Posts

171. Ben Ford on Situational Awareness and Managing for Constant Change

How do businesses actually manage — rather than plan for — continuous change?

The increasing adoption of systems thinking in business tells us that the world is changing very fast, and companies need to change at least as fast as their environment in order to thrive. It’s comfortable to talk about but hard and uncomfortable to do. Most people prefer to continue to do what they’re used to rather than embrace change and constant experimentation.

There’s a lot to be learned from the military where special forces are trained to specialize in rapid reaction in chaotic or VUCA (volatile, uncertain, complex and ambiguous) worlds. They face an ever-changing environment (often described as kinetic). They have a very pure evolutionary process: what wins, survives. While the military organization is hierarchical, military operations are flat so that tactical decisions can be made by the people on the ground.

While we are anti-war, we can nevertheless recognize that the military has experience and expertise in managing and organizing for continuous change. We can learn from it.

There are significant barriers to overcome to implement rapid change management in business.

Certainly, the time scales are different. Companies change at an intergenerational pace, one generation of managers (or managerial techniques) learning from the last one. In hierarchical organizations, people reach managerial and executive positions by accumulating experience. By the time they get to their high position in the hierarchy, they have locked in an old mental model. They miss the signals of change and fall back on preconceived ideas and notions and methods.

In addition, there is considerable inertia to overcome — a resistance to change that acts as a blocker to agility. It’s human nature to resist change. Once a company has established a niche or a market share, it’s genuinely hard to abandon the strategy or the tooling or the products and services and the marketing that got them there.

To put it in military terms, change is a constant battle.

Situational awareness is a set of tools that are transferable from military to business to improve management of change.

Situational awareness governs how well your understanding of the world maps to reality. It operates along two perspectives and 3 time frames.

Internal situational awareness concerns the orientation of your firm, resources, capacity, the capabilities of your team, morale and so on. External situational awareness concerns markets, competitors, customers, trends, technologies, and all the environmental factors that are subject to change.

The three timeframes in military terminology are tactical, operational, and strategic.

The tactical timeframe concerns people on the ground in contact with the environment. In business, this can be the sales team or customer service or engineers in direct contact with customers. They’re doing implementation work but they are also the sensing mechanism. They may have daily or even hourly cycles for intention to change, making the change, learning from the consequences of the change and moving forward to the next change. They must be empowered, trained and equipped, and confident about their freedom of action and adaptation.

The strategic timeframe is the macroeconomic scale of what the firm is trying to achieve for the customer. This frame may be months or years, and dictates how to organize, how to invest, and where to allocate resources.

The operational timeframe is between the other two. How does the firm integrate short term implementational excellence with long term strategic engagement with a changing environment? How does the firm integrate all the hourly and daily information coming from the front line with the long-term investments and resource allocation projects? In a software business for example, there may be a trade-off between building new tooling, which takes time, and rapidly delivering products from established tooling.

How to apply situational awareness.

Actively use the 6-box framework (internal /external perspectives, tactical/ operational/ strategic timeframes.

To achieve better alignment of internal / external timeframes, look for mismatches across boundaries in the firm. Do the people working on the front line have the same understanding of the importance of the work as the managers and executives. Does getting thing done seem more difficult than it should be? Are the feedback loops fast? Is the information in the feedback loops spread throughout the firm, through multiple teams, divisions and silos? What’s the gap between perceived ideals and actual experience?

To implement across three time frames is an exercise in portfolio balancing and active discovery, with a high premium on sensing skills.

How much time and resource effort should a firm spend on refining its tooling (the operational timeframe) so that every produced end-product is exactly the same (the tactical timeframe) while keeping an eye out for environmental change, when a future competitor might introduce a faster cheaper product (the strategic timeframe)?

As Austrian economics always stresses, there’s no objective answer, just subjective learning from experience. For example, Netflix was part of the strategic timeframe that Blockbuster failed to manage. Blockbuster was operating its stores in a proven fashion (tactical) and adding new stores (operational), while rejecting the implications of the Netflix model. Today (May 2021), Netflix shows signs of missing some strategic signals. They made content their focus (tactical) and built original production capability (operational) but may be finding that customer tastes are changing and the appeal of their produced content is in decline (strategic).

Similarly, for the last few years, funding has been easy for startups (tactical) and so they have focused on long term market development (strategic) without hitting profit and cash flow milestones (operational). Now that funding is drying up, they are having to shore up their operational capabilities.

There are a couple of techniques that are helpful. One is Horizon Scanning: allocating some resources to identifying and picking out future external scenarios that represent potential change or strategic threats and building a response in advance. Another is red team thinking: mapping out future internal failure modes and then working backwards from them to identify the trip wires to look out for, and to nip emerging issues in the bud.

