Your Strategy Is Not in Charge
Updated: 4 days ago
How Strategies Fail
Arguably the worlds top executives, Donald Trump and Xi Jinping, will meet this week to do what executives do best: Gather someplace swank on someone else’s dime to discuss trade and tariffs, critical minerals and AI. Then share a photo-ops projecting optimistic resolve. Whatever else comes out of this pow-wow, it probably won’t do much to avert the deeper problems on either sides of the Pacific.
Identifying demonstrable industrial or trade problems is actually fairly easy. For that matter so is a plausible solution. Implementation, on the other hand, is hairier. It is a systems problem. It doesn’t matter if it’s a furniture factory in Tupelo, a tech firm in Charlotte, or the two most powerful executives on the planet: you weigh data and what context you have, make a decision and pull the trigger. The system gets to work… doing something neither you, nor anyone else, wants it to do.
It’s not that anyone went rogue or dropped the ball, it’s that systems don’t run on strategy. They do exactly - and only - what they are designed to do. Whether we know that they were designed that way or not. I bring up this week’s Washington Beijing Summit largely because the world’s second largest economy is a glaring case study covering some 30% of global manufacturing of exactly how powerless executive strategy is in the face of a system that wants to do something entirely different.
Read the latest China Briefing on us
Before the AI onslaught, systems analysis used to refer to complex corporate systems and government bureaucracies as a form of “artificial intelligence” because they tend to implement decisions that one human had ever made, but obey anyway. It’s a mistake, however, to believe that networks or systems have desires or an innate will or intent, they don’t. It’s just a complex network of cause and effect where all the individual decisions makers are reacting to their immediate pain points.
A system’s outputs rely almost entirely on inputs, instinct and incentives. Inputs are straightforward and manageable, where systems seem to take on a life of their own are instincts and incentives. That is how an internal operator within the system perceives their role and reacts to the incentives provided. If you’re going to take something from this, remember that an organization does not execute your strategy, it executes it’s incentives.
The Trap You Are In
It helps to understand that any complex system is a fractal creation built on subsystems as well as being part of another. Theoretically a good system moves in a single direction to execute a strategy, in practice generally spend more energy and capital reacting to each other. China’s global strategy was building model that was brilliant and scaling industrial capacity. It deployed credit, local-government incentives state priorities and corporate behavior to reinforce the growth of its export model. It worked so well that the architects of the modern system failed to see that their optimizing of one metric - production capacity – was changing the nature of global markets needed to absorb the production. More crucially they failed to see the information as relevant.
A more local example is that as an investment banker, we referred to the compliance department as “sales deterrence.” Both subsystems are necessary, but they are still working at vaguely cross-purposes with parts behaving rationally, even optimally, according to their own incentives and metrics. And more metrics:
Revenue
Margin
Market Share
Utilization
Customer Acquisition.
Pick one and a decent manager with kids and a mortgage will optimize it. And then optimize it until they are optimizing the metric instead of the business. That is how you end up with a bunch of numbers that look great where no one sees that changing structure of the market as their job.
The China example here isn’t terribly complicated, it’s just enormous. The country’s lopsided industrial overcapacity is at a tipping point that its anemic domestic market can’t absorb. Beijing knows that it has to reorient the economy towards consumption, but the system was designed to do something else entirely. State run banks funnel credit and subsidies to keep firms open to prop up the local tax base and hit production goals.That fuels hyper-competition where must keep growing on top of ever diminishing returns. Meanwhile there is still no money in the consumer market to fuel the production. Yet, the old system will simply keep producing the old outputs because that’s what it was designed to do.
The Field Guide: Crime and Punishment
If you’ve done the work and have hammered out a grand design, or you have one of those personalities where you can dictate a pivot in strategy via your own unquestioned genius, it pays to determine whether the underlying organization is capable of executing your masterpiece of market domination. You can start by asking yourself three questions:
Will the system reward the behavior required to execute or implement your strategy?
What behavior does it punish?
What outcome would those incentives produce if nobody were in charge?
I’ve romped through some well-meaning socialist train-wrecks and well as large US corporations and can tell you that the addiction to command & control in both is eerily similar. Leaders, executives and heads of state can make decisions and dictate strategy but ultimately incentives are where we see what a model was actually designed to do.
When the two disagree, bet on the system.
