Strategy (Part 1): Making Decisions in the Face of Uncertainty

What is Strategy?

Besides being the favorite word of Business School professors, “strategy” has a rich and complex history as a concept, spanning across military, political, and business applications. At times, the different uses to which this word is put might leave us feeling like it is devoid of all meaning, but on closer inspection, there are elements in common across these different uses. In Strategy: A History, Lawrence Freedman does a masterful job of describing how the concept of strategy arose, became something to be studied and mastered, and eventually applied in new ways. Very briefly, strategy derives from the Greek word strategos, which means “general (of an army),” and so most fundamentally means “the knowledge and skills a general needs to do his job,” the same way that “craftsmanship” is the quality imparted by a craftsman due to his knowledge and skills. It was originally only applied to military matters, in the Renaissance began to be applied to politics, and in the twentieth century to business, with certain changes in emphasis and understanding coming about in these new contexts.

That still leaves us wondering “what, then, is it?” The definition that I like best is “Strategy is the coordination of lower-order means to achieve higher-order goals in the face of uncertainty.” Coordination speaks to the fact that something is not properly strategy if it is too straightforward or simple: flipping a light switch is not a lighting “strategy.” Lower-order means and higher-order goals highlights the fact that strategy is concerned with the relationship of what you do right here right now to affect a state of affairs you would prefer outside of the here and now. A general who wins the battle in a way that loses the war has not executed good strategy, and neither has the businessman who shows a good quarter by selling off the assets that would have allowed him to make money in the next. Lastly, strategy deals in the realm of uncertainty. If you know that taking an action will have certain outcomes, you have a plan, not a strategy. Unless you’re technique is bad or your equipment is dodgy (themselves forms of uncertainty), a recipe is not a strategy: you follow the steps, you get the meal.

Choosing a meal to prepare to impress a date, on the other hand, would qualify as strategy under this definition: you can make guesses about what she might enjoy or find impressive, but can’t know for sure, you are coordinating the ingredients, your preparation skills, your equipment and the timing, and you have a clear higher-order goal, but will it work? The only way to find out is to give it a shot.

What to Do With Strategy

So, as aspiring Renaissance Men, why do we care about strategy, what does an understanding of it do for us? We’ve identified our values, and we strive to bring them about in to the world, but as we discussed, there’s something of a disconnect between the handful of virtues we strive to uphold and the extraordinarily many things we might do on any given day, in any given moment. Strategy is the art and practice of connecting these big picture, life-spanning goals with our day-to-day actions.

Higher Order Ends – Thinking Through Goal-Setting

What kind of higher order ends might we seek to turn our strategies toward? Our first step should be to consider our values and virtues. These can both give us clues as to what to pursue (one of my virtues is “Hunger,” meaning to want to do hard, impactful things, so I might decide on a strategy to build a business), but also can give us guardrails around what our strategies should avoid (“Love” is another of my virtues, so I will want to avoid a business that hurts or takes advantage of others).

As mentioned above, though, our values tend to be rather abstract. Just knowing that I want to achieve great things doesn’t tell me what great things to strive for. So, we want to settle on more tangible goals to pursue. Goal-setting is at once very easy and also very hard. On the one hand, all there is to it is to pick something you want to achieve and then start working on making it happen. So simple! As all of us who have had any experience of the world have noticed, though, this conceptual simplicity quickly breaks down in the face of actually deciding what to do. The trick, of course, is in choosing the right goals, and then sticking with them until they’re achieved.

One problem, though, is that even that framing of choosing the “right” goals implies that there’s a definitive way to separate the good goals from the bad, that there is some set of goals that is the best answer, and everything else is falling short. Thinking this way very quickly leads to analysis-paralysis and is best avoided. Most decisions are settled very well by picking the “good enough” answer and pursuing it: “don’t let the perfect be the enemy of the good” and all that. That said, there are some decisions where longer and more careful thought makes sense, so let’s talk about how to distinguish between those.

If we will allow ourselves to venture into the dark arts of economic thinking for a moment, one way to think about a given decision is “what kind of payout will I get from getting this decision right?” Let’s go so far as to quantify (for the sake of illustration – most decisions are not so easily dealt with) and assume that your decision quality can be rated from 0 (worst possible choice) to 100 (the very best choice), and that your payout can be expressed numerically, such as in dollars. What shape does the resulting curve take? If it is linear (better decision, better payout in a nice straight line) or exponential (the better your decision the even better your payout), then you have a decision that is worth maximizing. Moving from a decision quality of 80 to one of 82 is worth it, and going from 82 to 83 is worth it, and so on. Of course, you’ll never have perfect information, and there’s always ways a decision could have been better, but if you sense that you’re dealing with something where even small improvements will yield better results, it’s worth taking your time and thinking hard.