The after-action review (AAR) is an important element of situational awareness.

The AAR is applied not just in the military but in fast change business environments such as agile software development. It’s a tool to separate the quality of the decision you made from the outcome of the action that you took. We tend to get attached to our decisions, even if they were based on poor principles.

The components of an AAR include:

  • What was expected to happen?
  • What actually happened?
  • What went well and why?
  • What can be improved and how?

The discussion must be open and honest without hierarchy or blame. As far as possible, everyone on the team should participate so that all perspectives can be included. The focus is on results and identification of ways to sustain what was done well as well as the development of recommendations on ways to overcome obstacles. It’s really important to identify with high fidelity what happened because only then is there a good chance to identify new opportunities or trends with equal fidelity. In situations of uncertainty, it’s important to identify “what happened” accurately, in order to be able to identify what it means and what it implies for future actions.

AAR becomes part of disciplined execution.

The Economics For Business community is familiar with the explore/expand method of managing business complexity: explore many options through experimentation and expand (by allocating more resources) those that show good results. Annika Steiber in episode 170 called this capability “ambidexterity” — combining two logics of business in consistent and reliable execution on one hand and openness to change and exploration on the other.

Ben expands this thinking into the concept of disciplined execution. Once a process is proven and is producing reliable results, map it out carefully and then take individual steps or parts of the process and see if they can be further improved, e.g., by automation, without changing the outputs. Processes thus become more resource efficient in producing their output. Always be trying to improve what you already do well.

Similarly, once an “explore” project starts to become productive, apply the same continuous improvement standard. Map the process, examine parts that can be improved, and do so part by part so production is maintained and efficiency is increased.

All of this change dynamic should be driven from the bottom up.

Process improvements, fast responses to feedback loops, experimentation and rapid change are all insurgencies — the established hierarchy and mental models will often find them hard to embrace. Insurgency is a bottom-up dynamic. When transformation is pushed from the top down, it often happens that the territory changes before the consultants have drawn the new map. The hierarchy’s role is to provide strong alignment with the orientation of the firm and its culture and vision-mission, alongside loose control of front-line action.

Additional Resources

“Apply Situational Awareness To Manage Change” (PDF): Download PDF

Ben Ford’s website, where you’ll find his Mission Control services: MissionCtrl.dev

Ben Ford’s LinkedIn page, with a lot of presentations and recordings to learn from: Visit LinkedIn

110: Yousif Almoayyed: Apply Economic Thinking To Better Manage Your Technology Projects

Does economic knowledge help you manage complex IT projects? Yousif Almoayyed thinks it does. He combines management knowledge with careful project management and principled economic thinking.

Economic thinking utilizes foundational principles to integrate knowledge management and business task management for all kinds of projects. IT projects provide a representative example.

Download The Episode Resource Economic Thinking About IT Projects – Download

Key Takeaways & Actionable Insights

The economic principles for IT project management include:

  • Ends-Means analysis.
  • Marginal benefit — marginal cost analysis
  • The law of returns — savings, investment and future benefit flows
  • Combinatorial productivity
  • Knowledge-based processes
  • Incentives alignment
  • Trust and reliability as institutional enablers

Ends-Means Thinking

Your ends are business ends: to generate new economic value by serving customers with continuously improving and continuously innovative services. Technology can be a means to achieve those ends, if properly harnessed. It can help with value delivery, it can help lower costs, eliminate waste and increase efficiency.

The key to economic thinking is to keep business ends and customer experience primary, and manage technology to serve those ends. Don’t let technology be the business’s master.

Marginal Benefits and Marginal Costs, and The Law Of Returns

The so-called Law of Diminishing Returns theorizes that, after a firm or a production process has attained some optimal level of performance, each further addition of an input will tend to achieve a smaller and smaller output increase. This can be true of technology projects and repays careful benefit-cost analysis. You probably already have considerable technology resources in your business, including access to services via the internet. Examine each additional tech input, at the margin, and identify just how much additional business benefit you can anticipate as a result of the new input. A rigorous approach to this analysis can be helpful in ordering priorities and understanding trade-offs.

Combinatorial Productivity

Economic thinking recognizes capital as a flexible, continuously changing combination of elements. Some combinations are capable of generating higher productivity than its individual components can achieve separately. This combinatorial productivity may not be intuitively predictable in advance, and so experimental combinations are appropriate, e.g. of old and new systems.

