Steve Weber / Politics and Economics

The Management Scholars of Ancient Greece

Today's Financial Times has a good article by Simon London reviewing a book by Jim O'Toole, Creating the Good Life .  Yes, it's another attempt to draw lessons from Aristotle for business.  Let's see -- add it to the list, Tony Soprano for Managers, Genghis Khan for Human Resources, etc.

I made the mistake (!) of sending the article to my co-author Jonathan Sallet, who replies as follows:

From next week's FT.

"Many people, when they've lived for half a century begin to think of how they will conclude their career or begin their retirement. For inspiration, they turn to religion, spirituality of different forms, or to gurus, of the management or zen persuasions.

"But I have taken a different path. Is it not Socrates who offers us the meaning of a good life? Think of him not just a tutor of Plato but also as the middle aged hoplite, fleeing for safety from the site of a terrible Athenian military disaster. Or, more famously, voluntarily committing suicide rather than departing the Athens whose democracy he despised.

"Do not these choices - and the autocratic (some say fascist)  philosophy so nobly pursued by his most notable disciple - give us a new way of viewing our life? Why hang around corporate boardrooms awaiting the arrival of the next Enron scandal when fleeing is a pathway right there in front of you?  Why show up to vote or embrace a social cause when cyncism can be raised to an art form (and remember Socrates didn't even have a blog, much less a talk show)? And why wait for the debilitating ravages of retirement, as your artificial knee begins to buckle under the weight of 18 holes, when such an obviously self indulgent (not to say self erasing) alternative is as close as, say, a cup of hemlock?

"Perhaps you have a different view. But I choose to ignore it, for Socrates has shown me the light. Engage in disalogue with others if you must, for me just make it socratic.

Should I be nervous?

A rare piece what is being reported as ‘good news’ from the front of the ‘war of ideas’ is making me very uncomfortable this weekend. 

It’s been discussed in the Times, the Post, and most clearly in this weeks Economist magazine, which subtitles an article “Unfamiliar Questions in the Arab Air” thus:  “as Al-Qaeda scores own-goals in its backyard, many Arabs, including some Iraqis, are beginning to rethink their position on violence in the name of resistance.”

It’s an obvious claim and not terribly surprising.  Whatever Abu Musab al-Zarqawi thinks he is doing by cutting off the heads of captives and most importantly blowing up hotels in Amman ? killing very few westerners but a lot of Muslims and notably dozens of Palestinians ? there had to come a point at which the Arab street pushed back.  Jordanians and others are marching to protest the violence.  Religious leaders and governments are taking their side.  Let’s be clear.  No one has been converted from jihadist ideology.  People do seem to be expressing doubts about the tactics. 

All to the good, of course.  Americans warm to the idea that some Arab publics are becoming less accepting of Al-Qaeda’s behavior.  That should be of great assistance to us in our long term struggle to win the war of ideas as well as the physical war on terror.

Wait a minute.  Is it really good news? 

Put yourself in the mindset of Zarqawi or perhaps Bin Laden, if he even knows what’s going on from his cave somewhere in Pakistan.  What must these guys be thinking now?  In the last several years, their efforts have been aimed at imposing pain in two places ? the American occupation forces in Iraq, and the ‘near-enemy’ governments of Arab states that they ultimately wish to bring down.  Maybe this was a conscious cost-benefit calculation.  Maybe they just don’t have the capability right now, given the pressure being placed on them by the US, to do anything else.  We don’t know.

What we do know is that they’ve put themselves over the marginally increasing benefits part of the return curve for attacking the near enemy.  And the discomfort in the Arab street is not just an annoyance.  It threatens their life-line.  So what would you do next? 

It seems to me the obvious move is to attack the far enemy, the US.  Would the Arab street protest against violence in the wake of, say, 10 suicide bombers in 10 shopping malls across the United States on the day before Christmas?  I’d like to think the answer is yes, but I doubt it is. 

I don’t know better than anyone else knows why it is that Al-Qaeda has failed to do anything inside the US since Sept 11 2001.  There are many theories, and as far as I can tell with regard to evidence that is being made public, they are all pure conjecture.  Some are more reassuring than others. 

The one thing I think I do know, or at least suspect at this moment, is that whatever the costs and impediments to mounting operations against the US inside the US may appear to Al-Qaeda, the discomfort in the Arab street following the Amman bombings would seem to heighten Al-Qaeda’s incentives to go after the far enemy.  And what better time than around the Christmas holidays?

"Exit" Strategies?

Zach Shore is a historian and currrently a Fellow here at the Institute of International Studies.  Zach has that rare gift of being able to move seamlessly between academic and policy debates.  He also has the guts to take on some of the thorniest issues in both 'worlds'.  Here's a piece he wrote recently which is (typically) provocative, challenging, smart, and at the same point, just a little bit disturbing in its implications. 

Voting is the Exit Strategy
by Zachary Shore

Zachary Shore is a Fellow at UC Berkeley’s Institute of International Studies and the author of BREEDING BIN LADENS: America, Islam, and the Future of Europe, forthcoming Johns Hopkins University Press.

When our soldiers’ death toll in Iraq recently reached 2,000, Americans held silent vigils across the nation.  In Washington, however, attention mainly focused on Bush administration scandals.  Despite the Iraq war’s rising costs in blood and treasure, no new strategies for defeating the insurgents have emerged since the occupation began.  This failure to provide solutions is an indictment of all of Washington’s political elite.  Fortunately, Iraqis have shown us a way out of the current quagmire ? at the ballot box.  In December, the next time that Iraqis vote, they should express their views on a question that impacts America’s future as much as their own: Do they want US forces to remain?

