Walks & Talks

The last of the odd ones

Friends,

By now, I am sure that many of you are back at work, though I would hope that many more are still enjoying some well-earned time off from it. Although 2021 felt like a more stable year than the crazy one that preceded it, I hardly think that I am alone in longing for some normality that does not come accompanied by a ‘the new’.

Thus, starting next week, things will revert back to normal for Strategy in Praxis; we will continue our foray into strategic frameworks and concepts by taking a critical look at Prahalad and Hamel’s notion of core competence. After that, we will dig deep into McKinsey’s 7S model, Michael Porter’s Five Forces and Robert Burgelman’s SBE process model. Kenichi Ohmae’s 3C framework will finish this round.

In other words, if you have not yet subscribed, there are a few good reasons why you might want to.

There will also be, as I alluded to last week, a couple of extra perks to becoming a paying subscriber (beyond the show of support and those that already exist, such as access to paywalled posts, a digital version of Strategy in Polemy and, for founding members, a signed copy of my new book once finished).

For example, one of them will be a significant (75%) discount to two-hour workshops featuring yours truly and a leading field expert. Free subscribers will be given a 10% discount, non-subscribers will have to pay the full fee.

The first two in the series will be an e-commerce strategy workshop alongside James Hankins, and then a marketing effectiveness workshop together with Andrew Willshire. Anyone and everyone who works in either field will be likely to know who these two gentlemen are - and that you will want to reserve a digital seat early.

Plenty of more perks and workshops will be revealed in the weeks to come. Until then, I will leave you with the transcript of a lecture that I gave last year at the renowned Marketing Festival. The talk, which discusses many of the topics that we cover in this newsletter, got excellent reviews. Hopefully, one or two of you might find it interesting.

Have a lovely weekend.

Onwards and upwards,
JP

---

Hi there.

My name is JP Castlin just like it probably says somewhere on the screen right now or did say on the screen just recently.

Unlike most in my line of work, I am both a strategist and a lawyer – which usually puts me on par with the Devil in most people’s eyes. Although I have not done any legal work in well over a decade, it is a combination that often takes audiences by surprise. To be fair, I am sure it would have surprised the younger me too; I doubt I thought I would become a lawyer when I took my first course in business management any more than I thought I would become a strategist when I took my first course in law school.

But here I am.

Life has a funny way of not working out according to plan. Therefore, we adapt and we evolve, through the ins and outs, the ups and downs, the expected and the unexpected. And eventually, there we are.

The same can be said for the firms that we work for in our various capacities. They all exist on a time continuum between inception and demise. Along the way, every day, things happen that the company did not foresee, forecast or plan for. How they managed to adapt and evolve, through the ins and outs, the ups and downs, the expected and the unexpected, led to them today, here and where they are.

Of course, you are probably thinking that this is all rather obvious. And you would be right.

It is.

So let me ask you this: why do still we insist on building strategies as if it’s not? Why is life not reflected in strategy?

The quest for the answer, as we shall see here today, will take us on a journey that includes the still haunting demons of centuries past, disproving Nobel prize winning theory using a screwdriver, American action stars in mullets, and lines draw in the sand.

But before we embark upon it, let us get the basics down first by attempting to answer one of my favorite questions.

What is strategy?

We hear people talk of strategy all the time at conferences such as these, we read about strategy in books, trade magazines, on social media. Look up the term on Google and you will receive close to two billion hits. Everyone agrees you need a strategy. But what does strategy actually mean?

Well, broadly speaking, strategy in theory and practice tends to mean one of four different things. It can be either:

1.     a plan, a "how," a means of getting from a here to there,

2.     a pattern in actions taken over time,

3.     a position that reflects decisions to offer certain products or services in certain markets to certain customer segments, or

4.     a perspective, what one might call a vision or direction.

But if we were to take a step back and look at these four standard definitions not individually or separately but collectively, we will quickly realize that they are not just different, but so different as to almost be each other’s counterparts. A plan is the result of direct control and deliberateness before the event, whereas a revealed pattern is the outcome of indirect control and emergence after the fact. Similarly, a position is where one is, while a direction is indicative of where one wants to be and therefore per definition cannot be.

So, which one is it? Which definition is the one to, so to speak, rule them all?

Well, of course, we have just established that the answer varies depending on who you ask. But in marketing, just as in business in general, most people tend to traditionally equate strategy with some form of plan. In a document, although the details differ, we specify what we are going to do, when, how and what it will lead to. Or at least should lead to.