Don’t be afraid of mistakes in your experiments. If you don’t encounter some surprises, you are probably not experimenting enough. Don’t permit technology vendors to constrain your experimentation. Proprietary systems can force you to work within their boundaries; there are plenty of routes to new productivity outside these boundaries. Yousif mentioned his experiments with Raspberry Pi — the single-board computer used by many for experimental applications such as robotics — as an example.

Knowledge and People As Critical Assets.

Economic processes are knowledge processes: bringing the right knowledge to bear at the appropriate step. Much of the knowledge is tacit – in individuals’ heads, based on their own individual experience. Consequently, assembling and preserving the right team with the right knowledge — both inside and outside the firm — is the primary task in IT project management.

How much tech knowledge do you need? It’s certainly not the most important knowledge for your project. That position is reserved for business knowledge: your project team, in order to attain the business ends you have established for the initiative, must have complete understanding of your firm’s business mission and purpose, and of the customer service context of the current project.

If you are clear in communicating business ends both internally and externally, you will be prized customer for IT suppliers, since this clarity is often lacking and can lead to confusion and conflict.

You will always be able to assemble the appropriate tech knowledge when your business aims are clearly stated.

Choose the outside vendors who best demonstrate their ability to understand and absorb your business ends, in combination with mastery of the specific technology means you require.

Incentives Alignment and Scope Specificity

Economic thinking pays special attention to the roles of multiple players in a system and the incentives under which each player is operating. For example, a systems integrator salesperson or project manager may be incentivized by his or her company to sell more units, or more customization that requires more installation hours now and more upgrade complexity in the future.

Your internal project management includes the alignment of roles and incentives to guard against this kind of conflict. Best to have your own internal project manager.

A big part of the internal project manager’s role is to think through the project scope in great detail, to give the business ends clear dominance over all other ends, to be as specific as possible on the technology means, and to guard against mission creep and the opportunistic exercise of power by IT managers internally or IT vendors externally who might use their technical knowledge to force choices that are inappropriate to business ends.

Big data analytics projects and A.I. projects can be examples of inappropriate technology choices. Big data projects that include extensive data gathering (e.g. through sensors or via cameras for visual data) can promise new insights through analysis of the newly acquired datasets, but a careful analysis of the potential value facilitation of the output might tell a manager that the marginal benefit is inadequate. Always ask whether the project facilitates new economic value for customers or in the firm’s capacity to serve customers. Make sure the incentives to install new technology are truly business-aligned and not simply to be modern or up-to-date, and staying close to the technological edge.

Trust, Reliability and Institutional Guardrails

All economic systems are collaborative networks of individuals, strategies and artifacts. Economists examine systems not only for efficiency but also for integrity, which often comes via institutional factors such as trust between people, and reliability of input performance from people and groups. Without these institutional factors, collaboration can become impeded and frictions can arise, slowing down projects or even rendering them unsuccessful. Great project managers check for these intangibles as well as for the robustness of the technology.

Technology Combined with Economic Thinking Can Open Up New Business Horizons

Some of these economic factors sound restrictive but they’re not. They help guide you to efficient and effective choices by thinking through resource allocations, trade-offs, system optimality and the long term consequences of invisibles such as incentive alignment.

Technology is capable of changing the economics of the firm. For example, it can change the constraints of size and resource availability via new connections to a vast array of external resources that were not previously accessible and that can boost your firm’s effective scale. Yousif pointed to applications such as Upwork to add global specialized talent at variable cost, and also made reference to his collection of previously unavailable commodity supply data that was once shielded but now is made available by technology and can provide early warning signals about market price movements, making his firm better informed that it was before, and therefore better placed to serve customers.

Use technology economically to expand your capabilities so that your marginal benefits exceed your marginal costs in reaching expanded and elevated business ends.

Additional Resources

“Economic Thinking About IT Projects” (PDF): Download Here

A Guide To The Project Management Body Of Knowledge (May 2021):- Download Here

The Austrian Business Model (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

Enjoying The Podcast? Review, Subscribe & Listen On Your Favorite Platform:

Apple PodcastsGoogle PlayStitcherSpotify

109: Desmond Ng: Entrepreneurial Empowerment and the Austrian Approach to Value-Generating Organizational Design

Austrian economics offers a wide range of knowledge and applications for better business performance. One of them is the design of high-value organizations

Download The Episode ResourceEntrepreneurial Empowerment – Download

Key Takeaways & Actionable Insights

Austrians understand the function of entrepreneurial businesses in the economy is to pursue and generate new economic value. That value is subjective, experienced by individuals as an improvement in their feelings of well-being. We also understand that subjective value applies not only to consumers but also to producers, including employees in firms whose purpose is value facilitation.

