Book Notes: Microbes, Gene Editing and a Terrible Disease

It is something I don’t talk about very often but I love science, biology , biotech and in I try to stay up to date on these topics so from time to time I try to read scientific divulgation books.

I had some pending books on my “to-read list” so in November I bought three of those books (birthday present to myself) and spent the Christmas holidays reading them. I’ll share some notes in this post.

1. The emperor of all Maladies: This has become a classic book on the subject of cancer and has received extensive media coverage (it even became a PBS documentary). The books tells the story of cancer, how the first treatments were developed and why it is so complex and hard to cure. Some Insights and facts that caught my attention reading this book:

  • Until “very recently” , we were in the dark ages of medicine: From the perspective of scientific and technological progress, the 1800’s don’t feel so far away. I don’t know why but in my head I had imagined these period somehow as being part of our “modernity”, yet it was only in 1846 that we started using anesthesia to do surgeries, and in 1867 we started using carbolic acid to perform surgeries. No doubt surgeries were perceived as a last resource remedy. Imagine the agony and the risk involved in a simple surgery.
  • As a disease Cancer has been documented since very ancient times. In 1862 Edwin Smith an American Egyptologist, purchased a Papyrus in Luxor, Egypt from an Egyptian dealer. It happened to be an ancient medical text, describing 48 cases of injuries, fractures, wounds, dislocations and yes, a case (number 45) that seems to describe a breast tumor.
  • How aggressive , disruptive and experimental the evolution of treatments have been. In our attempt to eradicate malignant cancer cells the treatment itself almost kills us.
  • A lot of progress has been made both in treating and preventing cancer and there are genetic treatment that have demonstrated excellent results but the book explains that part of the complexity in our fight to defeat cancer is that it exploits the fundamental logic of evolution unlike any other illness. Even though we are closer than ever to target very specific mutations (as described in the other books covered in this article) we are not even close to understand the million ways that the approximately 20,000 proteins in our cell interact with dozens if not hundreds of other proteins so that altering one specific mutation to prevent cancer does not lead to an unexpected additional mutation worst that the original.

2 . I Contain Multitudes: We have always perceived microbes and parasites as something to avoid at all costs, they are to blame for terrible diseases. Ed Yong’s book take us on a tour to the latest research about microbes and gives a more nuanced and balanced view about these very special creatures that live inside and among us.

With the use of Metagenomics we are now able to detect at a very precise degree, what combination of microbes exist in a biological sample. The latests research shows that microbes are very relevant to our general well-being, so we shouldn’t try to avoid them,and instead we should strive to get a balanced mix of microbes. They not only influence how we digest food. They play a major role in our complete immune system, our mental well being and are related to diseases as Autism, IBD, Depression and Obesity to name a few. The immune system isn’t just a means of controlling microbes. It is at least partly controlled by microbes.

It has been shown that the use of Probiotics doesn’t really make a big difference in our gut microbiome balance, but when we eat certain foods, we feed our microbes and indirectly promote the growth of some microbes over the other, this is called Prebiotics.

Just as genetic sequencing gave birth to companies like 23andMe offering sequencing as a commercial product to end users. There are a few companies now that can give you personalized health recommendations based on your gut biome and also early success stories in therapeutic use.

It is worth noting that, as a Science Journalist, Ed Yong made a terrific job covering Covid-19 during 2020 in the Atlantic. I also recommend taking a look at his TED talk.


3. Editing Humanity: This is the most recent of the three books. It covers the story of how the new CRISPR gene editing techniques developed. The scientists and labs behind them (also the patent disputes). The breakthroughs and innovation in disease treatment currently being developed and the inevitable arrival of the possibility of human genomic editing and the implications to us as a society.

CRISPR is part of the bacteria inmune system, it is a mechanism that allow bacteria to defend against viruses by cutting their DNA ( viruses are some of the bacterias fiercest enemies).

This book, tells the story of how the mechanism was first discovered by a Spanish scientist and confirmed by some researchers from a Danish dairy company, then it describes how this mechanism was engineered (taking advantage of the latest mRNA research) , so that we could tell the enzymes the exact piece of DNA to cut and replace it with a new sequence.

The book also explains how error prone the first experiments where with the basic CRISPR Cas9 mechanism and how the technology is evolving to become a precise “molecular editor” capable of replacing single bases without cutting DNA.

One major difference in the approach to gene editing is whether it used to edit someone cell to repair an unwanted mutation that causes a disease (somatic gene editing) versus editing a single reproductive cell or gamete, just before the fertilization takes places.

The first approach involves fixing DNA in millions of cells and is error prone, the second approach involves just editing one single cell but it makes the change heritable, so it basically implies the potential ability to alter human evolution. This has triggered a lot of debate in the scientific community, specially because most of the tools and supplies to perform have a very low barrier to entry.