America has sacrificed nearly $300 billion of its national treasure and more than 12,000 of its soldiers who have been wounded or killed in the effort to democratize Iraq.  How much more do Iraqis want the US to give?  Let’s ask them.  By allowing Iraqis to vote directly on whether they want American troops to stay in their country and for how long, three results could follow: all of them good for the US.

First, if the majority of Iraqis vote to have the Americans stay, it would deal a significant public relations blow to the insurgents.  No longer could they claim that they were acting on behalf of the Iraqi people.  It would be clear to all that they were defying the will of the majority.  And while this would not halt their attacks, it could undermine the tacit support they draw from an ambivalent populace.  It would also be a public relations coup for the Bush administration, as it could henceforth legitimately claim to be acting on behalf of the Iraqi people’s wishes.

Second, if a majority vote to have the Americans leave, then the US has a clear exit strategy.  The American people will not tolerate continuing to invest their blood and treasure for a nation that does not want them ? unless they believe that America’s national security is at stake.  If the Bush administration refused to exit, it would need to redefine its goals in Iraq in terms of security.  This would permit a new debate in which Americans could soberly assess how great a threat an unstable Iraq poses to our country, and how much burden we will bear to contain that threat.

The third possibility, the most likely one, is that the vote’s outcome would be mixed.  The majority of Sunni and Shia might vote to have Americans leave, while the majority of Kurds might ask us to stay.  This would allow the US to withdraw its forces to the Kurdish region, where it could concentrate its counter-insurgency war to greater effect.  The insurgents would then be handicapped by having to operate in a region where they enjoy less local support.  US access to local human intelligence would be enhanced.  Because we would not require 150,000 forces to stabilize the Kurdish north, America could immediately begin drawing down its troop levels, bringing many young men and women back home.

Best of all, because the Kurdish region is already more stable and has potential for prosperity, America’s association with that region could bolster our nation’s image in the Middle East.  Rather than looking like occupiers, US forces would be democratically welcomed, while they work to rebuild a part of Iraq.  If the north does flourish, the US military presence will be viewed by other Iraqis as a force for stability and prosperity.  This is what US forces would like to claim for all of Iraq, but the insurgents have shattered that hope.  By concentrating our efforts in the Kurdish north, we may have the best chance to create an attractive model for the rest of the country.

Whatever the result of this referendum, the act of calling for a vote in Iraq will refocus the debate in America.  Our soldiers are dying daily, and our enemies draw fresh recruits because of our continued presence ? a presence never democratically legitimated by the Iraqi people.  The Bush administration says, “Stay the course,” but it refuses to revise its failed strategy against the insurgents.   Opponents demand either a timeline for departure or a policy of “cut and run.”  But these critics don’t discuss the consequences that withdrawal will have for America. 

We need our national debate to rise to a more constructive plane.  The question is not whether we stay or go.  The debate should be about how any new strategy will affect our security.  An Iraqi referendum on our presence can take us closer to answering that key question, and to finding a sensible way forward in Iraq.

Supreme Court Nominees

Forgive a short moment of what will seem like ambulance - chasing.  But like everyone else (at least on the West Coast) I woke up this morning to the not-unexpected news that the White House had announced a new Supreme Court nominee.  Anything to get Scooter Libby off the front pages, I suppose.  Whatever.  Here's the part that makes no sense to me.  Within 45 seconds, I am hearing an outpouring of opinion from all sides of the political spectrum on this particular individual, whose name I can barely yet pronounce much less spell.  Okay, he's a federal appelate judge, so I have to assume that he is reasonably well known to at least a subset of the people who are busy opining about his qualifications and his political leanings.  It's the other people I'm worried about -- the people and groups who have never heard of this guy until this morning, and within 45 seconds have a fully formed and deeply held opinion about whether he should be confirmed.

This makes me crazy.  How about this for a radical proposition?  The President names his nominee. Everyone sits back for 24 hours and keeps their mouth shut.  Maybe they read a few of his decisions.  Maybe they do a little research.  Maybe they simply think a little bit.

I know it's impossible to enforce such a cooling off period.  But this is a supreme court nominee, not a first round draft pick for the NY Giants defensive line. 

Out of the Enligtenment?

Jonathan Sallet can't seem to stop writing, even when he claims to be on vacation.  Apparently, I provoked him just a little with my reference to Gordon Wood's The Radicalism of the American Revolution -- which is one of his favorite books.  And this is what resulted.  Jonathan is a lawyer by training, but he has spend much of the last decade(s) working either in politics or in the business, policy, and technology of communications.  That's useful background to reading this note he wrote :

America Enlightened 

Jonathan Sallet

A life of eighty-six years and a speech that lasted about three minutes. Both confronting the question of what is America.  Is America a race? A place? An accident? A geographic region bounded by (some) natural borders? A unique, ahistorical, occurrence?

Or the embodiment of an idea? The life of Benjamin Franklin and the Gettysburg Address of Abraham Lincoln chart the course of America as an idea -- as an Enlightenment society created to replace rigid social hierarchy with the individual’s capacity to pursue knowledge and society’s capacity to benefit from the sum total of individual aspiration.   

My friend, colleague and co-author Steve Weber was kind enough to note my  recommendation that he read Gordon Wood’s “The Radicalism of the American Revolution” a book that, along with Professor Wood’s equally excellent, “The Americanization of Benjamin Franklin”, probe the enormous change from a pre-revolutionary society through an enlightened age of political creation to the democratic successes (some would also say excesses) of Jacksonian politics.

What is an enlightened society?  One formulation would be to say that it assumes the ability and the willingness of individuals to pursue the truth and the desire of their fellow citizens to learn, to inquire and to improve.  Immanuel Kant, in his 18th Century essay “What is Enlightenment?” contrasted the state of enlightenment with the state of immaturity:

Immaturity is the incapacity to use one’s own understanding without the guidance of another.  Such immaturity is self-caused if its lack is not lack of intelligence but by lack of determination and courage to use one’s intelligence without being guided by another.  The motto of enlightenment is therefore: Sapere aude! Have courage to use your own intelligence.