To fully realize the skills and talents of their employees in the pursuit of the organization’s visions and goals, entrepreneurial businesses look for the best ways to empower employees to utilize their Hayekian individual knowledge for the innovation and adaptation that leads to marketplace success.

Dr. Desmond Ng uses the term Entrepreneurial Empowerment to describe this approach to designing an organization that best unleashes the creativity of its entrepreneurial employees.

Austrian economics is particularly suited to addressing the organizational challenges faced by today’s entrepreneurial firms.

Businesses understand that they need to be more responsive to customers and the market. Firms are moving from a top down decision-making structure and searching for ways to move to a more decentralized firm structure. They are aiming to take advantage of all the different knowledge experiences that may be inside the firm, to be more adaptive to changing market environments and to acknowledge the importance of empowering employees.

Austrian economists like Friedrich Hayek fully recognized the benefits of decentralization in adapting to changing market processes. Today, Austrians can apply that same understanding at the firm level, in the pursuit of unleashing the subjective experiences and individual knowledge of each employee to greatest economic effect.

The organizational design tool to achieve maximum decentralized value generation is Entrepreneurial Empowerment (EE)

A firm that organizes using Entrepreneurial Empowerment focuses at the leadership level on clearly defining the ends of the company (which can be packaged in the form of vision or mission or goals or objectives) and on ensuring that internal communications are strong enough and effective enough to ensure complete and fully distributed understanding and buy-in among the employee base.

The means for each individual to contribute to the achievement of these ends are left open to employees; they are not dictated or bound with managerial or administrative constraints. Leadership in an entrepreneurially empowered firm is non-interventionist, free of the strictures of central planning.

EE has two components: the first is structural empowerment (SE).

The structural empowerment element of EE refers to the communication structure that delivers employee empowerment. Se informs them about their opportunities for taking action and making decisions, and provides support for them to utilize their own knowledge in doing so.

Professor Ng used the example of design firm IDEO, which provides a fully-available repository of all the firms designs and ideas from all its engineers and teams, along with information about how past teams tackled the solutions to design problems, with what outcomes. Designers on today’s teams can utilize this shared knowledge, learn from the pooled experiences, and enjoy the freedom of embarking on new design paths by combining their own knowledge and skills with the corporate knowledge repository.

Structural empowerment also requires a policy to regard failure as an acceptable part of the innovation process, in order to foster greater risk-taking behavior among employees, and a greater willingness to experiment with new and unproven ideas. SE is a process that leaders and managers must actively and persistently support. The danger is that leaders may succumb to the temptations of power and control, and to seek to centralize their authority. This can be fatal to entrepreneurial empowerment and negate all its benefits.

The second core component is psychological empowerment (PE).

Employees perform best, innovate best and contribute the most creativity when they enjoy psychic rewards from their work. One important aspect of psychic reward is the search for and successful achievement of meaning and purpose. Research is clear that these high values are found in work when it is conducted in an environment that encourages their development. Professor Ng used Chick-Fil-A as an example where, because the company subscribes to a set of values, employees in what might appear to observers as the simplest and most repetitive service and production jobs can find meaning in their work. The result is unrivaled customer service ratings. Psychological empowerment comes from leadership conveying a set of principles.

Monetary incentives, rewards, and the awarding of titles can not match psychological empowerment in terms of effectiveness for motivating employees. The Austrian perspective delivers some quite revolutionary policies and approaches for organizational design.

Rethinking the concept of leadership.

In recent years, business schools have commanded a lot of attention by marketing and selling leadership studies, with products ranging from executive education to books and online courses. However, Austrian economics suggests skepticism about the underlying concept of leadership in business. Firstly, structural empowerment and psychological empowerment are the antitheses of business school style leadership — they suggest non-leadership, letting go of control, and abandoning hierarchy.

Secondly, as Professor Ng pointed out, the centralized authority suggested by business school style leadership tends to lead to the corruption of seizing power and control, clouding the ethical considerations that are at the heart of entrepreneurship, and undermining the trust of employees lower down the hierarchy. The results can be both a loss of legitimacy for the bosses and a loss of business performance for the firm.

The Austrian perspective on organizational design and management can lead us to a higher-performing firm, a more innovative firm, a firm that facilitates purpose and meaning for those individuals who work there, and trust and legitimacy for founders and executives.

Additional Resources

“Entrepreneurial Empowerment” (PDF): Download Here

Professor Ng’s Research Paper Entrepreneurial Empowerment: “You Are Only as Good as Your Employees” (PDF):- Download Here

The Austrian Business Model (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

Enjoying The Podcast? Review, Subscribe & Listen On Your Favorite Platform:

Apple PodcastsGoogle PlayStitcherSpotify

88. David K. Hurst: Managing People-As-Ends and not People-As-Means.

Key Takeaways and Actionable Insights

In many situations, the complexities in managing a diverse and layered team of people is to view individuals as ends and not means.

