Monday, November 30, 2009

Tic-Tac-Toe and Business Strategy

Business strategy is often likened to a game of chess: complex rules, practically infinite variations, many complex patterns, difficult to master... The complexity of chess can easily obscure the points about strategy, so let's use another game as a model for understanding the use of business strategy: Tic-Tac-Toe:

Business strategy is about moving swiftly and getting an advantageous position. In Tic-Tac-Toe, this is pretty straight forward: The first mover can choose the best position. In business, it is a bit more complicated. For example, a first mover may have to expend effort blazing a trail, selling a new concept to the market. A second mover can use the trail blazed by the first mover. when the time is right, the second mover can pounce, exploiting a weakness in the first mover's strategy.

Even if business strategy is more complex, the principle is the same: Move swiftly when the time comes, go for an advantageous position.

One important aspect that is often overlooked, is that this requires having both processes for strategy development, strategy deployment, and the training to use them.

I have written quite a lot about the advantage of speed. In a game of Tic-Tac-Toe, if you can make two moves while your opponent can make only one, you will win. Same thing in business.

There is no easy generic way to tell what the optimal length of a strategy cycle is, but you can easily determine the worst (except for not having a strategy cycle at all):

The worst possible strategy cycle length for your company is the same strategy cycle length your competitors use! This would be a year for most companies, because the strategy cycle is often tied to the budget cycle. (You might infer from that that a one year budget cycle is a bad thing. You would be right. from a strategic point of view, it is quite nutty.)

Usually, it is better to be faster than the competition, but not always. For example, Warren Buffet built his fortune by being slower than most of his competitors. Buffet spent his life identifying real signal in the stock market, while most people just react to random noise. There is an important lesson to be learned there.

All strategy games are games of interaction and isolation. You want your own forces to interact, while keeping opponent forces dispersed, unable to focus their power. In the game to the left, the X player has managed to focus his forces, while the O player did not.

In business, this means rallying your own forces with a unifying vision. It also means sowing discord among competitors, and competitors and their customers. It does not mean doing anything dishonorable or dishonest. You will need integrity and honesty in order to pursue your vision. Never compromise it.

In Tic-Tac-Toe, you can create situations where your opponent faces an impossible choice: Damned if you do, damned if you don't.

The same thing can be done in business. Business strategy literature is full of examples of how smart executives have put their competitors into situations like the one in the picture to the left.

However, there is another side to it: In business your own organization is so complicated that if you face a dilemma, it is very likely that your own organization created the problem, or at least contributed to creating it, in the first place.

We are so used to conflicts like these in business that one of our major problems is recognizing them as conflicts. We think of them just as the natural order of life. Consequently, even though most dilemmas can be solved, we don't. It does not even occur to us to try.

Personally, I like dilemmas. They are opportunities in disguise. Really! I rarely encounter business dilemmas that cannot be solved.

Here is one of my favorite approaches to strategy: Cheng/Ch'i (orthodox/unorthodox). Change the rules and play a different game than your competitors do. There are plenty of companies big and small who know how to do this. Most do it rarely, but some have incorporated it into their business models. Virgin Group and Apple are two of my favorite examples.

The idea is to start out with orthodox moves, enticing the competition to following a standard pattern, then use an unorthodox maneuver to hit from an unexpected direction. I provide several examples in Tempo!, my (work in progress) business strategy book.

Even a simple game like Tic-Tac-Toe has a strategy playbook: Go first if possible, get the center square first, occupy corners if you can. Business strategy is more complex, but the idea is the same: You can do a lot more if you know more about the rules governing the game. You can even change them.

Creativity Crow

In his excellent book Brain Rules, neuroscientist John Medina tells a very touching story about his newborn son and himself. Medina noticed his son sometimes stuck his tongue out. Medina immediately stuck his tongue out back at his son, encouraging him to do it again. This helped Medina to build a relationship with his son right from the start. (There is more to the story, both from a human and a scientific perspective, and Medina is a great writer, so I suggest you read the book for yourself.)