For the Revolutionary generation, Wood says, “America became the Enlightenment fulfilled;” the means, in the words of John Adams, “for the illumination of the ignorant and the emancipation of the slavish part of mankind all over the earth.”

Emancipation? In what sense can that term be applied to a group of politically active colonists who, in point of fact, were more likely to be slave owners than slaves?

In this sense.  The struggle of the Enlightenment was a fight for the ability to discern the truth free from the dictates of powerful, hierarchical institutions.  Those institutions could be scientific or political or social or religious.  But they had in common the belief that truth was a mandate from above, not a voyage to be embarked upon by any person.  So, for example, medical students in the Middle Ages learned anatomy by listening to san instructor read aloud the ancient texts of the Roman physician Galen while they watched a human dissection.  Sometimes what they saw differed from what Galen asserted.  And, when confronted with that disparity, they chose to believe received authority and not their own eyes.

Against this monopolization of knowledge sprang the Scientific Revolution, the invention of capitalism and the spread of democratic ideals, culminating in the American Revolution.  All three movements built upon the simple notion voiced by Stephen Hawking to explain why he was drawn to the study of physics: “It doesn’t matter what school you went to or to whom you are related. It matters what you do.”

Benjamin Franklin’s life serves as an example.  Franklin was born into an era of rigid social classes in which the mark of a gentleman was to graciously “condescend” to the other class, namely commoners.  Franklin’s own rags-to-riches story is well known ? a journeyman printer turned gentleman, scientist, revolutionary, diplomat and statesman.  Wood makes a larger point ? that Franklin’s life marked the larger journey from the times of social hierarchy to a time that embraced a radically different notion: That all men (if not yet all women and certainly not people of color) were created equal.

But that phrase, penned by Jefferson and approved by a committee of the Continental Congress on which Franklin served, was only born ? not fulfilled in 1776.  It fell to Abraham Lincoln ? eighty-seven years later ? to enshrine the Declaration as the central concept that defines America.  And so Garry Wills, in “Lincoln at Gettysburg: The Words that Remade America” devotes a short book to an even shorter speech.  Wills’ central point ? that Lincoln used the Declaration of Independence, rather than the Constitution as the central intellectual foundation of America.  With Lincoln, John Adams’ plea for Emancipation was proclaimed upon a larger stage.

The ability of the individual to seek his or her own truth can be misunderstood as lacking independent moral content.  The impetus towards democracy that overthrew the hierarchies of kings is sometimes portrayed as the same force that lead to the terrible excesses of the French Revolution.  The impetus towards scientific discovery that led to Darwin’s theory of evolution is sometimes treated as one step to Hitler’s genocide.

But the American Enlightenment was not devoid of moral value.  Indeed, Wood emphasizes that to the Founders:

[E]nlightenment was not simply a matter of material prosperity, of having Wedgwood dishes and finely pruned gardens.  It was above all a matter of personal and social morality, of the ways in which men and women treated each other, their children, their dependents, even their animals.  Such enlightened morality law at the heart of republicanism.”

And what was the “content” of this morality?  Wood tells us that “[i]t implied being reasonable, tolerant, honest, virtuous, and candid, which meant just and unbiased as well as frank and sincere.” Garry Wills cites “critical intelligence, tolerance, respect for evidence, a regard for the secular sciences.”

Here a potential conundrum arises.  For these Enlightenment virtues are not fulfilled merely by the exercise of direct democracy.  Kant’s formulation quoted above celebrates the ability of each individual to make a decision, but, by itself, doesn’t tell us how to assess the impact on society of the sum total of individual decisions.

For the Framers, the search for truth ? still enshrined in the capacity of each individual ? was cast as something more than simply counting noses. The Federalist Papers warned against mob rule and the power of factions.  The Constitution carefully structured democratic decision-making ? filtering them different branches of government, chosen at different intervals, and selected through different methods ? direct election for the House of Representatives, indirect election for U.S. Senators, election by the Electoral College for the president and vice president and selection by the other two branches for the members of the federal judiciary.

Moreover, majorities ruled by prejudice and passion are not permitted to invade an individual’s autonomy. Thus, the Bill of Rights and the 14th Amendment. 

Much of American history has taken the form of a debate between democracy and individual rights.  In Professor Wood’s words, the Framers who lived into the era of Jacksonian democracy “found it difficult to accept the democratic fact that their fate now rested on the opinions and voted of small-souled and largely unreflective ordinary people.” Indeed, a reasonable counter-factual argument could be made that had the South remained in the Union in the 1860s, the great Constitution amendments of the Civil War era, including the 14th Amendment’s guarantee of due process and equal protection under the laws in the face of hostile state action, could not have garnered sufficient public support to be ratified.

But, to my mind, the counter-majoritarean principles of the Bill of Rights and the Civil War Amendments have been justified too much as legalisms in and of themselves ? and not enough as examples of American political philosophy.  Of course, the Constitution guarantees the right to voice unpopular notions.  But, from the perspective of Enlightenment values, the ability to dissent is not just an attribute of individuality, it is also a necessary means for society to test, correct, and improve itself.   The First Amendment, in other words, benefits not just the dissenter ? it benefits society by protecting the instruments of enlightenment. Similarly, diversity is not just a right of minorities, it is a means by which society improves through meritocracy.

Still, it’s safe to say that the avowed espousal of Enlightenment values has disappeared from the political sphere.  Consider the last time you heard a successful political platform call for intelligence, empiricism and tolerance. Not lately.

