Directions & Destinations

On the modern planning fallacy

Friends,

I hope all is well with you and yours, and that this e-mail finds you on a boat with shoddy connection, in the tropics, three months after I sent it.

A couple of updates before we go-go

There is a famous scene in Joker in which the titular anti-hero, played by Joaquin Phoenix in an Oscar winning performance, realizes that his life has not been a tragedy, but “a fucking comedy”. Although I never thought my life was a tragedy, the past couple of weeks have been nothing short of bloody laughable.

It began with me, while away on a weekend holiday, picking up a stomach bug that also attacked my liver. As a result, I spent the rest of the week completely knocked out with cramps, high fevers, and headaches. Then, on the very day that I could begin eating again properly, I got sinusitis and a bad cold. Presto, just like that, another three days knocked out with fevers. Today (Tuesday), while I was busy coughing up a lung, I received a call from our kindergarten: my daughter had an eye inflammation and had to be picked up post haste. Obviously, this means a) that kindergarten is a no-go until she’s fine again, and b) that my eyes are about to get their due too, as history has taught me that they are notoriously sensitive; eye inflammations get around like a PowerPoint deck on retail media. And, oh yes, my wife leaves for France tomorrow (Wednesday) night, to return only Sunday morning.

Oy vey. There went that workweek too.

Well, nobody likes a whinging old fart, so let us move on.

In the news

Data from the US shows that companies are sending more jobs overseas, as they respond to increasing financial pressures. I predicted this might happen last year, but few seemed to make the connection between WFH and outsourcing. The reality is that, beyond the strategic dilemma, the difference between an employee working from home in New York and Mumbai is a lot smaller than many realize.

The Chinese economy beat expectations, as the the GDP in Q1 was 4.5% larger than a year earlier. As one might guess, pent up demand played a significant role in the uplift, as Chinese consumers shopped, ate out and travelled after nearly three years of stringent Covid restrictions. To illustrate, retail sales in March were up 10.6% YoY.

Perpetually misanalysed Casper finally realized that it should be a mattress retailer if it is to make any money. I am counting this as a personal win. For those unaware, I have made the case against the public perception of Casper for half a decade. Every year, my points were proven correct. Every year, people kept telling me I was still wrong. Does the strategic shift mean that the company is out of the weeds? No. But the first step towards solving a problem is admitting you have one.

Item of the week

Dave Snowden is, in my opinion, one of those people who will every single time provide you with something you did not know, think about or realize. In one of his latest tours de force, called Hope Without Optimism, he discusses one of the most central questions in strategy, namely what can one make in the here and now to improve the future. A great watch.

On the other hand, if we go back to natural science [as opposed to social science], there are things that have been subjected to peer review and multiple experiments. And these act as what in complexity is known as an enabling constraint. We say that if we know these things about systems, and we know these things about human beings, then we have to design on the basis of that knowledge, not on the basis of how we would like things to be. Complexity is materialist, it is realist, and it is pragmatic.

Moving on.

Strategy is about movement

But few have understood the implications

Although we may have different opinions on what the fine print should be, the affable Roger Martin and I share a lot of views on the headlines of strategy. As I have written elsewhere, he is one of exceedingly few top echelon strategic management thinkers (alongside Robert Burgelman, William Starbuck, and a handful of others) who have an understanding of what complexity is in a technical sense - and the paradigm-shifting organizational implications thereof.

The most recent post in his practitioner’s series illustrates my point rather well.

Historically speaking, as most of you will be aware, strategy has been considered synonymous with planning; it follows directly from the work of, above all else, Frederick Winslow Taylor and Henri Fayol upon which most modern frameworks are built (more on that in the premium section later).

Yet despite the eagerness with which practitioners claim that this still is the case, alas, it is a nonsense. Roger’s post adds yet another crucial reason why, and while I have made the same point myself previously, I have not covered it in-depth. So, today, I will. The PEST framework will have to wait.