But how often does it?

Not that often. Right?

Things in the real world tend to go wrong. If the strategist has failed to correctly diagnose the problem, the strategy will fail to solve it. If the strategist has managed to correctly diagnose the problem, they might fail to convince others to agree with the proposed solution, and the strategy will fail to be executed as intended. If the strategist has managed to correctly diagnose the problem and to convince others to agree with the proposed solution, there will still be external interference by competitors, market forces and world events, and the strategy will fail to be realized as intended.

All kinds of things can happen that make strategies succeed or fail, and many of them have nothing to do with the strategy itself. This may sound awfully provocative if you happen to be a strategist, but the fact is that just as a lot of companies make it not because of their competencies, but despite their incompetencies, a lot of strategies succeed despite their faults as those executing it are able to work around the problems. The reason why you don’t see the constraints, the surprises, the shit that happens, is because people handle them. Of course, conversely, a lot of good strategies fail because people are incentivized not to execute them properly or, for that matter, even at all.

So we have to be careful with assuming that just because the outcome was good the strategy had to have been, or its negative equivalent, because it usually is not true.

This is all rather evident for anyone who has practical experience, yet the messy reality of our present world is often forgotten in the idealized future state drawn up in a strategic planning process. Despite everything that goes on around us on a daily basis, we still believe that we can somehow dictate what the rest of the world will do in the future.

Why? What made us believe such a thing?

In order to answer that question, and this may come as another surprise, we have to go back to late 18th century France and a man called Pierre-Simon, marquis de Laplace.

By any measure, he was a genius.

A scholar and polymath, he not only developed some of the most fundamental equations in mathematical physics and argued that there could be black holes so far ahead of his time that he is considered not to have had an effect on modern theory – ponder that for a second – he also invented probability theory as it is popularly known today.

But he is also famous for creating a thought experiment that has lurked around the edges of mankind's view of the future ever since its inception. Building on Newtonian physics, he wrote in 1814 about a hypothetical being of vast intelligence. In a deterministic universe, where everything is a matter of cause and effect, this being, which would later be dubbed Laplace’s demon, would be able to calculate all of history and perfectly predict the entire future provided it had enough data.

Perhaps this collection of data reminds you of something?

Let me get back to that.

You see, a few decades later, another man called Léon Walras found the work of one of Laplace’s students. Walras, much like his father, was a great admirer of science, but he had not managed to make it into the scientific world himself yet, twice being rejected from prestigious schools due to his poor mathematical skills and later failing at engineering at a lesser one.

But not all fields were as mathematically advanced at the time. A few years later, while struggling to make it as a bank employee, Walras learned that economics was such field. In the work inspired by Laplace, he found ready to use formulas. So, he lifted them, straight from mechanics into his masterpiece: Elements of Pure Economics, published in 1872.

Unfortunately, the promise of Laplace’s demon, that of a perfectly predictable economy, turned out to be difficult to square with reality. This, clearly, would not do. Thus, Walras once more turned to physics for “inspiration” and effectively copied the concept of equilibrium.

In physics, as you may remember from school, equilibrium means that all the individual forces exerted upon an object are balanced and, as a result, it is stable in the sense that it does not accelerate in any direction.

So, just as a ball would settle into the smooth bottom of a bowl, a market would settle into an equilibrium point where supply and demand were balanced. Small things here would be balanced by small things there, big things there would be balanced by big things here. And just like that, equilibrium economics were born.

If you are unfamiliar with the concept, don’t worry. The only thing you need to know for the time being is that it lays most of the foundation for modern economics and is central to ideas such as markets being efficient and price equaling value.

Alas, yet again, it turned out there were still pieces of the puzzle missing. If markets were balanced like balls in bowls, something had to make them so. Something, the demon reminded them, predictable. The answer economists came up with was utility. It made sense. After all, it stands to reason that consumers would only buy things that were useful to them.

Fair enough. But what is the difference in usefulness between, say, an apple and an orange? Nobody really knew. They just figured there had to be some reason, otherwise the economy would not be balanced. And equilibrium theory said that it was.

American prodigy Paul Samuelson solved the problem. Rather than attempt to look inside people’s heads, he argued that one should instead look at the choices they made and assume that they were rational, logical and consistent in their behavior. While it would indeed be impossible to say that an apple is, in measurable terms, more useful than an orange, one could definitely say that this person prefers an apple to an orange or, as the case may be, vice versa.