Indeed, in today’s discourse, we lack even the language to explain and justify the pursuit of Enlightenment values.  Tolerance sounds weak.  Empiricism seems obscure. Intelligence seems elitist.

Moreover, Enlightenment values sound, to our ear, more like a call for nice process than an invocation of great national goals. One candidate says, we want a nation that is Strong.  Another says, we want a nation that is Reasonable. Who wins? 

Apart from political discourse, what other means are there to advance Enlightenment values?  Education, of course.  It is no coincidence that Jefferson founded the University of Virginia.  The Founders understood that education was critical to the creation of a modern mind.  They might not have been surprised to see that the battleground of the debate over creationism is the schools ? and they surely would have understood that there is more at stake than high school biology.

Is there a better solution?  Here’s a hypothesis that may be worth testing. I invite comment, attack ? anything short of personal abuse.  Might the following be true? That with the decline of structural republicanism and the passing of the Revolutionary generation, the pursuit of enlightenment values became a province of elites.  But as self-styled elites became removed from the political process and the aspirations that it served, the playing field was left to forces that did not represent the Enlightenment values of the Framers.  Without forceful advocacy, without intellectual heft and without the strength of persuasive language, Enlightenment virtues seem to be a form of special pleading for the weak or for the privileged ? not the cornerstone of American greatness. 

We need to be explicit about the importance of Enlightenment values. The current debate over the role of the Supreme Court, in a larger sense, is about the meaning of the American Revolution.  Because the true American Revolutionary is one, like Jefferson and Franklin, who regards science as a means for understanding the world; one who, like Hamilton, views commerce as a means of strengthening the nation; one who, like Madison, strives to construct a political system that pursues wisdom. 

There are voices today who seem to be trying to repeal the values for which the American Revolution was fought.  But who will stand up and say so? And, just as importantly, how can they best explain what is in danger of being lost?

Thinking about Risk

I've spent some time the last month thinking about the concept of risk, the practice of risk management...  like just about everyone else on the planet I suppose.  Luckily enough, my colleague Eamonn Kelly at GBN was asked to write a piece for the Financial Times on the evolving nature of risk in the business world... and we wrote together this piece -- which is an overview of course given the 4000 word constraint.  That said, there are some ideas that I believe are worth sharing and developing further. 

The Changing World of Risk  (appeared in the Financial Times on Friday Sept 9)

Eamonn Kelly and Steve Weber
Eamonn Kelly is the CEO of Global Business Network (GBN) and a Partner in the Monitor Group. His book Powerful Times: Rising to the Challenge of our Uncertain World is published next month by Wharton School Publishing. Steve Weber is a professor of Political Science at UC Berkeley and a senior consultant with GBN. His most recent book was The Success of Open Source, published by Harvard University Press in 2004

Is risk bad for business?  In the uncertain, complex, and volatile environment of 2005 it no doubt seems to many executives to be so.  Risk is something to be managed, reduced, hedged, or sold to others.  But it is worth recalling that the original concept of risk, derived from early European sea-faring adventurism, contained a powerful sense of opportunity and reward as well as downside and danger.  We believe that winning businesses in the future will be those that are best able to balance coping strategies, which are defensive and focused on avoiding downside risks, with an increasing mix of exploitation and exploration strategies, which embrace risk and make the most of the opportunities it presents.  This will require more than just continuous improvement in traditional risk management tools ? it will also involve a shift in mindset and focus.

There are good reasons executives tend to think of risk as something to be avoided.  Part is simply the hard-wired human psychology of loss aversion ? for most people it hurts more to be at risk of losing ten dollars, than it feels good to have a chance to gain an equivalent amount.  Part is the left-over experience of the 1990s ? in a highly permissive and opportunity-rich business environment where it was remarkably hard to fail, a smart and simple risk strategy is just to protect against catastrophic downsides and then let the engine run.  And part is the extraordinary innovation in risk management tools, which allow sophisticated hedging, re-packaging, and pricing of risk within increasingly liquid marketplaces.  These tools are increasingly valuable and important for business today ? but they are unlikely over the longer term to confer much in the way of sustainable advantage. A business that gives in to loss-aversion psychology, sells off its risk to others, and simply lets the engine run, will in the future most probably be described by one word:  unprofitable.

The world has always been a complex and uncertain place from the perspective of anyone trying to create value over time.  But without inappropriately flattening out the past and indulging in the fantasy that the ‘good old days’ were simple and straightforward, we should acknowledge the obvious fact that business ecosystems today are indeed faster moving, more interconnected, increasingly global, and both bigger (in scale and scope) and broader (more players, and more unfamiliar players) than they have ever been. Moreover, competitive pressures frequently lead to radical changes in our business models and behaviour that can generate unanticipated problems ? think of BA’s recent troubles arising from the outsourcing of its catering.  As the pace of change accelerates, many executives have the very understandable feeling that uncertainty and risk increasing at a faster rate than is quantifiable and manageable.  That sounds like a scary proposition, but does it need to be so?  In fact, a bigger menu of uncertainties provides daring innovators new opportunities to create upside risk. 

To see this more clearly, ask yourself if you think contemporary changes in the external business environment make the business ecosystem as a whole more fragile - or more robust.  Is the larger system within which your business operates fragile, brittle, stretched to a tipping point at the edge of chaos? Or is it meta-stable, protected by layers of redundancy, resistant to shocks, and survivable?  In fact we don’t really know enough about the behavior of complex systems to be certain.  For example, in July, a series of terrorist bombs hit the London underground. We can interpret the consequences of such attacks for the ongoing operation of the city in two very different ways. First, we can believe that ‘a modern city is such a tightly interconnected organism, with all its resources stretched in a relentless drive for efficiency, that it would not take much to bring the whole thing crashing down.’  But there is an alternative perspective - that ‘a modern city is such a complex organism with so many redundant pathways available to intelligent agents, that it is incredibly and surprisingly robust.  When hit somewhere, it routes around the damage to self-heal in ways hard to foresee.’