On the other hand, many decisions, perhaps most, do not have such a payout curve. Instead, they face diminishing returns. Going from 20 to 30 makes a huge difference, but going from 30 to 40 less so, and still less from 40 to 50. In these situations, you are better off satisficing: figure out what the lowest acceptable payout is, and accept the first decision that will achieve it. My favorite go-to example here is picking a place to get dinner with your friends. Finding a restaurant you all are likely to like is worth spending a few minutes on, but working out which restaurant you will all like the best is not worth spending a few hours on. Once someone throws out something that everyone goes “yeah, that could work” to, then you’ve got everything you need.

Besides the structure of expected “payouts” (again, for most important decisions this won’t be a purely monetary thing), and whether to seek to maximize or satisfice them, it is also useful to consider the options that a decision will give you or take away. If I decide to go to law school, that opens up jobs that I can’t have without law school, and if I forego law school, I’m saying goodbye to those jobs. If I take all of my money and put it into an investment, I can’t get into the next investment that comes along, but if I don’t invest, I don’t have a chance to steer that company as an advisor or board member to make it more likely to succeed. In the business field, we often refer to this as “optionality” – does a decision give you more or fewer options? Going back to the food example, if you and your friends can’t decide on one restaurant, you might propose a food hall, on the idea that each of you will be able to find something that works for him – that’s more optionality than if you pick a single restaurant with a fixed menu. A good strategic rule of thumb is “all other things being equal, choose the option that gives you more options down the road.” That “all other things being equal” is doing a lot of heavy lifting here, though, as very often, the decisions with the greatest chance of having big results are those that require accepting opportunity costs.

Our last consideration for goal-setting is the element of time. Bigger goals tend to take longer to achieve than smaller ones, and many of the most worthwhile things can’t be done quickly. All of which leads to us needing to set goals farther in the future. Time, though, is almost synonymous with uncertainty, as Nassim Taleb argues in Antifragile. The more time that passes, the more things that could happen will happen. This means that the farther out you set your goals, the more uncertainty you will have to deal with in trying to reach them, which means you are that much less likely to achieve them, at least as you’ve foreseen. What I recommend to deal with this is to avoid highly specific long-term goals (say, anything more than five years out). Oh, sure, you can have vaguer “goals” in the longer term, like “in 10 years I want to be much better off financially than I am now” or something, but you should avoid anything highly specific. Instead, set short to medium term goals that would work as stepping stones toward what you want in the longer term. Set a savings target for the year and see how it goes. If that went well, maybe do something more aggressive for the next year, or try some other ways to improve your financial situation, like investing, developing new skills, or starting a business.

Lower Order Means

We’ve talked through some considerations when it comes to goal-setting, so what are some things we might want to keep in mind with the lower-order means we use to achieve those goals? First is to bring in the comparison we made before between values and ethics. Values might be said to be our spiritual ends, whereas ethics are our spiritual means. And, as you might expect, just as we used our values to help us define our goals (and which goals not to chase), we also want to use our ethics to guide the actions we take to try to reach those goals. It is precisely because highly desirable goals can motivate extreme actions to reach them that we want to have a set of guard rails to keep us to those actions we can live with ourselves doing. So, our first consideration when evaluating possible means to reach our goals is “does this course of action square with my ethics?”

Another useful idea when it comes to evaluating possible means is that of “leverage” (another over-used word in business schools, but like strategy, useful nonetheless). Leverage is the idea that, like a physical lever, there are some ways of going about things where small inputs can produce big outputs. When it comes to practical endeavors, like building a business or pursuing a project, it’s helpful to think about three kinds of leverage. The first is People Leverage. This is the rather straightforward idea that a team can get more done than one person alone, and it’s been known and taken advantage of at least since the pyramids were built. The second is Money Leverage, the idea that if you have money now, you can usually turn it into things that will help you make (more, hopefully) money later. Usually this takes the form of getting a loan and agreeing to pay it back with interest, but hopefully using that loan to buy the things that will generate not only the principle and interest, but more besides. Lastly is Technology Leverage, which is the idea that there are some things you can do with technology that you can’t do without it. If you want to start a business mowing lawns, you’ll need some way to cut the grass, and a lawn mower will make you much faster than a pair of scissors. Where this has been seen most dramatically in the last few decades is the rise of software: one coder can create something that hundreds or thousands of people can use (and hopefully pay for, but that’s a whole ‘nother issue).

