Tuesday, November 27, 2012

Anticipation and Creation

By almost any measure you can think of, free-market economies are superior to the highly planned economies of socialism/communism.  Free market economies create more total wealth and do a better job of raising the general standard of living for the whole society.

Yet, for many years, I have been advocating strategic planning for businesses.  This begs the question:

If the economy in total is better off with free markets versus planned markets, then why do I believe that individual companies are better off having strategic planning?

This question is becoming more relevant based on the most recent book by Nasssim Nicholas Taleb, called “Antifragile.”  You may recall Taleb’s earlier book, “The Black Swan,” which caused quite a stir.

In Antifragile, Taleb takes a dim view of strategic planners.  His claim is that strategic planners do more harm to businesses than good in their attempt to gain control by way of rooting out the risk of randomness.  Taleb believes that the unintended consequences of these acts are to add delay, complication and inflexibility to the very business they are trying to improve.  As a result, instead of saving the business, the planning increases the risk of failure. 

This is a valid concern.  I have seen examples where this type of result has occurred.  For example, in the name of reducing risk by sharing knowledge and expertise, large shared services organizations are built.  These shared services organizations, if structured improperly, can add delay, complication and inflexibility to a business.  In two instances I am personally aware of, these negative results were so severe that the shared service organizations were dismantled.

So we cannot just dismiss the argument posed in this book.  We need an answer to the question.

One of the main reasons why a free economy is superior to a planned economy is due to the concept Joseph Schumpeter referred to as creative destruction.  The general idea of creative destruction is that great improvements to the economy do not come from proactively tweaking the status quo.  Instead, they come from allowing the status quo to die and be replaced by something far superior.  Only by freely allowing marketplace churn—letting old business models be destroyed by new business models—does the market make great leaps forward.

And the beauty is that, when left free of excessive planning, the market will do this creative destruction all by itself.  It is when we try to interfere and protect the status quo that we hinder the ability of the marketplace to make great strides. 

In a macro sense, allowing creative destruction has much merit.  But business leaders live in a micro world.  Their primary role is not the health of the total economy, but the health of their business.  Freely allowing their business to be destroyed in the name of Creative Destruction will not win them any praise from their stakeholders (shareholders, lenders, employees, etc.).  No, these stakeholders want the business leaders to cause their businesses to survive and thrive regardless of what is happening in the macro economy.

I believe that the best way to do this is via planning (we’ll discuss how to do this further below).

In his excellent book “Good Strategy/Bad Strategy,” Richard Rumelt makes the case that most of what is practiced today in the name of strategy is truly awful.  Worse than just poor execution of good processes, Rumelt believes that much of what is called strategy today is not strategy at all.  It is just terrible actions which hurt businesses. 

I suppose Rumelt would agree with many of the points made by Taleb.  In the name of strategy, a lot of negative activity is taking place.  But that is no reason to abandon strategic planning.

That would be like saying that just because some doctors conduct malpractice, we should abandon the science of medicine.  Or, because some reporters distort the facts, we should ban all news organizations.    

No, the proper response would be to eliminate the bad practices and promote good, healthy planning which works in concert with creative destruction rather than against it.
My first rule of strategy is this:  “ALL strategic initiatives eventually fail.”  My second rule of strategy is this:  “You are not an exception to rule #1.  YOUR strategic initiative will eventually fail.”

The primary reason why strategic initiatives eventually fail has a lot to do with the forces of creative destruction.  The environment in which you conduct business keeps changing.  What was the best thing to do in one environment is usually not be the best thing to do in a different environment. As the environment changes, your original strategic initiative becomes less relevant.  If you do not change, eventually your strategic initiative becomes irrelevant and you die—destroyed by creative destruction.

But here is where my rule #3 comes in: “Just because strategic initiatives die does not mean that your company has to die.  As long as you continually abandon failed strategic initiatives and replace them with relevant initiatives, the company will outlast any individual strategic initiative.”

The idea here is that good strategic planning is not primarily about trying to preserve the status quo or reduce the risk within the status quo.  It is about preparing yourself to prosper in a world where the status quo changes.

Hence, two of the most important words in good strategic planning are ANTICIPATION and CREATION.

Yes, the environment is changing.  But the change is rarely random.  There is logic behind the change.  The impact of an aging population can be roughly predicted.  The impact of business life cycles can be roughly predicted.  Advances in technology can be roughly predicted (like Moore’s Law).  As a result, the future environment should not be a complete surprise.  It can be ANTICIPATED.  And if something can be anticipated, then it can be prepared for.  And that is a key role for good strategy—to help companies better anticipate the changing environment in which they must prosper (and find ways to best exploit what is anticipated).

Why I would even argue that unusual Black Swans (events which have never before occurred) can be anticipated.  Sure, we won’t know the exact nature of the next potential disaster, be it a tsunami, earthquake, nuclear meltdown, housing crisis or whatever.  But bad, unusual things cycle through on a fairly regular basis.  And the best strategic response to negative black swans often doesn’t vary much.  There are only so many ways a black swan can impact the environment, no matter what it is.  Through the anticipative act of scenario planning, one can have a set of pre-planned responses which will work for almost any black swan.

However, even stronger than anticipation is CREATION.  Creative destruction occurs when a company reinvents the rules in a way which renders the status quo obsolete.  Those who are early masters of the new status quo typically gain disproportionate benefits.  Creative destruction has to be created by someone.  It may as well be you.  After all, isn’t it better to destroy someone else’s status quo than to have someone else destroy your status quo?

As Peter Drucker put it, “The best way to predict the future is to create the future.”  Therefore, good strategic planning looks at ways to reinvent business models—to create the next cycle of creative destruction.  In essence, the planning process is not used to preserve the status quo, but to become a leader in controlling how the status quo will be destroyed.

This is somewhat similar to the Blue Ocean approach to strategy.  The idea is to use planning to look for new, uncontested spots in the marketplace.  In other words, instead of trying to win in the highly competitive red ocean of the status quo, create your own new status quo (the blue ocean).

Strategic planning as a source for anticipation and creation might even be an approach that both Rumelt and Taleb would find acceptable.

Even though highly planned economies tend to be inferior to a more free-market economy, that doesn’t mean that planning is a worthless activity for individual companies.  Planning is worthwhile for individual companies, because it provides a means for them to survive the forces of creative destruction—either through anticipation or creation.   However, not all processes labeled “planning” focus on anticipation and creation.  Some focus on trying to preserve the status quo.   In a world where all strategic initiatives eventually fail, that second approach is not a recipe for long-term success.

The best planning looks forwards, not backwards.  As hockey great Wayne Gretzky put it, skate to where the puck is going to be, not to where it has been.  Anticipation drove his actions.  You should be driven by the same thing.

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