The one by Doug Garnett
On action, instability, and profitability
Friends,
I hope that 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.
In today’s newsletter, guest writer and complexity expert Doug Garnett discusses the need to understand both the peaks and the valleys of business stability. For premium subscribers, he also breaks down how to take advantage of the knowledge and create higher profitability.
Now accepting keynotes for 24Q4-25Q2
Every year for the last decade or so, I have created three main presentation decks. For 2025, however, I have (for the first time) added a fourth due to popular demand. They are:
What to Do When You Don’t Know What to Do: How to turn change into a competitive advantage. (Based on the new book by the same name.)
Leadership in Times of Uncertainty: How to steer an organization through a sea of change. (Executive audiences only.)
Resilient Retail: How to build a profitable retail business in the modern marketplace. (Based on the 2025 follow-up to the highly praised 2022 white paper The Gravity of e-Commerce.)
Artificial Intelligence Beyond the Hype: How to understand the narratives, risks, opportunities, and best uses of a new technology.
If you want to book me for your event, corporate speaking slot, or workshop, merely send me an email. To make sure I am available, please do so at your earliest convenience; my availability is limited and the schedule tends to fill up fast. More information may be found here.
A couple of updates before we go-go
As I have been working feverishly on the new book, one thing that has (repeatedly) struck me is how much discourse is built upon fundamental fallacies. It is common - indeed far too common - to uncritically apply theories of old under the assumption that they must remain relevant since nobody else has bothered to question them.
The phenomenon is hardly new, nor is my observation. The Woozle effect (a source is widely cited for a claim that the source does not adequately support, giving said claim undeserved credibility) has been known at least since the 1950s, but goes much farther back, as any historian will tell you.
One might suspect that it is, therefore, a remnant of our ancestors who found evolutionary advantages in not questioning information. Survival must obviously have been easier if, for example, one did not challenge the spiritual leader (and thus risk being cast out of the tribe). But we also seek to continuously lower cognitive dissonance. We instinctively reject ideas that we do not like but are similarly quick to embrace those that we do.
As I have written many times before, if something works in practice, it becomes irrelevant whether it also works in theory. However, it is worth pondering how you can be certain that it truly does, particularly if you are a strategist. Woods’ fluency law states that a well-adapted activity hides the difficulties handled and the difficulties resolved. Put differently, expertise hides effort. Oftentimes, the strategies that we use, and the strategic frameworks that we used to build them, work despite themselves. Sooner or later, though, it all comes crumbling down.
Moving on.
JP’s note: today, as we move to the third author in our 2024 guest post series, we turn to Adjunct Professor and long-time friend of the newsletter Doug Garnett. Doug is a personal friend whose insights I value greatly; we have long calls every week or two to discuss strategy, complexity, management, and life. Soon, however, you will have the opportunity to dive as deep into his mind yourself - Doug’s new book will tell you everything you need to know about complex adaptive systems in a business setting. He has kindly sent us the following text to whet our appetites.
Action and instability
The latest generation of credit card machines entered the US market around 2016, accepting payments with credit cards, phones, and a new contactless payment approach. The first two worked well. Contactless payment, however, remains a disaster.
Why? Because certain actions in business are so unstable that even tiny errors do tremendous harm.
Misunderstanding instability
Businesses tend to think of stability and instability in broad terms, summarized in questions like “is my business stable?”. The question may be important, but it ignores the ways businesses actually encounter instability - with specific actions.
Returning to contactless payments, US terminals tell shoppers to “Tap to Pay.” Following instructions, then, shoppers quickly tap the edge of their card on the terminal. When that doesn’t work, they tap again and tap yet again until, eventually, they slide the card into the terminal while muttering under their breath.
This is a three-letter error. The English the word “tap” implies something making a sound. This is why shoppers tap their card edge and believe they are following instructions. Unfortunately, shoppers can NEVER pay in this way - they must lay their card on the machine and wait for it to beep.
Words always matter, but some word choices - like the choice of “tap” - are exceptionally important. Here, the error magnified across the millions of machines in US retail that still tell customers to “tap”. The magnification made the choice one of high instability.
Instability, importantly, works both ways. In Europe, JP tells me, terminals inform customers to “Hold for Beep.” These wisely chosen words increase the effectiveness of the terminals.
Envisioning stability and instability of actions
We can envision what happened here with two images. The ball within the concave curve at the left is at rest and stable; while reasonable forces might cause it to roll side-to-side, it will always settle back where it started. The other ball - lying atop a convex curve - is also at rest but is so unstable that the merest breath of wind could make it roll off, never to return.
