#15 Strategy when you don't know
Why the conventional view of strategy can't handle the truth (about the future). Some learnings from the Uncertainty Mindset.
Welcome readers old and new. This is one of Thomas Hollands’ notes in his search for ideas which are surprisingly general, or generally surprising. You can find all past issues here.
The road goes ever on and on…
Merry Christmas homies. I’ve left Madeira now. In Switzerland with my family for the next few weeks, before I head to Canada, where I’ll stay for some time. Here’s my favourite pic from my favourite autonomous island region of Portugal:
Strategy & Uncertainty
'The unknown is existentially threatening, which is why people and organisations act both instinctively and rationally to reduce or avoid it.'
'Where the future is uncertain, people and organisations have the freedom to influence what it becomes.'
— The Uncertainty Mindset, Vaughn Tan.
What do startups, test-kitchens, and applied scientists have in common?
They all share the uncertainty mindset.
The uncertainty mindset has been one of the central ideas of my 2020. It's a state of mind, and also a newsletter and a book, by Vaughn Tan. As a happy result of corona-time, I was lucky enough to work with Vaughn a bit this year — I helped teach his class Strategy by Design and I got to read his book. It was so good I read it twice.
It's a study of the most innovative restaurants in the world, and what makes them the best. Vaughn argues that these organisations are great at innovation not because of any innate talents, but because the people in the organisations have a mindset better suited to innovation (and failure) than everyone else.
Though Vaughn's learnings come from the restaurant industry, the insights he draws are general. They're applicable to small teams of people in any field, who are trying to do something new — especially 'disruptive' startups and applied research teams in big organisations.
In this issue I'll summarise some parts of UM in the context of doing strategy under uncertainty. First I'll quickly recap a conventional view of strategy, before showing how this conventional view is impaired by uncertainty. Then, I'll go on a whistle-stop tour of some of the book's recommendations on how to design teams to handle uncertainty. If you want to dive deeper, there’s a lot more detail in an essay I just published on my blog.
Off we go.
Strategy, a homebaked definition
Strategy is the process of working out your goals, and then working out a set of actions to take in order to achieve your goals.
Your goals depend on your values: the set of things that you believe are important and won't compromise on. Your values provide a framework from within which to choose goals. If you value money and the respect of your work colleagues, your goal might be to get promoted as soon as possible. If you value family and your health, your goal might be to make enough money to adequately survive, while having enough time to work out and play with your kids.
Aside: It is important to articulate your values. Otherwise you end up with goals that aren't in line with what you really care about.
The actions you can take depend on your own abilities, your resources, and your environment. They depend on the things you know how to do, can learn how to do, and the things your environment constrains you to do at the moment. You can only make lemonade if life gives you lemons; and you have enough time, sugar, and a vessel for the freshly squeezed juice.
The conventional view of strategy emphasises gathering information and planning. If you can build an accurate map of your environment, your resources, and your current abilities, you can identify all the possible actions available to you. You can break an overarching goal like 'be the most profitable lemonade stand in the neighbourhood' into subordinate goals, like 'source the cheapest lemons' and 'put the stand on the street corner with the most traffic'. Then, picking the 'right' set of actions simply involves choosing those which advance you furthest towards your goal.
A 'right' answer implies wrong answers. Once you've picked the 'right' set of actions, you can go about eliminating all the 'wrong' ones, becoming lean and efficient, adapted to your environmental conditions like a prized racehorse.
The conventional view of strategy works well when the environment is static. But most environments aren't — even the rules of horse racing change every now and then. When your environment changes, the 'right' set of actions changes with it. And in an uncertain environment, there isn't a 'right' action at all.
Uncertainty is not Risk
The conventional view of strategy has an assumption hidden within it: It assumes the future is risky, instead of uncertain.
A risky future is one you can plan for. While you can't know for certain what will happen, you know all the possibilities that might happen, and you can estimate how likely each one is. There is an optimal set of actions, and the better your information about the possible futures, the better the actions you will take.
An uncertain future is one you can't plan for. Not only can you not know for certain what will happen, you can't even know all the possibilities that might happen, and you also can't know how likely each possibility is. There is no 'right' set of answers, but there are still lots of wrong ones.