I had reason to reflect on Medina's story recently during a dinner. A psychologist who has worked as an advisor to industrial leaders in Sweden was present. So were two children, about 4 years old. The children began sticking their tongues out at each other, just like Medina and his son did. (And triggering mirror neurons, which was one of the things Medina wrote about.)

The psychologist immediately applied the same expertise he uses to advice industrial leaders:
Stop that, or I'll tell a crow to fly by and shit on your tongues!
Which approach do you think is more likely to build a better tomorrow?

Tuesday, November 24, 2009

TED Talks: Living with Data

This is the most amazing user interface demo I have ever seen:

Thanks to Hannu Kokko and Petri Aukia for tweeting about this.

Are Nash Equilibriums Killing Agile Initiatives?

Over the past two years I have seen a lot of debate about the success of Agile software development. Agile methodologies can produce great results. This is well documented. Yet, in many companies, they don't.

This has lead many people to question Agile. Some reject it altogether. However, the root cause of the problem isn't in the Agile methodologies. The root cause that makes Agile fail is in the companies adopting Agile methodologies.

Let's look back about ten years, when Agile was beginning to gather momentum. It was believed that if a company was functionally organized, like this:

Introducing an Agile software development method in part of the organization like this:

would cause everyone in the organization to reevaluate their strategies, so that the organization could reorganize into a flow organization, like this:

It turned out not to be that simple. An important reason is that most business organizations are designed to be in a stable state. All major players know that if they change their strategy, and the other major players don't, they will loose. It looks a bit like this:

This is a simple example with three players: A, B, and C. If A goes Agile, A can win only if B and C reorganize their part of the organization too. If either B or C chooses not to reorganize, A will loose.

Suppose, for example, that A charges its internal customer B per hour for software development services. By introducing Agile, A might be able to develop software 5 times faster than before, and would thus make 80% less money than before, even though the company as a whole would benefit from reduced lead times and improved product quality. A can benefit from Agile only if A, B and C together change the internal economic system of the company. That is unlikely to happen.

It is worse than that. B and C might have to reorganize to the extent that they cease to exist in order for the company to reap the benefits of Agile. For example, a company may no longer need a Project Management Department, because though Agile teams have leaders, they don't necessarily have project managers. Of course, the Project Management Department will oppose such changes.

Game theorists have a name for such situations: Nash equilibriums. Wikipedia describes a Nash Equilibrium like this:
If each player has chosen a strategy and no player can benefit by changing his or her strategy while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitute a Nash equilibrium.
A system may have many possible Nash equilibriums. There is no guarantee that a Nash equilibrium is optimal for the system as a whole. Most are not. However, it is often very difficult to move from one Nash equilibrium to another. To do it successfully, all players must be made aware that a better state is attainable and they must trust each other to change.

This is the crux of the matter: Successfully introducing Agile requires a paradigm shift for the entire organization. Most organizations are not prepared for that. Few Agile initiatives have top management support allowing them to change parts of the organization outside the software development department.

That is not to say change is impossible. It is not. It is merely very difficult. On the up side, the difficulties are to a large extent inherent in the organizational structure of most companies. Once a company goes Agile successfully, it will have a more adaptable organizational structure, which makes it the organization easier to change in the future.

Sunday, November 22, 2009

Sweet ReTweet

I have had a Twitter account for some time now. Like many other Twitter users, I am interested in what impact, if any, I have with my tweets. (A tweet is a Twitter message, a text string no longer than 140 characters.)

Just for fun, I decided to map the travel paths of some recent messages that had been picked up and retweeted by other Twitter users. The (very simple) map looks like this: 
As you can see, having a message retweeted means a lot for how much it spreads. Usually, after one of my tweets has been retweeted, I have also picked up a couple of new followers. (Which I usually begin to follow in return.)