The prevalent mood today is arguably to default to the first interpretation ? that we occupy systems that are essentially fragile and vulnerable. Paradoxically, from the perspective of a generic actor in any system, that may be the more reassuring belief ? after all, the more robust and meta-stable the system as whole, the less it needs any specific company, country, or person to flourish or even survive.  In a meta-stable system, nobody is too big or too important to fail.  But from the perspective of a strategic actor, both interpretations signal opportunity.   Knowing more than others do about the nature of the system and where it sits on the fragile-robust continuum is a critical source of advantage ? and it requires us to think about the larger and more external context within which we operate.

But how much attention do executives pay to the external features of their business ecosystem?  In our work with major corporations, Global Business Network often draws a distinction between three critical environments for every business. The first is the internal environment ? the organization itself, and its people, systems, assets, processes, culture, etc. The second is the market environment ? the world of customers and competitors, products and substitutes, suppliers and partners. The third is the external environment ? the world of political dynamics, economic growth, technological development, social and demographic shifts and changes in the physical environment. In our experience, most organizations pay far, far more attention to the first two than they do to the third. What beliefs could lie behind this allocation of executive bandwidth?  One hypothesis is that the big, messy external world is just so hard to understand, that the returns to investing the next marginal bit of attention there are too small to matter.  A second hypothesis is that the external space contains too much irrelevant risk; the risks that matter to the business eventually will filter inwards toward the inner circles; and you can pick up those signals and respond as risk crosses the boundary to enter the transactional space. 

These hypotheses are not entirely wrong.  But they are also not in and of themselves satisfactory, because they provide no real source of sustainable advantage.  The observation that externally originated risk is hard to understand spells opportunity for someone who can separate, even partially, signal from noise.  And if you wait until upside risk is clarified within the transactional space inhabited by your customers and competitors, it’s already too late to seize the most attractive opportunities. 

Yet most risk management today is based on coping strategies that manage downside risk. Such defensive measures are needed, of course - but they also have their limitations. Consider the most common coping strategies adopted today.  Many companies cope with downside risk by using increasingly sophisticated econometric and other mathematical models and paying increasing attention to them.  This is good, so far as it goes.  But models have limitations, and it’s often the case that the more finely-tuned the model, the more catastrophically it tends to fail when the world moves outside the parameters for which it was designed (think Long Term Capital Management).  And those parameters are often much less transparent than they need to be  - in part because they become deeply buried within the assumptions of the models, and in part because the models typically do not deal well with external uncertainty.

Companies also cope with downside risk by elevating the risk function within the corporate hierarchy ? for example, establishing risk management committees at the board level.  This is also good, because it ensures that risk receives greater resources and attention and that risk management and mitigation enjoy greater clout.  But too much attention to risk at the board level can yield an overly defensive posture, because quantifiable (and often disaggregated) data becomes a fixation for decision-making and the tacit, tactile understanding that is present in other forms of knowledge within the organization is undervalued.

Companies increasingly cope with downside risk by throwing money at the problem.  At some price, it’s almost always possible to offload to others at least the risks you know about, through multiple layers of hedging and insurance.  This is good, because it offers re-allocation, specialization, economies of scale and scope, and all the other benefits that come with disaggregating and marketizing business functions.  But giving away risk (or, more precisely, paying someone to take it away) at some point means giving up control of significant pieces of the value chain, and allowing others to control it to their advantage. 

And finally, companies cope with risk by acting conservatively.  Caution, discretion, and prudence are sensible ways to view a complex world.  But it is remarkably easy, particularly for large and successful organizations with lots to protect, to become overly conservative.  Conservatism at some point simply has to yield to growth strategies; the key is to know when to move.  Cost-cutting can only go so far.  Loss-aversion is not a long-term way to win.  In expanding markets the smart hopeful will always beat the fearful. 

This can be a deeper problem even than Christensen’s “innovator’s dilemma”, although it certainly overlaps with and reinforces his important insight.  Combine the organizationally-incentivized conservatism of incumbents with the loss aversion hard-wired into individual human brains, and you have a recipe for disruptive market change.  That is just fine for the disruptive entrants and for the business ecosystem as a whole; indeed it is a big part of what makes some ecosystems meta-stable overall.  But it is not so good for the companies that are eaten up along the way.  They need a more aggressive and advantage-seeking way to think about risk.

And they need it now more than ever.  We believe that coping strategies, while remaining a necessary part of any corporate strategy, will in the future increasingly be seen, used, and priced like utilities that everyone simply must have.  But they will not be a source of significant and sustained advantage ? that will come from seizing the upsides of risk.  There are two simple but important claims behind this argument.  First, we believe that the information revolution has made ‘that which is known’ more evenly distributed around the world, and in close to real time.  Put differently, facts (including factually-based probabilistic assessments of risk) will be available to everyone, all the time, at commoditized (and thus nearly equal) pricing.  There will be precious little and diminishing differentiation available in access to ‘that which is known’.  This, of course, means that the ‘unknown’ or at least ‘the uncertain’ will become increasingly important as a source of competitive advantage.

Our second claim lies at the intersection of technology and ideology.  Information technologies combined with market-friendly ideologies have led to the increasing application of markets as a way of allocating resources and solving problems, in many aspects of economic, social, and political life.  It is axiomatic within simple microeconomic theory that externalities ? situations where the full costs and benefits of a decision do not fall on the decision maker but on someone else -- are a source of inefficiency in market settings.  And so a critical piece of the re-engineering of marketplaces, enabled by information technology, has been the internalization of many externalities.  Polluters increasingly have to pay the costs of their pollution. 