And thus, the foundation for modern economic theory was basically completed: markets are balanced by equilibrium because consumers are rational in their economic choices, later mathematically formulated by Arrow and Debreu’s gorgeous Nobel prize-winning theory of general competitive equilibrium.

At last, Laplace’s demon appeared to have conquered economics. If markets and consumers indeed are predictable, it only becomes a matter of better models and better data before one can foretell their behavior in detail. Again, this might remind you of something.

But, and this is a rather big but, it was all based on assumptions. Walras and his contemporaries had no evidence, no empirical work to fall back on. In reality, markets are not equilibrium systems. If they were, there would not be creation, innovation and diverse growth of products and services on offer. Many economists that preceded Walras knew that. He did not.

Likewise, Samuelson was attempting to solve a mathematical problem. In order to make it work, he had to assume that people are rational and make consistent decisions based on logic. But if you have ever heard Rory Sutherland speak, you know that they do not. They tend to make decisions based on context and their recent history, and then post rationalize it.

As it happens, Laplace’s demon was eventually exorcized from physics with the introduction of the second law of thermodynamics and later quantum mechanics. Yet it still haunts us in strategy to this day. Although modern economic and strategic doctrine no longer universally presumes equilibrium, strategic planners often still act as if it did, as if markets were predictable and full of rational consumers making logically consistent choices. Just as Walras assumed equilibrium and Samuelson assumed rationality, strategic planning assumes we can know what is to come.

As long as we collect enough data, that is. Then, we will be able to predict the future.

But we cannot.

And I mean that literally.

Using this screwdriver, I am going to demonstrate how.

What could you do with this? What uses of this screwdriver can you think of? I would imagine that you can think of quite a few.

Screwing in a screw, obviously. Scratching your back, perhaps. Opening a can of paint. Conducting an orchestra. Hammering in a nail. Proving a point at a marketing conference. Maybe you even considered that it could be tied tightly to a stick and used for spearing fish – and that it could therefore also be used to set up a business: fishing spear rentals.

The point of the exercise – which originally comes from Stuart Kauffman – is that the number of potential uses of a screwdriver is not infinite but indefinite. Put differently, it is not unlimited, but without a specified limit. In technical terms, there may be a sample space, but it is impossible to define it.

We cannot use a screwdriver for absolutely anything, but we can come up with all kinds of new uses all the time as the context around us continuously changes and new ideas come into our heads. There are more uses for a screwdriver at a building site than at the bottom of the ocean, for example.

But importantly, we cannot predict what the next suggested use of a screwdriver will be because, if you think about it, if you can, well, then you have created it. It would have been impossible to predict the invention of the wheel, because the act of prediction would have meant that you then created the wheel.

The idea to sell your products on Amazon does not come into existence until Amazon does. Amazon does not come into existence before the internet does. The internet does not come into existence before the personal computer does. And so on. One adjacent possible – what can come to be – creates a new adjacent possible; what then can come to be. Fishing spear rentals are only ever possible after you have invented fishing spears and some sort of rudimentary economy or trading system. But neither cause fishing spear rentals to exist. They merely enable it. Someone still has to have the idea.

Arrow and Debreu’s theory of general competitive equilibrium, as beautiful as it is, relies on the assumption that we can pre-state all dated contingent goods, that is, that we can know all products and quantities thereof that will be sold. Or to put it differently, that we can know all potential uses of the screwdriver and that Amazon will eventually emerge from the invention of the personal computer. It is at the very core of their theory.

But clearly, as we have just demonstrated, we cannot. It is not that we do not know what will come, we cannot know what will come. Nobody, two hundred years ago, could have foreseen the IT revolution or what the price of a second-hand iPhone sold on eBay today would be.

History is littered with predictions of what would be yet never came to pass, but they are outnumbered by orders of magnitude by events that came to be yet nobody foresaw. Or for that matter could have been foreseen.

Strategic planning thus suffers from a fundamental problem, of us assuming to know what will happen, what our competitors will do, being able to control not just our companies but effectively the future. If we do A, then B will happen.

To be fair, it’s not entirely our fault. All through basic to higher education and beyond, we have been told that there is a correct answer and, even more importantly, that we should know it. If we do not, it is our fault. We should have studied harder. We should have collected more data.

And when we go to work as strategists, clients expect us to know the answer. Not only have they too been told that all you have to do is segmentation, targeting and positioning and success is all but guaranteed, but surely, us holding the answers is why they pay us the big bucks.

