Everything & Anything

How companies should move

Friends,

I hope that all is well with you and yours.

Before we begin, a quick word on the book club. We are now coming up on the halfway point of The Management Myth, and you should have received an email detailing virtual meeting slots and questions to prepare (or at least ponder). If you have not, please reach out to me either via email or Twitter.

Now onto the topic of the day.

As I explained on social media a couple of days ago, the final piece of the acquisition-retention trilogy that was due to land in paying subscribers’ inboxes today will be postponed for one week. The reason is that an argument about the strategic implications of current events has started to gain traction in the media, and the consequences could be serious financial and managerial setback for any company that takes heed.

(So, for those who have asked, no, I will not be commenting upon the demise of Fast at least at this time - if more of you want me to, just let me know and I will.)

In short, the narrative goes something like this: it is clear from recent international developments (Covid and the war in Ukraine in particular) that the world is uncertain. Consequently, companies should constantly be on the move, prepared for everything.

This is, to be blunt, infantile.

Starting with a why

In order to understand why this is such a dangerous supposition, we first have to establish three key concepts in naturalized strategy-making. To be perfectly clear, these concepts come out of complexity discourse, and are thus by no means unique to me or of my creation:

1. the adjacent possible,

2. resilience, and

3. the difference between a surprise and a shock.

Starting with the adjacent possible, a term which we have touched upon previously, it can be defined as ‘what can come to be’. Crucially, this space is dramatically larger than what actually will ever come to be. As Stuart Kauffman put it in At Home in the Universe:

Biological proteins use 20 kinds of amino acids — glycine, alanine, lysine, arginine, and so forth. A protein is a linear sequence of these. Picture 20 colors of beads. A protein of 100 amino acids is like a string of 100 beads. The number of possible strings is just the number of types of beads, here 20, multiplied by itself 100 times. That’s 10¹²⁰, or a 1 with 120 zeroes after it. Even in these days of vast federal deficits, 10¹²⁰ is a really big number. The estimated number of hydrogen molecules in the entire universe is 10⁶⁰. So the number of possible proteins of length 100 is equal to the square of the number of hydrogen molecules in the universe.

We might suppose that, through natural selection, nature has tried out this stunning number of combinations, rejecting all but the small subset that have found their way into earthly life — that there is no reason for us to look any farther than our own genomes. Robert Shapiro estimated the number of trials that might have occurred in all the oceans ever dreamed of by Columbus. I think this part of his argument is reasonable. Assuming that a “trial” occurs in a volume of one cubic micron and takes one microsecond, Shapiro calculated that enough time has elapsed since the earth was born to carry out 10⁵¹ trials, or less. If a new protein were tried in each trial, then only 10⁵¹ possible proteins of length 100 can have been tried in the history of the earth. Thus only a tiny portion of the total diversity of such proteins has ever existed! Life has explored only an infinitesimal fraction of the possible proteins.

Put differently, the number of things that can happen (the space of the possible) is titanic in comparison to what does (the space of the actual).

However, the present situation is even more complex than that. In the protein example above, the sample space (10¹²⁰) is known. In markets, it is not. This means that while the events that might come to be admittedly are not infinite, they are undoubtedly indefinite. As a result, it is impossible to accurately calculate the probability of them happening – regardless of how much data we collect. The future, in other words, is not something we can plan for with perfect accuracy.

Of course, traditional strategic management doctrine in general, and the planning school of thought in particular, still appears to assume that it can. The essence of the endeavor is said to be one of sacrifice; we define the one thing that we should excel at – the big bet, to use popular agency parlance – and then devote our time, effort and resources to ensure we are better at it than anyone else. In technical terms, this is called robustness. It is, one might say, the ability to withstand a hit.

But, as per the reasoning above, robustness hinges on insight that cannot exist; of future technology yet invented, competitors yet founded and choices yet to be made. And as I have written before, expanding a system's ability to handle some kinds of events increases the system’s vulnerability to other kinds of events. Any attempt to become optimal with respect to certain variations, constraints or disturbances increases brittleness in the face of any that fall outside of the set.

Sooner or later, therefore, a hit will inevitably come along that knocks the company on its metaphorical arse. What is then needed is the ability to rise again, a capacity to rebound from the trauma with continued identity. This is called resilience.

Lastly, we get to the difference between a surprise and a shock. The easiest way to explain this, I have found, is through what I call the Alan Affair (which is a reinterpretation of David Woods’ Noah story).

Alan can be summed up as a man who likes his routines. Without exception, he arrives at work at 9am and leaves at 6pm. One day, however, he decides to break the pattern and goes home early… …only to find his wife in bed with one of his colleagues. She has had a surprise. Alan has had a shock.

A surprise is a small thing, a detail, to which one can adapt or fine tune one’s behavior – cheat a little earlier in the day, if you like. It is typically not defined by its frequency (or lack thereof), though it can be, but rather that it somehow fails to fit one’s model of the world. A shock, on the other hand, completely changes one’s entire world view. It forces radical rethought, reconsideration and reconceptualization.

Bringing it all together

So, what the hell does this all have to do with the original problem? Well, the reason why companies cannot prepare for everything is due to the principle of the adjacent possible; one cannot know what ‘everything’ is because it constantly changes and expands. What one therefore has to do is to increase resilience and learn to understand what, to the organization, constitutes a surprise and what represents a shock.

The pandemic and the war have revealed that many companies struggle with the task. They either react too late (or not at all) or overreact entirely, and the reason is almost always that they were poorly prepared.

But, crucially, when one prepares for unforeseen events, one is not preparing for any one event in particular even though it hypothetically could occur. Rather, as Woods notes, one is learning the skills needed to handle surprises, analyze situations, gather information, and get a feel for when to make a key decision and when to hold it off. One is preparing not for everything, but for anything.

Claiming that companies can create everlasting robustness is, to my original point, childish. It relies on a belief that one can imagine every possible future scenario, a proposition so silly it should not be taken seriously by anyone, and would require a financial prioritization that would drastically limit the company’s ability to compete.

Instead, you should ask yourself what you can do today to increase your ability to adapt tomorrow. What can you do to improve your capacity to handle a future where that which has worked no longer works, where that which was routine has become irregular, and where that which produced consistent results no longer does because the world has changed and the context is different?

Remember that there is no point in running fast all the time. The key is to be able to run fast when needed.

Next week, paying subscribers will get the acquisition vs retention final, as promised. Until then, have the loveliest of weekends.

Onwards and upwards,
JP