This is good for the system as a whole of course.  But it is not good for actors that have previously been able to capture the benefits of a product or an action, and externalize the costs on to others.  Nice work if you can get it, but it is increasingly hard to get.  And there lies the second emerging challenge for corporate risk thinking.  It was socially inefficient, but wonderful for the company that could get away with it, when you could hold the return piece of the risk-return combination to yourself, and impose the risk part on someone else.  Technology is making it easier to break up those deals, and ideology is making it more defensible and attractive to do so.  As companies have less of this ‘risk externality inefficiency’ to capitalize on, they’ve got to find something else to replace it.

And that means moving to re-embrace risk as a source of adaptive advantage.  In the future, managing the standard downside risks will increasingly become a ‘hygiene factor’ in business planning ? simply part of the cost of playing.  The notion that some companies are too big or too important to fail, and thus can manage risk differently, will become less prevalent.  In the 1960s it really was true that ‘as goes GM so goes America,’ but there really is no equivalent of that today, and it will become less likely over time that any company could achieve that threshold.  Sustained advantage will come from the capacity to adapt faster and more effectively than the rest of the pack.  That’s familiar as rhetoric, but still unfulfilled as practice in many respects.  When advantage lies mostly profoundly in the unknown and the uncertain, the ability to sense and learn faster, to correct mistakes and drop losing bets, to tolerate ambiguity and live with, even embrace, ambivalence, becomes absolutely essential. 

In the future, the discipline of business risk practice will have to help people and organizations navigate these challenges.  This will require much greater allocation of attention to the external world beyond the immediate business environment, and the mapping of risks within more integrated frameworks that highlight their sensitivity to external uncertainty. It will require the systematic development of new competencies and capabilities that work from the ‘outside-in’ - such as early warning and scanning systems, scenario planning, systems thinking and real options.  It will require new approaches to experimentation and learning and greater investment in the on-going development of decision-making executives. It will require more emphasis on the nurturing and sustenance of internal and external human networks, and strategic conversation that places risk as a source of discovery and opportunity. 

Most important, however, it will require treating uncertainty as a powerful starting point for innovation and renewal, rather than simply as a threat to be minimized.   The new discipline of risk will eradicate from our mental lexicon, once and for all, the mistaken 19th century notion of "survival of the fittest".  In a constantly changing environment, the organism that is optimally tuned for today’s world is a dead organism in tomorrow’s very different world.  Forget survival of the fittest, and replace it with survival of the most adaptable.  After all, as Darwin himself observed, "It is not the strongest of the species that survive, nor the most intelligent, rather, it is those most responsive to change".

The night before the day after

As whimsical as this may sound, the night before the first day of school is still a very stressful moment.  It signals the end of the summer, which is without a doubt the best invention ever created by humankind.  And I still have the same nightmares I had when I was in third grade -- going to class with the wrong notebook, showing up on the wrong day for the test, that kind of thing.  You think that kind of thing is going to stop when you are twenty, then when you are thirty, and then... well let's just say it never goes away.  at least for me.

One of the great things about summer, for me, is that I get to read books.  I mean, the kind of thing where you sit down and actually read a whole book, not a few chapters here and there, and without significant interruption.  I read a couple this summer and re-read a couple of old books that I had read before and not really understood.

The best of the latter category is The Radicalism of the American Revolution by Gordon S. Wood.  My friend and colleague and co-author Jonathan Sallet reminded me about this book and he was right to do so.  I had read this book a decade or so ago and not understood it.  I mean, I knew it was important and I knew it was smart, but I didn't know just how important or smart it really was. 

This time the book had a profound effect on me.  Wood explains, in deep detail, the social revolution that was embedded in the (essentially political conservative) American revolution  -- in particular, the move from a traditional hierarchical society where relationships were understood as familial obligation, to a modern market society of autonomous agents where relationships were understood as voluntary contracts betweeen consenting parties of equal standing.

I'll have more to say about the substance of the argument as I work on my book about US-China relations, because Woods' argument is coming to figure prominently in my thinking.  For the moment, and in a whimsical way, I just want to reflect on what was different in reading it this time.

This time, it got into my gut not just into my head.  What i mean by that is that on this read, it wasn't just a social science argument that made good sense to me.  I began to feel, as Gordon Wood wanted me to feel, what it really felt like to live in colonial America.  I felt like I could feel in my gut the sense of familial obligation that cemented the relationship between the colonists and the King.  I understood at an emotional level, a little bit, how one could have been a loyalist rather than a patriot in 1776.  The experience was more like reading a really great novel than anything else.

And now I find myself with a powerful challenge, on the night before the first day of school.  In the next thirteen weeks, I will have 26 chances to make some kind of (hopefully coherent and powerful) argument before a large lecture hall of smart undergraduates.  I know the intellectual messages that I want them to receive, but with 26 chances of 90 minutes each, what kind of impact can I possibly have on their guts? 

I've long thought that the key to being a decent teacher is to allow your enthusiasm for what you are teaching to show.  But enthusiasm only goes so far.  I'm waiting for some easy to deploy, user friendly technology solution that can take me a little further.  I want someway for my students to 'feel' a little bit of what it must have felt like in the winter of 1947; or the summer of 1848; or (I said this was whimsical) at the Battle of Hastings. 

Maybe it's time for me to start experimenting with the Xbox or something like that?  ;) 

China.com

Doesn't that sound like it's 1999 all over again?

There is certainly enough buzz around the last few weeks' investments in Chinese internet companies to make it sound that way.  I was determined to sit this one out for a bit and let the dust settle.  But my conviction not to chase ambulances just because I can now that I have a blog, sort of got blown out of the water today when Yahoo announced a billion dollar cash investment in Alibaba, a Chinese ecommerce company with revenues of 68 million dollars in 2004.  And of course there was the IPO of Baidu -- whose stock finished its first day of trading at something like 2000 times earnings?

