by

Shocking news: Execs do what they’re paid to do

From Matthew Yglesias’s column in Slate:

In theory, executive compensation schemes linked to stock market performance are supposed to focus managers on the long view. But in practice, the opposite seems to be the case. In an impressive paper published in April 2013, Alexander Ljungqvist, Joan Farre-Mensa, and John Asker found that publicly traded firms systematically under-invest compared to privately held ones. The effect is larger in sectors where stock market swings are more closely tied to quarterly earnings reports, indicating that what they call “managerial myopia” is likely the culprit. In other words, when you pay executives to increase the share price, they focus on increasing the share price—even when that means focusing on headline numbers in the next quarterly financial report rather than on the long term.

Changes their orientation, in other words. If you read this closely, you can see the effect of incestuous amplification: “Of course our strategy is working! Can’t you see the share price going up every quarter?”

To paraphrase Yglesias’s argument, companies that don’t obsess on quarterly profit growth open up a range of options. If you read his entire column, you can see that the real secret of Amazon’s continued success is that it uses these options to operate inside customers’ and competitors’ OODA loops.

by

Ilya Prigogine and the inevitability of the OODA “loop”

Fans of Boyd’s Strategic Game will recall the quote from Order Out of Chaos that Boyd included as Chart 18 and this bit of analysis from Chart 19:

Prigogine called far-from-equilibrium forms like the vortex, ‘dissipative structures.’ The name comes from the fact that to keep their shape these structures must constantly dissipate entropy so it won’t build up inside the entity and ‘kill’ it with equilibrium … [These dissipative structures] can survive only by remaining open to a flowing matter and energy exchange with the environment … The structure is stabilized by its flowing. It is stable but only relatively stable—relative to the constant energy flow required to maintain its shape. Its very stability is also paradoxically an instability because of its total dependence on its environment. The dissipative structure is autonomous (separate) but only relatively separate. It is a flow within a flow.

The idea of a dissipative structure heavily influenced Boyd’s thinking on Orientation, which he would characterize as a far-from-equilibrium process, and eventually on the entire OODA “loop” and the processes that support it:

By pulling all this together, we can see that the key statements, OODA loop sketch, and related insights represent an evolving, open-ended, far- from-equilibrium process of self-organization, emergence, and natural selection. (The Essence of Winning and Losing, 4)

New research out of MIT now suggests that the idea of dissipative structures not only explain the the OODA “loop,” but make its existence and indeed the existence of life itself inevitable:

The formula, based on established physics, indicates that when a group of atoms is driven by an external source of energy (like the sun or chemical fuel) and surrounded by a heat bath (like the ocean or atmosphere), it will often gradually restructure itself in order to dissipate increasingly more energy. This could mean that under certain conditions, matter inexorably acquires the key physical attribute associated with life. (“A New Theory of Life,” by Natalie Wolchover, in Quanta Magazine, a publication of the Simons Foundation)

Although the article doesn’t delve into organization theory, it might be that the same process operating at the macro level explains why a large degree of bottom-up self-organization can produce devastatingly effective organizations. But I speculate.

by

Boyd Conference in San Diego

Friday, February 28 and Saturday, March 1, 2014, sponsored by the Rady School of Management at the University of California San Diego.

Chuck Spinney will present a revised version of “Evolutionary Epistemology, A Personal View of John Boyd’s ‘Destruction and Creation’ … and its centrality to the … OODA Loop.” This is absolutely the best summary of Boyd’s philosophy, and, as far as I know, the only one to connect Boyd’s 1976 paper to the OODA loop, which he unveiled some 20 years later. If you’ve found “Destruction and Creation” daunting (be honest now), “Evolutionary Epistemology” will answer a lot of your questions.

I’ll cover what went on between those two bookends. We’ll spend most of our time on Patterns of Conflict, introducing its main themes and discussing a fair number of its charts. I’ll also touch on Organic Design, Strategic Game, and Conceptual Spiral, and Boyd’s last briefing, The Essence of Winning and Losing. These are complex works that Boyd evolved over two decades, and my goal is to make their powerful ideas accessible to entrepreneurs and established business leaders.

For information on the conference, go to http://boydbusinessinnovationconference.com/, and to register, visit the Rady School’s conference site at http://rady.ucsd.edu/Exec/Open/Boyd-Conference/.

by

Can America Win Wars?

The answer, according to Andrew Bacevich in a new LA Times op-ed, is a clear “No.” He writes:

Confusing capability with utility, the United States knows how to start wars but has seemingly forgotten how to conclude them. Yet concluding war on favorable terms — a concept formerly known as victory — is the object of the exercise. For the United States, victory has become a lost art.

While it’s impossible to argue with the facts — Fallujah, for example, has been captured by forces connected to al-Qa’ida, an organization that didn’t exist in Iraq until after our invasion — the good colonel is wrong in his conclusion that we lost a war in Iraq. The war in Iraq was handily won in a three-week campaign ending with the capture of Baghdad in April 2003. What happened next, and what we lost, was the occupation.

We shouldn’t feel too badly about this. Since the end of WW II, successful occupations are few indeed. The only one that springs to mind is the Israeli occupation of the West Bank, and that’s a chapter still being written. The Soviet Union, with force and brutality at its disposal that we could only dream about in Iraq, failed to hold Eastern Europe, for example.