For those who have yet to read the piece (I highly recommend that you do), Roger’s main argument is that strategy ultimately is what you do. This, as he points out, may or may not have anything at all to do with what you write in a document:

Essentially, companies back into the timing for strategy. It needs to be finished in time for some combination of board approval, the operating plan process, and the budget process. That is why the obsession with ‘are we there yet?’ And if necessary, executives will force strategy to be done more quickly and less thoroughly to be finished in time for these other important and dependent events/processes. … This obsession is driven by a belief, which the business world holds but I don’t, that your strategy is what your strategic plan says it is. Based on that belief, it makes total sense to think that you have to finish your strategic plan in order to have a strategy that can be presented to the board and translated into an operating plan and/or budget. While that seems to make total sense, I believe otherwise.

Your strategy is what you do, which may or may not have anything to do with what you say or you write in your strategic plan.

Of course, while entirely correct, this argument is hardly novel; versions of it have existed for nearly 40 years at least (see Henry Mintzberg and James Waters’ seminal Of Strategies, Deliberate and Emergent, published in 1985, for example). But Roger adds an absolutely pivotal second layer through the seemingly simple question: “are we there yet?”.

You see, all strategy is defined by movement. Regardless of whether you are a planning fundamentalist or, like me, a proponent of more adaptive methods, the point of the strategic exercise is to move the organization. The difference between the two schools of thought is that while adaptive strategy is concerned with direction, strategic planning obsesses over goals; it deals not in journeys but destinations.

Given the ambitious nature of the tool, this tends to subsequently equate to grand dreams of mythical locations (even though most companies barely have enough resources to make it to the airport), or what Steve has labelled the Garden of Eden fallacy: planners define an ideal outcome, a magic new reality in which all of the organization’s problems have been solved, draw a straight line to the present, add a couple of objectives along the path to ensure alignment, and off they go. Inevitably, day two, something happens that they had not planned for, and the company unceremoniously falls off the idealized trajectory.

However, Roger’s question demonstrates the impossibility of the proposition even if the company somehow were to arrive. Arrival implies the cessation of movement. It implies stopping.

And that cuts straight to the heart of why strategy and planning are, and forever will be, two different things. Strategy is about continuous movement. Planning is about moving to a point where you need to move no longer.

Do not get me wrong; planning is not without its uses. If one is dealing with order or a context in which programming (i.e., activities planned in advance) is fundamental, such as an advertising campaign, planning is undoubtedly the correct tool. But there is no advantage to be found in the obviousness of order, and campaigns eventually stop.

By contrast, if the organization that ran said campaign were to stop, it would immediately be no more. It seems fitting. After all, if you were to somehow reach the Garden of Eden, you would indeed be dead.

Next week, I promise, we will discuss PEST, well, unless I get the plague or something. Until then, have the loveliest of weekends.

Onwards and upwards,
JP

This newsletter would normally continue below with additional market analyses exclusive to premium subscribers. However, given that we are lagging one edition behind, I have decided to keep them free for all for one week.

Premium subscribers will instead get an additional bonus feature coming soon. To unlock it, an e-book, and a number of lovely perks, and future premium member exclusive content, merely click the button below. If you would rather try the free version first, click here instead.

I am going to cut straight to the chase this week; we have plenty of market events to catch up on, and there will be another part in our ongoing look at artificial intelligence in strategic management. So, without further ado, let us jump straight in.

In market news

IKEA is investing $2.2B into the US over the next three years, with almost the entire sum going to new stores and improving its fulfillment network. Sounds like someone has read our white paper. (I kid, obviously. But the move could have come straight out of it.)

Apple is moving further into finance with Goldman Sachs, unveiling a high-yield savings account that carries an interest rate of 4.15%. According to Apple, the rate is more than ten times the US average. Given the aftermath of Silicon Valley Bank’s collapse, the timing could not have been better, and the move should serve the company well as it continues to strengthen its position in the financial sector.