If you follow me on Twitter, you may have noticed I retweet other people's tweets a lot. I follow a lot of people who are smart, fun, and willing to share their knowledge of Systems Thinking and related subjects. I want these ideas to spread, so I retweet the best tweets I read. Quite often, these tweets link to some blog post. Here is a map of some recent retweets I made:

Sometimes I get a chance to be helpful. Notice the orange arrows in the picture? Tom Kealey started tweeting recently, so he only has 25 followers. When I picked up one of his tweets and retweeted it, my 222 followers could read it. One of those followers is Bob Marshal (@flowchainsensei). When he retweeted my retweet, his 1,216 followers saw Tom Kealey's message.

I follow 263 people. Obviously they can come up with many more good tweets than I can do alone, so retweeting isn't just a way to be helpful, it requires a lot less effort than coming up with good tweets oneself. I can't be brilliant everyday, but the 263 people I follow can.

There are plenty of sites that analyze Twitter activity. The best I have seen so far is Twitalyzer. Twitalyzer can give you a plaintext summary:
@Kallokain's average influence in Twitter is 1.2 out of 100 and has been unchanged recently.  Their most recent influence was rated 1.2 out of 100 which we believe is slowly developing.
Twitalyzer uses five factors in its analysis. You can get a plain text explanation of each:

Mine is 1.2%. Quite low. Influence is a composite of several other factors. Obviously, with 222 followers, I won't have much impact on the twittersphere as a whole.

Signal-to-Noise Ratio
97.7% is quite good. As Twitalyzer puts it:
...the distribution of components in your signal-to-noise ratio (see below) which, based on the Twitalyzer's analysis is best described as "astonishingly high" in your most recent analysis based on 43 of your last 44 updates being counted as "having signal".
68.2% leaves room for improvement, but according to Twitalyzer it's quite good:

...your relative generosity (see below) which, based on the Twitalyzer's analysis is best described as "very high" based on your retweeting other people 15 times in the last seven days. While retweeting other people may or may not be part of your general approach towards Twitter, this behavior is a component of the Twitalyzer's measure of influence.
5.9% means I tweet much less than I should, at least if I want to grow my follower-ship very fast. On the other hand I want a life outside Twitter. My velocity probably won't improve much, unless I hire people to tweet for me, like Guy Kawasaki. Twitalyzer says:
...your relative velocity (see below) which, based on the Twitalyzer's analysis is best described as "very low" based on your publishing 44 updates in the last seven days. While contributing a lot may or may not be part of your general approach towards Twitter, this behavior is a component of the Twitalyzer's measure of influence.
1.6% is pathetic. I won't change the world anytime soon, unless I do some radical improvements. Here is what Twitalyzer says:
...your relative clout (see below) which, based on the Twitalyzer's analysis is best described as "very, very low" based on your being cited 24 times in the last seven days. While getting other people to reference you may or may not be part of your general approach towards Twitter, this behavior is a component of the Twitalyzer's measure of influence.
Twitalyzer can also tell me the stats of people talking to me on Twitter. This is useful. Even if my own influence is low, I may have friends in high places. My most influential connections on Twitter look like this:

— Average —

So, collectively, we may have a little influence on Twitter. Whether Twitter influences politicians, educators, and C-level executives is another matter. Of course we are not a homogenous group. And we are a group only in the sense that we communicate on Twitter. We have different perspectives, different purposes, and therefore different agendas. On the other hand, judging from what we do on Twitter, we also have interests in common.

It should be possible for a group of systems thinkers to figure out how to leverage the influence we have on Twitter in order to get more influence.

It will be interesting to go back to this post in a year or so, to se what, if anything, has changed.

Wednesday, November 18, 2009

Finding Strategic Opportunities - A Tempo! Supplement

I have published a new Tempo! supplement on Scribd. This one is about the virtues of using multiple paradigms and strategic patterns when solving business problems and developing business strategies. I hope you enjoy it.
Finding Strategic Opportunities

Topsy-Turvy World: Reflections on the EIU Organizational Agility report

Awhile ago the Economist Intelligence Unit published a report named Organizational agility: How business can survive and thrive in turbulent times. Here is a quote from the preface, just so you know what the report was all about:
In December 2008 and January 2009, the Economist Intelligence Unit conducted a survey of 349 executives around the world on the benefits, challenges and risks associated with creating a more agile organisation. The Economist Intelligence Unit wrote and executed the survey, conducted the analysis and produced the report. To supplement the findings of the survey, the Economist Intelligence Unit also conducted in-depth interviews with a number of business executives from leading companies.
The results are interesting. For example 40% of the respondents considered agility to be extremely important, a core business differentiator. (And I agree with them.) Another 48% considered agility to be somewhat important, a contributing factor to success.