The problem with using the war metaphor where it doesn’t apply shows up in Bachevich’s recommendations, in which he wants to conduct war, just do it in a smarter way:

Take force off the metaphorical table to which policymakers regularly refer. Rather than categorizing violence as a preferred option, revive the tradition of treating it as a last resort. Then get serious about evaluating the potential for employing alternative forms of power, chiefly economic and cultural, to advance American interests.

As an alternative, how about using American power to further American interests here at home? I’m thinking of things like our expensive but statistically mediocre health care system, fading economic prospects for the middle class, ballooning (and profitable) population in privately run prisons, crushing student debt, and exploding pension obligations in many of our states and municipalities?

For more on the difficulty of holding on to conquered populations in this day and age, I recommend Martin van Creveld’s The Changing Face of War (Presidio, 2006).

by

More evidence for meditation

“Meditation may help with anxiety, depression and pain,” by Andrew M. Seaman, reporting on a review of 47 randomized research trials that used mindfulness techniques to treat conditions including anxiety, pain, or depression recently published in the journal JAMA Internal Medicine.

Harvard’s Dr. Allan Goroll, who wrote an editorial accompanying publication of the study, noted how orientation governs behavior, often despite data:

The analysis is an example of an area of much-needed scientific study, because many people make treatment decisions based on beliefs – not data.

“That is particularly the case with alternative and complimentary approaches to treating medical problems,” he said. “It ranges from taking vitamins to undergoing particular procedures for which the scientific evidence is very slim but people’s beliefs are very great.”

The lead researcher, Dr. Madhav Goyal of Johns Hopkins, cautioned that the purpose of meditation is not so much to cure specific disorders but to improve quality of life in general:

Goyal said people should remember that meditation was not conceived to treat any particular health problem.

“Rather, it is a path we travel on to increase our awareness and gain insight into our lives,” he wrote. “The best reason to meditate is to gain this insight. Improvements in health conditions are really a side benefit, and it’s best to think of them that way.”

“Orientation,” as Boyd often insisted, “is the Schwerpunkt.” Always do what improves orientation and you can’t go far wrong, at least not for very long. Meditation is a powerful technique to help you do this, and I’ve long thought it should be a part of the curriculum in military leadership and civilian MBA programs.

by

Adaptive leadership in law enforcement

Don Vandergriff and Fred Leland have published their new book for law enforcement: Adaptive Leadership Handbook – Law Enforcement & Security: Innovative Ways to Teach and Develop Your People (Volume 1).

From the book’s description on Amazon:

A practical handbook to develop adaptive thinking and leadership abilities in those on the bleeding edge of today’s law enforcement and security challenges. With techniques and methodologies proven over years of real-world application, this book will bring to life “how to think” under stressful, ambiguous and often dangerous circumstances. By improving the speed and accuracy of your decision-making and problem solving, you can adapt and respond effectively to any situation.

by

Is hierarchy necessary?

One well-known company doesn’t think so.  According to Cnet, Zappos will, by the end of 2014, eliminate “all job titles and managers in a corporate structure, leaving nearly every employee on equal footing.” Quoting the news site Quartz, 

Zappos is going all-in on the system and will create approximately 400 “circles” made up of a group of employees that will be tasked with projects. The group must work together — sans hierarchy — to do their jobs.

This is fascinating. A couple of observations;

  • The system isn’t totally without hierarchy — somebody is doing the tasking. Note the “nearly every employee.”
  • It will be interesting to see if new hierarchies form within the circles, and what mechanism they evolve to form and un-form circles.
  • The Danish hearing device company Oticon has been experimenting with similar ideas since the late 1980s.
  • Boyd didn’t say anything about how to organize a military unit or a business. He once told me that he had a preference for “bottom up” because such an orientation fostered initiative and creativity. On the other hand, if you look at his description of mission (Patterns 76), it’s clear that he was thinking in terms of hierarchies.

We should pay close attention to Zappos’s experiment and, of course,wish them the best.

by

Is business strategy wrong?

Or at least that part that talks about improving the bottom line through better customer service?

That’s the conclusion reported by Business Week on a survey of 146 publicly traded corporations. Basically, they found no correlation between customer satisfaction and YTD stock returns. For you geeks out there, the regression line was y = -0.6x+79.17, with R^2=0.018. What this means is that there is actually a slight negative correlation between stock market returns and customer satisfaction (that is, higher customer satisfaction scores are associated — very slightly — with lower stock market returns), but with an R^2  so near zero, a better conclusion is that there is no meaningful relationship. Continue reading →

by

Climate change

No, not the kind you’re thinking of.  In the late 1980s, Boyd come up with a list that he originally called “principles of the Blitzkrieg.” It wasn’t long, though, before he renamed it “an organizational climate for operational success.” The climate consists of:

  • Mutual trust, unity, cohesion (Ger. Einheit)
  • Intuitive competence (Fingerspitzengefühl)
  • Mission “command & control’ (Auftragstaktik; Boyd preferred “leadership & appreciation”)
  • Focus & direction (Schwerpunkt)
  • Mental agility (Behendigkeit)

You can use this climate, or whatever culture you fancy, as a Schwerpunkt: Whenever you’re making choices, try to move in the direction that improves the climate. If anything, obsessing on climate may be more important — in the sense of requiring more of a leader’s resources — in business than in war.

With that in mind, check out the latest LinkedIn post by Hiroshi Mikitani, CEO of Rakuten: The Real Role of Leadership is Climate Control.