Meta-level strategic thinking

18/10/2019 ☼ DesignStrategyUncertaintyGoals

Underlying assumption about the nature of strategy (or design); What meta-level strategic thinking is; Types of goals: super- and sub-ordinate; Consequences of goal-type for freedom to act; Types of problem-situations: risky vs uncertain; Consequences of problem-situation-type for strategic choice; Design thinking as an appropriate approach for uncertain problem-situations.

Main takeaways:

  1. Before doing a strategic analysis, do a meta-analysis of the nature of the goals being pursued and the nature of the problem-situation;
  2. Goals can be [relatively super-ordinate and abstract] or [relatively sub-ordinate and concrete];
  3. There are relatively more degrees of freedom in the types of actions that can be taken to achieve super-ordinate goals (compared to sub-ordinate goals);
  4. Risk ≠ true uncertainty;
  5. There are at least three successively more problematic sources of true uncertainty:
    1. Uncertainty about what actions are possible
    2. Uncertainty about what outcomes any given action will produce
    3. Uncertainty about what outcomes are preferred
  6. Risky problem-situations permit clear choices about strategic responses: the rule is to choose actions that maximise the expected utility of outcomes (a conventional risk-management approach).
  7. Truly uncertain problem-situations do not permit clear choices about strategic responses. Iterative design approaches (reflective conversations with problem-situations) in combination with the pursuit of relatively super-ordinated goals may be more appropriate for these kinds of problem-situations.

(What follows is a basic and generally applicable way to think strategically—but it is not the only way to think strategically.)

The baseline assumption throughout is that strategy (or design) consists of [choosing actions] in the [context of internal and external resources and constraints] to [achieve a specified goal (/solve a specified problem/achieve a specified definition of performance)]

Thinking strategically involves asking and answering a series of questions:

  1. Goals: What are the goals? How are they prioritized? How are they measured? How do they interact with each other?
  2. Situation: What resources and constraints exist within the organization? What resources and constraints exist in the organization’s environment?
  3. Actions: What actions are available to be taken? How do they relate to the resources/constraints in the situation? How do they relate to the goals?

But before that analysis, there is a preceding analysis to be done. This involves asking and answering two questions:

  1. What type of goal is it?
  2. What type of problem-situation is it?

Goals: Super- and sub-ordinate

Strategy is choosing actions to achieve goals—but goals must first be defined/chosen. All else equal, if the goal of the NHS is to maximise the number of patients treated, it would take very different actions compared to those it would take if its goal was to maximise the quality of treatment for all patients treated. Recall: there is no objectively correct goal to pursue, only subjectively correct goals.

One way to think about goals is whether they are relatively super- or sub-ordinate. Relatively super-ordinate goals are those which are higher-level” or more abstract.” Relatively sub-ordinate goals are those which are lower-level” or more concrete.” For instance:

Rel. super-ordinate goal Potential rel. sub-ordinate goal/s
Increase profit Sell 75% more of the same stuff; Increase profit margin on stuff sold by 30%; Create new stuff to sell; Pay workers 15% less.
Get into an MBA programme at a top business school Get two years of work experience at a top-tier company; Do well in business and management undergraduate modules; Get an research assistantship with a business school professor; Do well in GMAT.

Relative ordination, degrees of freedom, and clarity of choice

The more super-ordinate and abstract the goal is, the larger the number of relatively sub-ordinate goals which can contribute to achieving it—but the less clear exactly which of those actions will lead to achieving it. This is another way to say that there are more degrees of freedom when choosing actions that may achieve super-ordinate goals but less clarity about what actions to choose.

The more sub-ordinate and concrete the goal is, the smaller the number of relatively sub-ordinate goals which can contribute to achieving it—and therefore the more clarity about which actions to choose. For example:

Super-ordinate goal Potentially contributory sub-ordinate goals
↑ Relatively more abstract and super-ordinate Improve London Underground user satisfaction Speed trains up; Install better signaling equipment to reduce delays; Provide more training for train-operators; Hire more train-operators; Replace old trains with new ones; Hire more customer relations staff; Reduce fares; Open new Tube stops; Run 24h Tube service throughout the week; Renovate Tube stops.
↓ Relatively more concrete and sub-ordinate Improve London Underground user satisfaction by making 98% of trains run on schedule Install better signaling equipment to reduce delays; Hire more train-operators; Replace old trains with new ones;

What this last example implies is that there’s a tradeoff between freedom (the number of actions to choose from) and clarity (certainty about what actions to choose)—we’ll come back to this later. Also note two other things:

  1. The super-ordination or sub-ordination of goals is relative not absolute. The same goal can be super-ordinate relative to one goal and sub-ordinate relative to another.
  2. If a goal is sub-ordinate and concrete enough, it looks like an action. (And if an action is super-ordinate and abstract enough, it looks like a goal.)

Problem-situations: Risky vs truly uncertain

A problem-situation” is the wide context for a strategic analysis—which is why we do it first. Later when , we will look more narrowly at the internal and the external context an organization faces —this, we label situation.”

Certainty vs risk vs true uncertainty

In considering the problem-situation, the first and most important question to ask is whether it is risky or truly uncertain. To explain both risk and true uncertainty clearly, they should be contrasted against certainty.

Certainty: Imagine that you are a US-based manufacturer of Buve, a popular carbonated beverage. You are sure that demand for Buve will grow steadily at 4% a year. You own your manufacturing and distribution facilities, have long-term price contracts for all the materials you use to make your products, and have no desire to introduce new products. The regulations in force also mean that you can be sure no competitors will enter the market. In this world where you are certain about your knowledge about what the world will be like, your business decisions—such as how much and when to invest in equipment, when to hire production staff and how many of them to hire—are straightforward and easy to both analyze and plan for.