So far, so good, but when asked what the most important business challenge will be, about 50% of respondents answered "to drive down operating costs".

This sets up a conflict, because agility requires redundancy. Redundancy costs money. In other words, companies must spend money in order to be agile enough to make money in turbulent times.

We can express the conflict using an Evaporating Cloud (conflict resolution diagram), like this:

There is of course no answer to this dilemma that is always correct. In some situations, driving down operating costs is the only thing you can do, in other situations, being more agile will open up a world of possibilities. Sometimes you can do both, like Steve Jobs did when he got back at the helm of Apple. (He killed several projects that were going nowhere, which saved money, but also gave the organization focus, and enabled it to be more agile.)

In most cases, the best solution is to go for agility. Cutting costs is a defensive measure, and you won't win a fight by defense alone. Driving down costs is a viable strategy only if the money saved can be used to take the initiative and go on the offensive. It is reckless to cut cost without first exploring alternatives and exploring possible negative consequences of cost cutting, like reducing capacity at a constraint, or creating a new constraint. (Don't forget that employee morale easily can become the constraint limiting the performance of your organization.)

Despite this most companies go for cutting costs without really considering alternatives. This is partly because it is easier. (Even if it doesn't work, it is still easy.) Partly it is because of a psychological phenomenon: loss aversion. Loss aversion means that our emotional reaction to a loss is much stronger than our emotional reaction to a corresponding gain.

The agility side of the Evaporating Cloud above is about working very hard in order to make a gain. The cost cutting side is about an easy way to avoid losing net profit.

There is only one thing, really, that can induce us to take the more difficult path: Passion. Managers and executives need passion driving them to challenge themselves. Passion for what? Doesn't matter really, as long as it is a passion they can infuse in the rest of the organization. Steve Jobs has made good use of his passion for design. Richard Branson is passionate about doing and learning new things, and having fun.

Without passion, only extrinsic rewards beckon, the work of leading the organization is merely an obstacle in the way of obtaining the reward, and the preferred route to the reward is a shortcut.

For example, try to make sense of this: Every manager wants their organization to improve, but according to the survey only 17% were interested in having an improvement process. I must admit, the Evaporating cloud has me stymied:

What can possibly be gained by not having an improvement process? Well, there is one thing: All serious improvement processes come with tools for doing root cause analysis. When you do a root cause analysis of a problem, you often end up identifying a policy decision as the root cause of the problem. That creates work for managers: They must fix the problem. Even worse, they must learn how to deal with the problems, for example by studying and practicing Lean, TOC, SPC, Systems Thinking, etc.

If you do not have passion, and your work is just an obstacle you must overcome in order to get your paycheck and bonus, why on Earth would you want to create more work for yourself? Of course you wouldn't.

On the other hand, if you are one of the many competent and passionate managers that do exist, if you do get serious about improvement processes, you will be the nail that sticks out. We all know what happens to that one. It is my experience that good managers often make improvements in secret, to avoid having their efforts squashed by superiors. It's a topsy turvy world:

In our world where topsy-turvy is the norm
Where we’re taught the only way is to conform
Where nothing is quite sane
Where peace can never reign
So long as topsy-turvy is the norm
–Stanley Cooper

John Boyd pointed out that most of us have the goal to "survive on our own terms". Bearing this in mind, the cloud can be redrawn like this:

This version is a bit more cynical. I can't say I like it, but I suspect it is fairly close to the truth. If managers believe not having a process of continuous improvement will increase their personal comfort, it explains a lot.

It is of course possible to systematically break these clouds, and resolve the conflicts, but I'll save that for a future posting. For now, thinking about the conflicting desires is itself a good start.