01 July 2012

Gresham’s Law of Strategy: Why Bad Advice Drives Out Good Advice

Milo Jones
Visiting Fellow
Pembroke College

Guest Post

Near the end of a seminal essay on strategic surprise, Richard Betts writes:
“The intelligence officer may perform most usefully by not offering the answers sought by authorities, but by offering questions, acting as a Socratic agnostic, nagging decision maker into awareness of the full range of uncertainty, and making authorities’ calculations harder rather than easier.”
I believe that the same should be true for corporate strategy consultants: often their job is to make long-range calculations harder rather than easier.
Why then, is the opposite so often true? In a world in which surprise, disruption, and the unanticipated are rife, why do strategists who promise to make calculations easier rather than harder often succeed?
I think a phenomenon that I call “Gresham’s Law of Strategic Advice” is at work.
E pluribus unum
As my friend Dylan Grice at Société Générale recently reminded us in an issue of Popular Delusions, Gresham’s Law is an economic term that proposes that when two currencies are in circulation side by side, bad currency – that which is debased – tends to drive out sound, pure currency.
Dylan summarized why: when two currencies are in circulation together, one stable and the other falling in value, consumers choose to pay for goods and services with the declining currency while hoarding the stable one.
Over time, only the depreciating currency is left in circulation: sound money “disappears,” and bad money drives out good.
While the law is named for Sir Thomas Gresham, a Tudor banker who witnessed Henry VIII’s debasement of the coinage, the phenomenon was noted as early as the fifth century BCE in Aristophanes’ play The Frogs.
The first strategist
Similarly, let us imagine two strategists have been invited to present to a Board how they would prepare a long-range (say ten-year) corporate strategy. Our first strategist might open by holding up a copy of a business bestseller from a mere five years ago, The World Is Flat.
He could say that when this book came out:
“Skype was a typo, Facebooks were paper, Twitter was a sound bird’s make, 4G was a parking spot, and Linkedin was being part of the inner circle. None of these phenomena are even in the index, and this is a book about how technology is going to change business in the future!
This first strategist stresses that even without technology undergoing rapid change, complexity, uncertainty, and surprise will confront the firm in the next decade.
They always have.
This poor, naïve soul might even point out that in such a world, the firm won’t succeed by applying stale “strategic” frameworks like the BCG Matrix (which dates back to 1968), Porter's Five Forces (created in 1979), or Value Chain Analysis (introduced in 1985).
Anyone who has studied or done business in the last 30 years – including the competition – uses these!
Like it or not, this strategist might say, your firm is likely to face a world in which an integrated, adaptive, and non-predictive strategy is likely to work best. Such a strategy can be formulated and executed consistently, but the outcomes are hard to determine and impossible to quantify.
“At best,” he concludes, “We might use some Monte Carlo simulation tools like @ RISK to specify a range of outcomes.”
This strategy consultant has the intellect, experience, and integrity to admit that no amount of PowerPoint can overcome the inherent complexity, uncertainty, and surprises of the future a decade ahead.

Now the second strategist comes in

This fellow also makes the decade ahead sound dangerous. He also talks about complexity, uncertainty, and surprise.
But then, using the tempo and rhetorical tricks of a revival preacher, he lays out a clever, clear chain of cause and effect-based actions the Board can take that will carry the firm’s profits along a steady Newtonian “trajectory” to new heights.
Risks are not merely acknowledged, they are even quantified (each Risk gets a bubble on a grid whose size and position indicate some combination of likelihood and impact).
This fellow shows the Board hell, but then offers a clear strategic path to corporate salvation: “Use this part of the Value Chain to pull yourself into this part of the Matrix, and by 2023 you’ll be the master of all Five Forces - hallelujah!”
Now the board isn’t dumb.
The second strategist, however, has made their job easy, neat, and tidy. The company is publicly traded, and the CEO has a conference call with analysts tomorrow.
She knows which story she’d rather tell. And there are structural factors at work – big organizations need forecasts, even when they’re known to be wrong.
Kenneth Arrow, the Nobel laureate in Economics, worked as a statistician during the Second World War. When he discovered that the Army’s month-long weather forecasts were worthless, he tried to warn his superiors.
In response, he was told, “The Commanding General is well aware the forecasts are no good. However, he needs them for planning purposes.”
Look into my crystal ball--see what the future holds for you

Given a choice, the analyst or consultant promising illusory certainty is likely to carry the day with most Boards.
If you understand the basic techniques of Cold Reading, you’ll find them used by many strategists and prediction services who offer long-range strategies and forecasts; some substitute the Internet for a crystal ball, but the game is the same.

Dylan quoted Cicero, and so will I: “Human nature being what it is, all men prefer a false promise to a flat refusal.”
That is why I propose “Gresham’s Law of Strategic Advice:”
In a world of complexity, uncertainty, and surprise, you can bet that most of the time, bad strategic advice (predicated on clear predictions) will drive out good (non-predictive) strategic advice.

Reposted with permission.

© Bredholt & Co.