Right?

How does it make you feel when you don’t?

Not great, I would imagine.

So, we collect as much data as we possibly can, try to make sense of it all, and then create an idealized future state where, magically and dare I say conveniently, the messiness of the present has disappeared, we have seized all opportunities, won every award and there is world peace. We then draw a straight line between that point and the now, add a couple of events or goals along the line, and call it our strategy.

What happens day two?

Without fail, what happens on day two?

Well, something we hadn’t planned for. An executive leaves, a competitor moves… …a pandemic breaks out. And so, we have to start over, collect more data, build another plan, hope it works this time around. Again and again, we do more of the same old, expecting different results in the emergent new.

Some would call that insanity, others might call it best practice. Consultants typically call it good business, because they can dip back into their client pool and tell everyone they need an update, which means more work and more money. Either way, the cycle begins anew.

But there is a reason why things seldom work out the way we think. And the reason is, as we now know, that the economy is not an ordered closed equilibrium system but a complex adaptive one. The difference is that between a machine and an ecosystem, or as Karl Popper once famously put it, between a clock and a cloud.

Usually when we say that something is complex, we mean that it is really very difficult indeed, a higher state of complicatedness.

But complexity in a scientific sense is something altogether different. It comes out of the Latin word plexus, which means braided or entwined. So, a complex adaptive system is a system that has a large number of interconnected components that interact in non-linear ways, learn and adapt on a systemic level. Examples include the climate, social networks, ecosystems, the immune system, cells, power grids, the economy, markets and companies.

Complex adaptive systems display behaviors that are completely different to those that traditional economic and strategic doctrine historically have assumed from markets and firms. In complexity, nothing is context free. Everything is context specific. Doing A does not lead to B but can lead to all kinds of things. It is a system not of known knowns or even the known unknowns, that is, the things we know we don’t know. It is the system of unknown unknowns – the things we don't know we don't know. The next uses of the screwdriver. The invention of the personal computer enabling the creation of Amazon a century later.

Complexity is an established scientific fact in fields such as physics, biology, ecology and chemistry. Although thinkers like Schumpeter, Hayek, Simon, Beinhocker, Arthur, Kauffman, Snowden and others have delved deep into the subject, most of the business world has not caught up. It is time to, because for strategy, it changes almost everything.

To take just a couple of examples:

Because the behavior of a complex adaptive system is different to the behavior of its individual parts – the system has its own behavior – we can neither reduce the system into an individual any more than we can aggregate the individual to the system. The behavior of an ant colony, a system, tells us no more about the behavior of an individual ant, a part, than the behavior of an individual customer, a part, tells us about the behavior of a market, a system. And, just like that, buyer personas become utterly meaningless and root cause analysis methods like the five whys entirely pointless.

Meanwhile, because everything is context specific and context is ever changing, there is never such a thing as “all being equal”. So, generalized recipes for success or universal notions that you should, say, split your brand vs activation spend 62/38 just because your company happens to be categorized into in a certain vertical, turn fatally flawed.

Further, because we cannot know in advance what will happen in detail regardless of how much data we may collect, the popular idea of the big bet becomes impossibly stupid. It is like putting all your money into one particular use of the screwdriver, hoping to master it better than everyone else. But in complexity, sooner or later, a situation will inevitably arise in which the use is no longer relevant and, somewhat ironically, we will be screwed.

In technical terms, this is called strategic drift, a gradual deterioration of the relative quality of actions taken that eventually results in a catastrophic loss of competitiveness and profitability. In plain language, it is where companies go to die.

Insights into complexity change the strategic game.

Fundamentally.

So. The follow-up is obvious. What should we do instead?

Indeed, it is the multimillion, or sometimes even multibillion, dollar question.

How can we, as strategists, navigate complexity while still steering our companies, marketing departments or even campaigns in a wanted direction?

Well, you will be able to find my full thoughts on what the answer might be in my upcoming book, available in fine bookshops everywhere in the hopefully not-so-distant future. But here and now, exclusive to Marketing Festival, I will share a few of them.

Firstly, and perhaps most importantly, you need to do away entirely with the idea that there are guaranteed paths to profit, and instead face the fact that the best we can do is improve our chances. No supposed expert, thought leader, columnist or keynote speaker will be able to tell you precisely what you need to do in order to make it to the promised land, regardless of how many times they have done it before. Complex systems are what is called non-ergodic, that is, they are non-repeating. Patterns can emerge, even become stable, events can be similar – but crucially, they will never be identical.