Imagine you're preparing for a weighty end-of-year exam. If you know the exam questions will be recycled from prior years' exams, you can look at past papers, identify the questions that came up the most, and spend time on each question in proportion to its relative frequency. You can take a risk-based approach. But if the course is new, then you have no past papers to look at. You have to master the material as best you can, in preparation for questions which could be about anything. You must reconcile yourself to uncertainty.
Risky environments have countable possibilities whose likelihoods you can estimate. Uncertain environments have uncountable possibilities whose likelihoods you can't even guess.
Uncertainty is scarier than risk, and most of human civilisation is built to insulate us from it. But uncertainty also contains opportunity: if the future is uncertain then you have the potential to change it. Strategy under uncertainty is an attempt to do just that.
Strategy when you don't know
Most realistic environments are uncertain, not risky. E-commerce adoption seems to be following a nice steady uptick, until coronavirus comes along. Mortgage-backed securities are a safe, high-yield bet, until they aren't.
As noted philosopher of uncertainty Mike Tyson once said: "Everyone has a plan, until they get punched in the face."
The real world is far more detailed than the best models we can make of it. It's impossible to take account of everything. The very act of making a model of reality is choosing which bits of reality to focus on, and which variables to ignore. Run an experiment long enough, and those ignored variables will change your system, and what you thought was a great map will no longer represent the underlying territory at all. Uncertainty is unavoidable.
In UM, Vaughn recalls a conversation with a chef at Amaja, a three Michelin star restaurant known for using local Patagonian ingredients in entirely new ways:
'He said there hadn't been any strategic plan from the beginning. Amaja had been driven by the realisation that whatever they did would likely be relevant for only a brief instant, and that the key was to get things "right for now", because "everything would change anyway".'
The restaurant industry is highly uncertain. It's driven by the incessant experimentation of fame-seeking chefs, who serve an increasingly demanding clientele composed of critics, connoisseurs, and social media influencers. Diners want novelty, and reward quality innovation whenever they taste it. In such an environment, it is tough to plan for one year, and you can't even see the three to five year time horizon which most organisations are accustomed to.
When the future is uncertain, you have to throw your plans out the window.
In an uncertain environment you can't break down an overarching goal into subordinate goals, because you don't know what needs to be done before doing it. The best you can do is pick a guiding overarching goal and start following the most promising path to meeting it.
In an uncertain environment you can't identify all the actions you're able to take, let alone work out which one is 'right' or 'wrong'. The best you can do is try something, learn from your attempt, iterate, and improve.
In an uncertain environment, there isn't one 'right' thing to do. Instead, there are several roads that lead onward, and many more dead ends. The best you can do is to stay alive and keep on walking.
In an uncertain environment you can't know what the 'right' targets are, so motivating your team with performance-based incentives doesn't work. You can't reward the winners if you can't define what winning is. The best you can do is to leap into deep water, and work out how to swim.
In an uncertain environment, there is no advantage to efficiency, because you can't know what to be efficient at. Being very efficient at the wrong thing is a sure path to a dead end. The best you can do is to stay nimble, build your capacity, and wait for an opportunity.
The organisations in UM follow all these principles. They didn't just survive uncertainty, they thrived in it, and they're still thriving today. In my essay, I’ll explore how they do it.
SIL #3: Something nice to keep you warm
One of the unexpectedly wonderful things about Madeira was the wine.
I’d tried Port a couple of times, and didn’t like it — far too sweet. But I love Madeira wine. My introduction to it couldn’t have been better. I first tried it at a friend’s birthday: after dinner everyone else had a digestif produced with nuts, and because I couldn’t drink it, the waiter brought me a glass of 50 year old Madeira instead.
You know when you’re out of shape and you do yoga for the first time in a while? The next day you feel a pleasant ache in hundreds of tiny muscles you forgot existed.
Drinking Madeira wine was the same sensation, but on my tongue. It was a flavour explosion that I didn’t know could exist. It blew my mind, and I’ve been hooked on it since.
See you soon.