Speaking of SVB, KPMG auditors missed what ultimately brought down the bank, but despite it supposedly being “textbook mismanagement”, so did auditors for the nine other US banks most exposed to precisely the same risk. A recent paper called Limited Hedging and Gambling for Resurrection by U.S. Banks During the 2022 Monetary Tightening? further contends that hundreds of banks share the risk. Almost as if it was not obvious to those who did not have the benefit of hindsight. Almost.

Y Combinator are doing what they said they would do by backing away from later-stage investing, which apparently still is coming as a surprise to some of their companies. Although I have no insight into relevant communication, it strikes me as somewhat odd that startups would believe it to be their role to advise on their investors’ investment strategies, well, beyond the self-serving.

The Ghosts in the Machine

In the world of scientific management created by aforementioned gentlemen Taylor and Fayol, which in turn mirrored attempts by Walras and others to scientize economics, chains of events in organizations were linear, direct, and controllable. After all, they reasoned, the rules that governed business processes were, in principle, no different to those which governed physics.

Their ideas were revolutionary when introduced, and remain central to strategic management concepts to this day. Most modern frameworks are, either explicitly or implicitly, control based. The thinkers (strategists) create the strategic plan. The doers (operations) then carry it out, as instructed, to the letter, without much thought of their own. If done properly, or so the narrative still goes, the organization will function like a well-oiled machine.

The mechanistic metaphor brings with it a number of immense dangers, however. To illustrate, in a recent MIT Sloan piece on “algorithmic management”, one could read the following:

With the help of digital technology, complex managerial tasks, such as the supervision of employees and assessment of job candidates, can now be taken over by machines. While still in its early stages, algorithmic management — the delegation of managerial functions to algorithms in an organization — is becoming a key part of AI-driven digital transformation in companies.

Ignoring for a moment the fact that complexity is non-algorithmic (adjacent possibles are a) indefinite and (b) only possible to put on a nominal scale), the act of reducing human behavior into mathematics carries a fundamental corollary: whatever is left will be restricted to that which is mathematically measurable. If the organization is a machine, this is not a problem; employees are cogs, to be improved or replaced, as the fires of industry burn according to well-known laws of business physics.

Unfortunately, it is not. Some people merely like to think in such terms, as it implies that firms can be designed, optimized, and controlled. Also, as Anthony Suchman once observed, the organization does not participate; change comes only from the engineers who expect and are expected to be in complete command of the design, implementation, and outcomes. Unexpected results imply culpability for deficiencies in design or execution.

It is easy to see through the silliness of it all. Certainly, there are things that one can measure, but the ones that matter most tend to be uncontrollable. Even Mark Friedman, the man who literally wrote the book on results-based accountability of the kind that algorithms would look to, admitted that they are - but then added that “we should not allow that as an excuse because then there would be no performance measures at all”.

The same ridiculous addendum echoes in the AI debate. So often lost is that far from everything is explainable by mathematics, unless one limits everything to the kind of things that mathematics are good at explaining.

At the end of the proverbial day, the strength of algorithms is that which most humans struggle with. The weakness of algorithms is that which most humans do well. Treat one as the other and you will inevitably fail, much as the MIT Sloan researchers eventually also realized:

Focusing solely on efficiency can lower employee satisfaction and performance over the long term by treating workers like mere programmable “cogs in a machine.”

Employees are not cogs, but ghosts in the machine.

For those unfamiliar with the expression, it was first coined by British philosopher Gilbert Ryle in his 1949 book The Concept of Mind. In short, Ryle used the phrase to criticize the idea that the mind and body would be separate entities. We know today that they are not.

Similarly, we know that an organization cannot be clearly split into thinkers and doers, nor that all that which an employee is can be understood by an AI. Just as strategy is all of that which you do, not just what is written in a document, employee performance is all that which they do, not just what turns up on a score card.

The sooner we understand it, the better both algorithms and humans can be.