The  media is all over this stuff, as it should be.  There are two obvious reasons why these things are happening.  (But first, recognize that IT, Internet, etc. companies based in America have been making huge investments in China for a long time.  Baidu and Alibaba are not new phenomena, they just feel more salient in some ways because of the increased attention to the US china relationship.)

The two obvious reasons are obvious.  First, just as thieves rob banks because 'that's where the money is', growth companies need to be in the China market because that's where the growth is.  As my former colleague Eric Best, now at Morgan Stanley, once said, a (very) simple version of China in the world is simply this:  pick a number, any number-- multiply by 1.3 billiion -- what do you have?   a very big number.  that's obvious

Second, it's another demonstration of just how 'un-flat' the world really is.  Globalization is real as a process of increased mobility across borders, yes, but are we anywhere near something like a global market where borders don't mean anything?  Not even close.  The rules of doing business in China are different, very different, at almost a fractally complex set of levels, from doing business in the United States or in France.  By rules I mean both the official rules (remember, it's taken the internet companies some time to figure out who they need to talk to in Washington DC to influence the official rule making and regulatory process there in ways that aid their strategies -- it would take a bit more work (!) to figure out the same in Beijing) and the unofficial, behavioral rules (what do consumers want?  how do they make purchasing decisions?  do they 'trust' payment systems and delivery systems?  etc etc)  So, if you want to do business in China, you need to learn a lot about the playing field, and Chinese companies know a  lot more than you do -- because the world is not flat.  that's also obvious.

So what is non-obvious?  A third piece of the strategy, which is about hedging against a train-wreck in Sino-American relations.  I'm not imputing this directly to Yahoo or anyone else -- I have no idea if this is implicit, explicit, or anything else in their decision making.  But their behavior is consistent with a hedge against the possibility that 'defensive localization' will be an important way of managing trade, currency, and content restrictions that could be in our de-globalizing future. 

The historical analogy:  in the 1980s, the Japanese began to get serious about building auto factories in the United States.  They did not do this to save on shipping costs for cars, anymore than Yahoo needs to be 'present' in China to save on 'shipping costs' for bits.  They did it to get closer to the market, to learn about American rules, but most significantly to hedge against currency fluctuations, trade restrictions, and political barriers to, well, globalization.

I see the same kind of hedge happening today in Sino-American internet business.  And it makes sense.  If you think it plausible that barriers will go up -- whether they be taxes, or local content regulation, or censorship rules, or standards battles that end up placing sand in the gears of the 'global' internet protocols -- don't you want to have a way to be 'inside' the walls of even a partially private garden, if there are 1.3 billion people in that garden? 

I'm not saying this is a bad thing, anymore than the Japanese auto factories in the United States were a bad thing -- for Japan or for the United States.  I'm just pointing out what I think is part of the game here that I believe we should go into eyes open.

A Modest Proposal for Iraq

The war in Iraq is nearly over, and the United States has nearly lost.

It's time for us to recognize a few core realities about the conflict in Iraq, and reason from those to an action plan for salvaging what we can out of this debacle.  What I'm about to suggest is not a good outcome for the people of Iraq.  It is, I think, a reasonable outcome for the United States, at least compared to the alternatives.  It is actionable.  It will preserve the most important, minimal necessary interests of the United States.  It's possible to make a case that in the long run it might work to the benefit of the Iraqis as well.  But I'm not so cynical as to defend it on that basis.

First a mea culpa.  I was a mild to moderate supporter of the war at first, for a set of reasons that now look to be truly stupid.  Believe it or not, my thinking in 2002 went like this:  The Bush Administration is a political animal of the first order.  More than anything else, they want to be re-elected in 2004.  To start a war in Iraq is a huge and incredibly risky undertaking, that is not on the face of it necessary.  The list of things that could go wrong is so extensive and so frightening, that they must have an incredibly compelling reason to take such a huge risk.  They must know something that we don't.  Because otherwise the cost-benefit calculation is incredibly clear:  why take such a risk if you don't have to?  The downside is so much worse (and more likely) than the upside.

I don't think I've ever been so wrong in my life.  And it's a classic mistake of strategy -- to overestimate the strategic rationality of someone you don't know very well -- mistaking his or her ideologically inspired, or narrow minded, or standard operating procedure driven behavior, or just plain stupidity -- for a carefully reasoned and logical plan that would make sense if you just had all the data.  Live and learn.

Okay then.  Here are two realities we should acknowledge:

1.  We are fighting precisely the war that Saddam Hussein wanted to fight against us.  The so-called 'insurgents' did not develop their very sophisticated strategies on the fly.  Saddam knew he could not defeat the US Army at the borders of Iraq.  So, he called what any decent quarterback would call on 3rd down and 7 yards to go when you have a very weak defensive line:  a draw play.  The US Army is indeed fighting something very much like the dreaded urban warfare scenario that people talked about in 2002-3.  And, not surprisingly, we are losing.  I would go one step further.  The only thing Saddam has really done wrong was to get caught in his foxhole.  If he had not been captured, we'd be looking at a plausible scenario where Saddam Hussein himself was back in power a few years from now.  I suppose that was pretty much what he had planned.

2.  The so-called 'insurgents' do have a political program.  And they can win.  Why do I say that?  Because I am tired of reading statements from the Pentagon and elsewhere that categorically denies both of these points.  On what basis can we say that?  The political objectives of the anti-American forces in Iraq may not be fully coherent and consensual, but then again neither are the objectives of the pro-American forces.  Some of the insurgents want a return to Baathist rule.  Some probably want Iraq to be the center of the Osama Bin Laden caliphate.  Some want a gang-ruled warlord state where they can extract money.  Those are political programs.  We may not agree with them, or see them as sustainable.  But they are as real as any political program.  And the fact that they are not coherent in our view is a very bad reason to assume that they cannot win.