So, when you find yourself looking over options of how you might go after a goal, you can ask yourself “is there a way other people could help me make this happen?” (People Leverage), “is there a way money now could help me get what I need to make the rest of the plan happen?” (Money Leverage), and “is there a way technology could help me achieve this better or faster than I could do without it?” In answering these questions, it’s helpful to first go wide: allow any options that come to mind to show up, write them down, and don’t worry (yet) about whether they’re good ideas or ones you’re willing to follow through on. First, just get all the options on the table (“there’s no bad ideas in brainstorming”), and only after you have them start to evaluate which ones are ethical, which ones are more likely to be effective, which ones have too high an opportunity cost associated with them, or what have you.

Uncertainty

We’ve now talked through our higher-order ends, our lower-level goals, given some thought to how we might coordinate and align them, and so that leaves us with uncertainty to contend with, which is not surprising, as it is central to strategy. One author I respect foregrounds this centrality by simply defining strategy as “making decisions amidst uncertainty.” The trouble with talking about uncertainty is, well, it’s uncertain. It’s slippery. If we could nail it down, it would be certainty instead.

That said, there are some useful things you can say about uncertainty and how to think of it, and here, again, much of my thinking is shaped by Nassim Taleb, who has thought long and hard about uncertainty. Taleb’s key insight is that trying to predict when something uncertain will happen, and so to be ready to do something about it, is rarely a good approach. Instead, it is far more value to ask “what will happen if/when this uncertain thing happens?” and then do your best to be ready for it. For example, instead of anticipating what kind of surprise expenses might come up, just have enough money in savings that you can handle it. As I mentioned earlier, this understanding is built on the idea that given enough time, the uncertain but possible becomes certain, so you’re better off being ready for when it happens, rather than wondering if it will happen.

Taleb goes on to explain that most objects, systems, or structures can be grouped into three ways of how well they deal with uncertainty. Fragile things do very poorly with uncertainty. If the uncertain thing happens, they break. You’re drying your favorite mug, your hand slips on the still wet ceramic, and whoops, time for a new mug. Mugs are fragile. If you had been drying your cast iron pan when your moment of butterfingers struck, no worries (though your floor might not be in such good shape). Cast Iron skillets are robust: they’re not much hurt by uncertainty.

So far, so obvious, right? Well, the title of the book I linked earlier gives away Taleb’s third category, which is the most interesting one: some things are antifragile. What does that mean? It means something that not only shrugs off the effects of uncertainty, but is actually made better by it. Your immune system is a perfect example: you get sick, your immune system deals with the uncertainty, and now you have an upgraded immune system that can stop that particular germ from bothering you again (or at least not as much). Likewise with your muscles: you subject them to stress by going to the gym, they rebuild after that stress, and are now bigger and stronger. You’ll notice that both examples I’ve given are biological, which is not coincidental: antifragile systems tend to be organic: it’s much harder for a rational, intentionally-designed system to be not only prepared for uncertainty, but able to take it on, learn from it, and get better.

Another important thing about these three categories is that each category is within certain bounds. A system might be antifragile to stress up to a point, robust if the stress is higher than that, and with enough stress fragile. Your immune system gets stronger from a cold, might hold on for a really bad flu, and might be totally wrecked by something like the bubonic plague.

The reason to introduce this is that it gives you a helpful way to think about the uncertainties you face in forming your strategies. What are some of the uncertain things I might encounter on this course of action, and what would happen to me if I did? Could I change my plan to make them affect me less? Or, heck, could I change my plan so that if they happen, it would be an opportunity? If you own a home, a crash in housing prices is bad for your net worth. If you’re sitting on a pile of cash waiting to find the perfect place to live, it’s the right time to act. How you are positioned makes a huge difference in what decisions you can make and how much they’ll help you.

We’ll continue our discussion of strategy next time when we talk less about the key element we didn’t discuss directly here, but was implicit throughout: you and your will.