Management and organizational frameworks often treat people as means. The business ends are external: so-called shareholder value, or stakeholder value, which is fashionable today, or simply revenue and unit sales goals or metrics and KPI’s.

Managers are taught to look at people through an economic lens as resources – human resources – in the same way as material resources and financial resources, to be utilized as efficiently as possible.

But people are not means. They are subjects, and they have subjective ends of their own. They’re searching for identity, meaning, and trying to meet their own potential. If managers recognize this, their approach to people as team members and employees will be much different.

Individuals need to be able to tell their own story in their own space.

We work for money but we live for story. The most important story is the one we tell about ourselves and our values. People need opportunities to tell their story. Everyone at every level in an organization and in every type of role or job needs this opportunity.

To do so, they need their own space in which to create and embellish their story, a space that is unique to them and gives them a fine-grained perspective of which they are masters, and for which others will prize them.

David Hurst gave the example of Costco, where the in-store personnel have space to use their own discretion to serve customers. If a customer (a guest, in Costco parlance) requires assistance in locating an item, a Costco associate will stop whatever they are doing and escort the guest all the way to the shelf location. They have their own space and their own discretion to design and deliver a unique level of service, and a story they can tell about their customer commitment. This becomes a culture that pervades the entire company.

FedEx has similar spaces, and similar stories about individual employees going to extraordinary lengths to make sure packages are delivered on time.

One way to create these spaces is to give everyone intelligence gathering roles.

David Hurst tells the story of delivery truck drivers in the steel fabrication business. He treated them with deference for their ability to gather real-time intelligence: which competitors had trucks in the customer’s yard; what concerns were customer employees talking about; which customers were friendly and which ones adversarial? These front line employees are able to gather and feed back market intelligence that was faster, deeper more local and more detailed than traditional reports. It’s small data, often much more valuable than big data. And the employees can tell their stories about their intelligence gathering and their important role in company processes, from their unique space.

The word in management usage now is fine-grained. The front line has a fine-grained perspective and fine-grained intelligence. This fine grain is highly valuable, especially when shared in collaborative teams and structures where everyone knows their role, which is not tied to hierarchy.

Hierarchy and structure create a cascade of negative effects for the people in them.

As companies grow and become larger, they require internal specializations and experts in narrow, technical fields. Specialization brings hierarchy, where general managers can supervise those in specialized roles. Hierarchy leads to careerism and status, when employees are not collaborating with each other but competing. The result is what David calls a power trap. The firm becomes trapped on the right had side of his Management In A Field Of Tensions model.

Recently, it has become fashionable to coin terms such as human capital, or brand capital, or relationship capital, or even spiritual capital or street capital. All of these terms are sloppy definitions of capital from an Austrian point of view.

Management In A Field of Tensions Diagram

Click on the graphic to download it.

The tension for management lies in a continuous pull of the “hard, scientific” side of the model, away from the humanistic side.

Austrians lean towards the left hand side of David’s model: humanistic, treating people as ends, respecting narrative more than data. For example, the exercise of judgement under uncertainty, so central to the Austrian paradigm of the entrepreneurially-driven economic system, lies on the left hand side of the model. It’s practical, grounded wisdom, when entrepreneurs make decisions when they don’t have all the data. (And the Hayekian insight is that no-one ever has all the data.) They glean what they can from the individual observations of people involved in the situation at hand (small data), and then decide, knowing that the consequences are uncertain, and that they will need to be adaptive to change in the future.

The right hand side of the model represents the pull of so-called science: hard data, mathematical calculation, plans and administrative bureaucracy.

Smaller, private, more entrepreneurial companies can often avoid the right hand side of the model.

Smaller and privately held companies have many advantages. They tend to be more frugal in good times and bad, and act carefully with cash, thus retaining flexibility in difficult markets. They have a high bar for capital expenditures and make fewer malinvestment decisions. They often try to avoid carrying too much debt, so that bankers don’t have power over them. And, importantly, they are often better at retaining talent and keeping experience inside the firm. They can avoid the careerism of competing for status in the hierarchy, and just let people become better and better at their jobs. On the left hand side of the model, as David describes, it’s all about people.

Free Downloads & Extras From The Episode

Read about David’s management philosophy of Leading Like A Gardener here.

Get David’s book The New Ecology Of Leadership here.

“The Austrian Business Model” (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

Enjoying The Podcast? Review, Subscribe & Listen On Your Favorite Platform:

Apple PodcastsGoogle PlayStitcherSpotify