So what should we do about all this?

Here's my modest proposal.  Acknowledge that we have lost, withdraw American forces, and let the chips fall where they may.  It may take a decade for the country to sort out a set of civil wars.  It will be a humanitarian nightmare for the people of Iraq.  And it is as likely as not that whatever political authority comes to rule Iraq, or parts of Iraq, will be as troubling to American foreign policy objectives in the region as Saddam was.

Here's why this is not a crazy idea.  Go back to the Winter of 2003.  What were the smart anti-war Americans saying at that time about US policy?  They said, 'Iraq is a threat, but containment is working.  So why invade?  Let's create a policy called 'containment-plus'.  Let's tighten the enforcement of the embargo, incent the surrounding countries to really hold to sanctions policies, beef up UN inspections, increase our support for opposition groups within the country, and so on...'

It's time to consider applying that exact policy to a post-Saddam Iraq.  Pull our forces out.  Station UN-authorized troops on Iraq's borders to monitor people and goods moving in and out.  Compensate Iraq's neighbors with real cash for lost revenue and be ruthless about enforcing a strategic embargo.  Use air power to enforce an inspections regime and to destroy any protean terrorist training facilities.  Reign in whatever new government comes to power in Iraq.  Turn Saddam over to a UN war crimes tribunal.   And so on.

Would it 'work'?  That depends on what you mean by 'work'.  What I mean is quite minimal:  protect America's vital interests in the region, at a cost we can afford to bear. 

If you hate this idea, remember that Jonathan Swift used his modest proposal to break up what had become a calcified discussion about seemingly intractable dilemmas.

Mr. Bolton goes to NY

It has taken me a while to digest the fact that President Bush really did use a recess appointment to put John Bolton in the position of US ambassador to the United Nations.

I don’t know Mr. Bolton.  I do know that the internal politics of the State Department are nasty and the fact that there are lots of people who don’t like him there or in Washington more generally is nothing like a disqualification for the job.   

I get the sense (who couldn’t?) that he is an outspoken, opinionated, occasionally un-diplomatic guy who speaks his mind plainly when many people in DC will hem and haw, qualify and load everything they say with contingencies and deniability.  I actually like his comment that, roughly, you could lop a few stories off the top of the UN building and no one would know the difference.  I think he’s right about that.  Although he’d be just as right if he were to say it about most very large organizations, including every government and university I’m familiar with.

The issue is NOT about reforming the UN.  Everybody, including the UN secretariat, agrees that it is an inefficient, sometimes corrupt, often ineffectual, and expensive mess.  Sure, let’s lop off those floors.  The issue is what do you do after you are done with that.  What do you replace it with?  What positive agenda do you put in place?  No reformist CEO taking over the reigns of a badly managed corporation will survive for long with only a cost-cutting agenda.  Organizational hygiene is all for the good, but it’s the beginning not the end of the story.

And what does John Bolton signify about that stage of reform, which is the important one?  I could use more colorful language, but I think the appointment signifies that the US couldn’t possibly care less.  And this is a strange time to send that signal.  The Bush administration is saying, on the one hand, that it wants to repair its relationships with traditional allies.  Remember Secretary Rice’s recent trip to Europe?  And then, we do this to the UN.  In your face, so to speak. 

The message is clear, I think.  Yes, the US wants to fix its relationships with the rest of the world, but it wants to do that on a bilateral basis without any intermediation from international organizations. 

I am not a fan of international organizations for the sake of vague promises like ‘global governance’ or stuff like that.  In fact, I wrote a piece in ETHICS AND INTERNATIONAL AFFAIRS a couple of years ago arguing that the current generation of international organizations is obsolete.  Global systems (economic and political) do not, on the face of them, require global governance as a matter of logic.  We know some things about distributed governance mechanisms in other parts of life.  So the point is not to save the UN for the sake of the UN.

The point is that weaker countries gain benefits from these organizations, benefits that they cannot gain when they are forced into a bilateral bargaining relationship with the US.  And the ability to offer those benefits is a very useful thing for US foreign policy makers to have. 

In other words, international organizations, and particularly the contingent promise of membership in a club that brings significant benefits to its members, are important assets that the US can use to influence the behavior of other states.  But we’ve let those assets deteriorate, sometimes through benign neglect and at other times through conscious, even aggressive choice. 

There is a broader issue of foreign policy strategy at stake.  While the United States has dramatically enhanced its deployment of ‘sticks’ in the post-9/11 world, it has been less imaginative and successful in its use of ‘carrots’.  Even an extraordinarily powerful country needs both as tools of foreign policy if it is going to get what it wants.  It is certain that enhancing the capability and credibility of military force is important to US influence abroad.  It is just as certain that America’s ability to offer to other states things that they say they want and need can be influential as well

It is important to be clear that carrots are not some fuzzy manifestation of ‘soft power’.   They are not designed to make people feel good about the United States or want for some vague reasons to do what we wish.  Carrots are concrete, material incentives that offer the promise of benefits to states that change their behavior in directions we desire.  To promise an upside benefit to an adversary may require different diplomatic moves than to threaten a downside risk, but the diplomacy is just as real and can in many instances be just as effective.  Surely the combination of carrots and sticks is a more potent source of influence than either alone.  But we’ve let our stock of carrots deteriorate while we’ve been overly focused on sharpening our sticks. 

And with the appointment of John Bolton, we might as well just go ahead and drink the carrot juice, because we just ground up another carrot that would have been more valuable to have, in order to give to someone who really wanted it.