This scenario sounds unlikely to the point of caricature because this much absolute certainty is nearly unheard of. We live in worlds which are uncertain in that we don’t know (and often cannot know) enough to be sure about how the future will work out. Contrast this with risk:

Risk: You still own Buve, and the world of complete certainty described above remains except for one detail. There is now a significant chance that bad weather affects sugar cane harvests in some of the countries your sugar producers are located in. If this happens, even with long-term price contracts, there is a chance that some of your sugar suppliers will be unable to deliver as much sugar as you will need. Specifically, your infallible analysts have put the chance of a 1000-ton sugar shortfall at 20% within the next two years. Your production will be affected if this shortage does occur, reducing your profit in that period by $2 million. Given the current price of sugar ($220/ton), you decide to protect yourself by buying 1000 extra tons of sugar for $220000 and renting additional warehouse space to store it for two years at $24000.

The risk here is the 20% chance of losing $2 million in profit in the next two years (i.e., $400000), which exceeds the cost of buying and storing the emergency sugar stockpile ($244000). Deciding to stockpile some sugar is clearly sensible. The word risk” here means that the exact future that will result is unknown, but the different possible futures are knowable in a way that allows you to plan by calculating how likely different possible futures are and taking clearly sensible actions based on those calculations. To be clear, this requires a type of certainty about the unknowns (in this case, being certain that there is a 20% chance of a 1000-ton sugar shortfall in the next two years).

In other words, risk is a type of uncertainty that can be measured, quantified, then eliminated by a calculated strategic action (in this case, by stockpiling sugar)—the approach to doing this is to act based on expected outcomes. Now, contrast this with uncertainty:

True uncertainty: You still own Buve, but in a slightly different world. This time, you’re uncomfortably aware that no regulations prevent competitors from entering the market and introducing new beverages that will compete with your product. You’re profitable, but not so profitable that you can be certain competitors will enter the market attracted by those profits. At the same time, you’re aware that if competing products do enter the market, they will probably affect not only how much you sell but also how much you can charge. However, you’re not sure how likely this is or how it will affect your business. Buve’s exact future is unknown, but you know neither all of the possible futures nor how likely each of those possible futures is. You aren’t able to calculate (as you could in the risk scenario) and make sensible decisions about what you should do based on how likely the different possible futures are.

True uncertainty cannot be measured or eliminated by planning of the type described previously. And this third scenario introduces only one element of uncertainty—whether another company will introduce a competing product into the market. Realistically, in a complex and interconnected world many other things are likely to happen to Buve that would make its future difficult to foresee and thus to plan for.

Types of true uncertainty

There are at least progressively more problematic types of true uncertainty in addition to the environmental uncertainty Buve faced above:

  1. Uncertainty about what actions are possible. Example: A ready-to-wear clothing company wants to enter the activewear market but is unclear which market to launch the activewear collection in.
  2. Uncertainty about what outcomes a particular action will produce. Example: The same clothing company wants to launch its activewear collection in China by having a WeChat celebrity endorse it online, but isn’t sure if this will reach its target customer.
  3. Uncertainty about what goals (i.e., what outcomes) we want to achieve. Example: The same clothing company

The type of problem-situation affects strategy

Under certainty, risk, and true uncertainty, choosing actions to achieve desired outcomes (i.e., to achieve specified goals) is very different.

  1. Certainty: Choice of actions is clear and simple.
  2. Risk: Choice of actions is clear but potentially complicated (risk-management approach to maximise utility of expected outcome based on known probabilities of different outcome).
  3. True uncertainty: Choice of actions not clear (design approach of having iterative reflective conversations with the problem-situation).

A design approach for strategy under uncertainty

What does it mean to have reflective conversations with a problem-situation? Simply put, this is a design process which involves iteratively confronting the problem-situation to produce and test hypotheses about goals, about the range of possible actions to take, and about the relationships between actions and outcomes.

This means repeatedly asking if a particular outcome is desirable (i.e., Is this outcome a desired goal?”), whether we know all the actions we could take (“Are there other things we can do to achieve our desired goal?”), and whether the actions we take produce the outcomes we believe they produce (“If I do A and expect A’, does A’ actually result?”). The answers to each round of these questions informs the next round of questioning.

Some characteristics of this approach are:

  1. Iteration of fluidly defined actions.
  2. Initially uncommitted, with gradually increasing commitment to particular courses of action.
  3. Trials of possible paths of action.
  4. Responding to the results of trials.
  5. Active investigation of problems and goals.
  6. Constant reframing of problems and goals.
  7. Moving back and forth between solving local problems and global problems.

Relatively super-ordinated (i.e., more abstract) goals make iterative conversations with a problem-situation easier” in the sense that they offer more possible goals to choose to pursue, and therefore more potential actions that might achieve those goals. Pursuing relatively super-ordinated goals thus increases an organization’s (or a person’s) ability to respond to the particular resources and constraints of the situation and to previously unknown aspects of the situation. But this is only comparatively useful when problem-situations are uncertain. (Because concrete goals are relatively easier to achieve in a risky problem-situation, i.e., when there is certainty about the possible actions that can be taken and the outcomes those actions will produce.)

This is an extremely simplified overview written for undergraduates. For more on risk and uncertainty, see classic work by Frank Knight and Daniel Ellsberg. For more on the design approach outlined above, see Design as a reflective conversation with the situation,” in The Reflective Practitioner by Donald Schön. A full reading list (for my PhD seminar in strategy and design) is available here.