & Gareth Jones.

Roger Stewart           

June 2020                              

PRECIS: Learning from the evidence

Learning from Evidence in a Complex World by John D Sterman. Am J Public Health. 2006 March; 96(3): 505–514.

Precis of the Precis

A “Manhattan Project” approach to crises (experts secretly provide advice to inform policy decisions) fails when success requires change of behaviour throughout society!

Measurement in science introduces distortions, delays, biases, errors, and other imperfections, some known, others unknown, maybe unknowable. Groups of experts may help overcome these challenges; but they may be thwarted even if participants receive excellent information and reason well as individuals.  They are prone to use defensive routines to save face; make untested inferences seem like facts; and advocate positions, while appearing to be neutral. Some groups appear functional but suffer from groupthink: the members of a group mutually reinforce their current beliefs, suppress dissent, and seal themselves off from those with different views or possible disconfirming evidence.

 Our judgments, decisions and behaviours are moulded not only by evidence, but by personal traits and frames, emotions, reflex, unconscious motivations, and other nonrational or irrational factors, and by pressures created by the systems in which we act.

Implementation of social policy affects people. They seek to achieve their own goals and act to restore the balance that that has been upset by the policy. Citizens become cynical, non-compliant and actively resistant when they think that those with power and authority manipulate the policy-making process for ideological, political, or pecuniary purposes. The problem intensifies when those in authority respond by pulling harder on their policy levers, thus creating a vicious cycle.

The power of ‘the system’ to shape behaviour is an opportunity for policymakers to design enabling systems in which ‘outsiders’ can contribute to decisions and actions … and to achieve what central command and control cannot.

PRECIS

“We shall be guided by the evidence” is a common refrain in the COVID-19 pandemic. Should policy the complex problem of a contagious epidemic be left to the scientific or technical experts who can provide the evidence? A “Manhattan Project” approach (where experts secretly provide advice to inform policy decisions) fails when success requires behaviour change throughout society (as in COVID-19). The following explains this apparent paradox.

Measurement in science introduces distortions, delays, biases, errors, and other imperfections, some known, others unknown, maybe unknowable (so, for example, no one knows the real current incidence or prevalence of COVID-19 in South Africa). Measurement is an act of selecting a fraction of possible experiences of which we are aware. We may not even be aware of the remote issues or effects of our decisions and therefore omit important data from the evidence

            Deep learning arises when evidence not only influences our policy-decisions within existing mental models of reality, but also feeds back to alter those very models. The same information, interpreted by a different model, yields different decisions and different policies!

 (Of course, many issues relating to the pandemic and other complex problems are outside the remit of science – ethics, for example – and that opens another can of worms).

Groups of experts may help overcome these challenges, but also can be thwarted even if the participants receive excellent information and reason well as individuals.  Defensive routines are used to save face; make untested inferences seem like facts; and advocate their positions, while appearing to be neutral. Individuals may make strong attributions to other members that are not grounded in evidence or may be irrelevant (groups of experts are prone to become dysfunctional and unable o arrive at consensus).

Some groups appear functional but suffer from groupthink: members of a group mutually reinforce their current beliefs, suppress dissent, and seal themselves off from those with different views or possible disconfirming evidence. Experts and decision makers tacitly may avoid publicly testing their beliefs; sometimes they explicitly communicate that they are not open to having their mental models or decisions challenged (or say they are but are not).

Even if a team were to overcome its challenges and were united in recommending the best course of action, the implementation of their decisions is often distorted by asymmetric distribution of information in society, private agendas, and game playing within the whole system. Obviously, implementation failures can aggravate the situation: the decision-makers who are evaluating the outcomes of their decisions may not understand the ways in which those decisions were distorted, delayed, or derailed by other actors in the system.

Finally, because error is often costly (not just in monetary terms) and many decisions are irreversible, the need to continue with past decisions often overrides needed change or experimentation.

 Our judgments, decisions and behaviours are influenced not only by evidence, but by personal traits and frames, emotions, reflex, unconscious motivations, and other nonrational or irrational factors; and by pressures created by the systems in which we act by not only evidence

Judgments are also strongly affected by the frame in which evidence is presented or its obvious implications (e.g. to support or counter an existing policy). Scientists are not exempt from judgmental biases. Common problems in judgments made by experts and authorities include overconfidence (underestimating uncertainty), wishful thinking (desired outcomes are more likely than undesired outcomes), and confirmation bias (seeking evidence consistent with our preconceptions and policy (so-called ‘policy-based evidence making’).

Unexpected or seemingly aberrant behaviours in others are persistently attributed to their undisciplined personal habits or qualities, attitude or failure to follow procedure (and, therefore, they are not credible). The reaction of those in authority then becomes scapegoating, blame and policy focused on controls to force compliance. This authoritarian reaction provokes resistance and non-compliance, which strengthens the authorities’ erroneous belief that these ‘deviants’ (including scientists with alternate views) are unreliable and require still greater monitoring and control.

Social systems contain intricate networks of feedback processes. Implementation of policy decisions affects people. They seek to achieve their own goals and act to restore the balance that that has been upset by the policy. Citizens become cynical, non-compliant and actively resistant when they think that those with power and authority manipulate the policy-making process for ideological, political, or pecuniary purposes.

Their reactions also generate intended and unintended consequences. The problem intensifies when those in authority respond to the feedback by pulling harder on their policy levers, thus creating a vicious cycle.

The power of ‘the system’ to shape behaviour is an opportunity for policymakers. It is an opportunity to focus efforts where they have highest leverage; not to control people, but to design enabling systems in which people outside the formal decision-making structures can contribute to decisions and actions … and to achieve what commands and controls cannot.

Roger Stewart

24 May 2020