When words were chosen for these terminals, the design committees were working in the situation resembling that to the right, where small errors easily magnify into massive failure.
The idea that both are “at rest” here is critical. Companies tend only to consider whether their whole business is stable or unstable without considering how single actions might cause the result of a project to be horrific, tremendous, or a mediocre “meh.” They are also misled by bureaucracies and their committees which are thought to ensure stability. Sometimes they do. Yet bureaucracy is incapable of acting with savviness when facing unstable actions. An intense committee process surrounded credit card payment choices and the result of that process was a disaster. The existence of the committees likely led companies to trust their choices - probably thinking “how bad could it be?”. Quite bad, in fact, it turned out. Bureaucracies rarely know whether they created useful stability or only an appearance of stability.
Note, also, this raises a danger for those relying on heuristics when making decisions. Heuristics develop as short-hand ways to make decisions. Quite often, they are exceptionally useful. Yet previously reliable heuristics can lead to disaster in an unstable situation.
While the card issue was a communication error, tiny errors lead to similar disasters in product design and engineering, manufacturing, budgeting, company rules, regulations, or managing by metric. And while instability and volatility are rarely mentioned when allocating overhead, overhead allocation errors can lead to tremendous advantages or disasters because they change how a company thinks about whether specific products are profitable.
The stability error
That a situation is unstable is neither good nor bad - it’s just a fact. Ralph Stacey once articulated how poorly executives understand stability when he noted that most executives believe “long-term success flows from a state of stability, harmony, predictability, discipline, and consensus”. Thus, companies think unstable situations always bad, and stable ones always good. The belief, on its own, often leads to disaster.
The truth about stability and instability is different. Complexity shows that ecosystems and companies only become healthy because they encounter situations that are at least somewhat unstable. Consider an observation from the study of fresh-water systems.
"By making things predictable in the short term, we make them unpredictable in the long term," says Steve Carpenter, director of the Center for Limnology at the University of Wisconsin-Madison and lead author of the report. "We actively make things worse."
"Living systems need a certain amount of stress," … as they evolved, "they continually got calibrated against variability." Just as our immune systems rely on exposure to bacteria and viruses to sharpen their skills at responding to disease, natural systems also need that kind of stimulation.
The stress of instability calibrates ecosystems and, in business, builds mechanisms we rely on to remain healthy and strong as the world ebbs and flows around us.
Our actions take place on a stability terrain
The stability context of our actions changes with time. Using the above images, let’s now envision stability on a project, for example, changing along a stability “terrain” as time passes.
Starting from the left and moving to the right, this illustration suggests a project’s path along a stability terrain. During its opening stages, our project is at higher risk of instability. Eventually, there is a period of more stability before instability returns, and so on.
Let’s call the stable times “valleys” and the unstable times “mountaintops” or “ridgetops.” It is important to note that being in the valley of stability does not make all choices stable. Rather, all work risks instability but within the valley the impact of the errors we make is less significant. There’s also a trade-off because, in the valleys, the potential for outsized good results is also lower.
Experienced managers build instincts to know where projects or activities lie along this terrain and learn to anticipate decisions which might be particularly unstable.
Taking this idea one step further, consider a cross-section of the terrain developing new products and bringing them to market. Instability continues well into early market introduction, often only disappearing well after a market success. Companies need to respect the long period of instability before declaring products successful.
Companies are experienced with stability but NOT with instability
Before closing, let me offer a last idea which paid subscribers will explore in more detail. In illustrating the idea of a terrain, I allowed the time amid instability to be roughly the same as the time amid stability. That is rarely if ever the actual case.
Companies gain most of their experience in those times when projects, product lines, or other key company activities are stable. As a result, most companies have weak decision making skills amid instability as they fail to comprehend how unstable decisions might be. This insight helps us articulate an unintended consequence of market success. Once companies become sufficiently profitable they build new bureaucracies or extend existing ones. Of course, bureaucracies are sometimes brilliant at building stability. But most bureaucracies are built only after there is significant demand for product and services. That means companies can’t know whether specific bureaucratic operations matter in company success. As I noted in a blog post earlier this year, “half of my spending on bureaucracy is wasted I just don’t know which half.”
Executives must remain alert as bureaucracies are kept because they help companies feel secure, not because they are known to be of significant value. And even a bureaucracy significant today can become unimportant in the future, preventing success on mountaintops while hiding errors made in the valleys.
Business success is so tricky that my reply when asked “what is best?” will always be “it depends.” On what? Many things. In particular, it depends quite heavily on the situation of stability around the actions you take.
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