Consequently, you need to understand your unique context and to what extent whatever is proposed will apply to you. It may be a lot, but it may also be three fifths of fuck all even though it is considered accepted wisdom.

Secondly, because we cannot know precisely what will happen, what new uses of a screwdriver our competitors may come up with, we should at long last abandon the idea that the essence of strategy being sacrifice means that we should abandon all else in favor of one. Strategists love to identify courses of action and firmly commit to them, but this can lead to objective blindness and an insensitivity to cues that the company is heading the wrong way; what one might call the difference between grand vision and tunnel vision.

Focus is not the same thing as direction. Some companies need focus, all need direction. The only thing we can know about the future is that it will be different from the present. Change is not a contrast but a constant. So we need to build companies that have the ability to adapt to it as it emerges. And the adaption is best done in small steps, continuously, not large pivots once we have realized that the shit has hit the fan, because by then it is usually too late.

Thirdly, we should throw out the notion of alignment and replace it with concept of coherence. Alignment is, in effect, drawing a line in the sand and expecting people to stay on it in the name of sticking to the plan, regardless of what happens. As we have established, that is rather silly when we cannot know what can happen, and we also know this from experience to be true. Employees often end up wasting time, effort and money trying to get back in line after a false step, while unable to seize unexpected opportunities or handle sudden risks.

Coherence, on the other hand, is about cohesion and understanding. It is enabled by drawing not one but two lines in the sand, known as boundary conditions in complexity, and then allowing people the freedom to move in-between, to innovate and experiment, so long as their movement takes the company in the wanted direction, towards a shared understanding of success.

Reusing our screwdriver metaphor, I call this the MacGyver Theorem, named after the mullet-clad American action hero of the late 1980s who refused to use weapons, instead relying on his ingenuity to come up with solutions to the situations in which he inevitably found himself on a weekly basis.

In order to survive and thereby create the possibility to thrive, strategy should not aim to only achieve mastery of one use of the screwdriver but over time enable as many positive, relevant and coherent uses as possible, defined by the lines in the sand that we expect our employees not to cross. Not all uses. Positive, relevant and coherent.

Fourthly, as a result of what I just mentioned, we should update traditional goal setting with measurement and metrics that reflect trends, cadence, tempo and direction. Since, again, we cannot know what is to come, there is no point trying to define it. A realistic goal today can be unrealistic tomorrow. A floor can become a ceiling. End points never are, time never stops. Hence, we should focus on movement.

But do be aware that movement and speed are two different things. While there is nothing wrong with what one might call appropriate fastness – on the contrary, we need to develop the ability to move fast when we have to – there is a danger in allowing speed to become a virtue in itself. There is, for example, little use in delivering products efficiently if they offer no value. Remember, to paraphrase Peter Drucker, that there is nothing so wasteful as doing with great efficiency that which should not be done at all.

We are not looking to change. We are looking to improve. To understand when to explore and when to exploit.

Thus, we will need to emphasize praxis, a concept which, as it happens, I first came across in law school. Neither theory nor practice, but the combination of the two in a perpetual learning cycle from market insights, so that we can better adapt and evolve, through the ins and outs, the ups and downs, the expected and the unexpected. And eventually, there we will be.

Just like I am now, here, at the end of my talk.

I would guess that it was not what you had expected at a marketing conference, but that was also kind of the point.

Although Laplace’s ancient demon would attempt to convince you otherwise, there is no such thing as a perfectly predictable universe, nor any guaranteed road to corporate success. The fatal flaw in his creator’s vision was that it only held for ordered, machinelike systems. In modern reality, everything from the effect of a marketing campaign to the consequences of economic policy or the outcome of a corporate strategy falls into the category of complex systems.

Does this mean that anyone can do strategy, there would be no value in experience, we should do away with strategic planning entirely and go all-in on agile?

No. Absolutely not.

My point is that even as our models improve, any strategist worth their salt has to be humble and open to reconsideration, readjustment, adaptation and evolution in ways that make sense to the context.

The common refrain of focusing narrowly on a single robust idea in a finalized strategy document simply does not hold up to scrutiny any longer; it may create a temporary business advantage if we are lucky but is mathematically guaranteed never to lead to a sustainable one. There is simply too much inherent uncertainty and too many unforeseen consequences in the complex environment that we call, and is, life.

It is about time strategy reflected it.

Thank you.