Final Thoughts

Since I read Ray Kurzweil’s book The Singularity Is Near: When Humans Transcend Biology (back in 2005) I have tried to follow up on the promise of Genetics, Nanotechnology and Robotics. Of the three , I guess Nanotechnology really has not delivered on Kurzweil expectations (who by the way , works at Google since 2012), but Robotics has continued to evolve to a very impressive degree, you can check the Boston Dynamics Christmas christmas robot dance.
But of the three, I think nothing has evolved as fast, as genetics and biotech in general.

We have been hearing that software is eating the world, but now we also now that bio is eating the world. Advances in Biotechnology are evolving at neck breaking speed. Just a few years ago this all sounded like science fiction but just as I was finished reading these books DeepMind announced the Protein Folding problem has practically been solved.

Like the Silicon Valley Startup ecosystem, there is a whole ecosystem of biotech startups. This is also leading to a whole new wave of investment opportunities.

Having the ability to edit genes in a precise way while also solving the folding problem are two major achievements, I wonder why they receive so little attention.

I am sure in the following years (months?) we will be hearing a lot of new discoveries and breakthroughs.

Book Notes: Capitalism Without Capital




Why market valuations for some companies are so high when the traditional way of analyzing those companies through their fundamentals don’t support those valuations?

Why it seems that Investment indicators are in low levels when interest rates are so low? Is there an additional element hidden in plain sight that could constitute what could be call there is a “Dark Matter of Investments” ?

What is the relevance of Organizational Design, Process Engineering, Training, Innovation management for companies?

The answer to these and other relevant questions is the growth in relevance of intangible assets.

The book resumes decades of research in intangible investments: How to measure them, what are their characteristics and how they event might explain some atypical behaviors of the stock market

In this post I will write some of the notes I took while reading the book

Basic Concepts

Investment: What happens when a producer either acquires a fixed asset or spend resources to improve it.

Asset: An economic resource that is expected to provide a benefit over a period of time.

Intangible Assets: Complex pricing systems, ambitious branding, marketing campaigns, detailed process, new product designs, new business models, training.

Over time , intangible investments (investing in intangible assets) have steadily increased . Data suggest intangible investment overtook tangible investment around the time of the global financial crisis.

Is it possible that the rise of intangible investment is nothing more than a consequence of improvements in IT? Is the intangible economy a sort of corollary of Moore’s Law or an epiphenomenon of what Erik Brynjolfsson and Andrew McAffe call the Second Machine Age? Or is it that IT and the research that lead to it was shaped by and economy hungry for intangible investments rather than intangible investment happening as a response to the serendipitous invention of various forms of IT

How to measure Intangible Investments

Measuring investments is a very relevant component of GDP , but the “investment” concept was strictly limited to physical stuff . It did not take long for economists to start questioning this.

In 1962 Fritz Machlup (one of the first economists to examine knowledge as an economic resource) wrote a book entitled “The Production and Distribution of Knowledge in the United States” in which he asked whether different types of knowledge were valuable things that could be produced and started to measure spending on everything from research and development to advertising and branding to training.

Recognizing that Research and Development and Knowledge Production was a vital force in raising GDP a working group of the OECD ment in Frascati, Italy in 1963, to agree on a common framework for measuring R&D, codifying the approach in what became known as the “Frascati Manual” , revised in several subsequent editions, the latest being in 2015.

The thing that reignited economists interest in the measurement of intangible investments where computers and software development. In 1999 the US BEA introduced software as an investment tinto the calculation of IS GDP.

The idea of a new economy also prompted economist to examine the role of knowledge investment more generally. Theorist worked out economic models where knowledge played a key role in promoting growth, either via spillovers of knowledge from one producer to another, or via the competitive process of investment in continuous product improvement.

Then began a painstaking process of defining and measuring the different types of investment. In 2005 Corrado, Hulten and Sichel produced the first set of estimates for the United States.

Types of Intangibles

Computerized Information: Software and Databases
Innovative Property: R&D, Patents, Copyrights.
Economic Competencies: Training, Market Research, Creating Distinctive Business Models.

How to measure Intangible Investments

Measuring intangible investment is a not as straightforward as measuring tangible investments. First we need to find out how much firms are spending, but not all of that spending will be dedicated specifically to the creation of a long-lived asset. The process has a lot of subtleties .

For example when software development is done in-house, staticians imagine there is a software “factory” inside the firm and try to measure how much spending it takes to run the factory, but how much time is dedicated to the creation of a long-lived asset. For programmers might spend 90 percent of their time but how much time should be assigned to managers ?
How about Marketing, Organizational Capital and Training? Should those be treated as an Investment?

Not all of this questions have been settled yet , but it is a fact that they are very relevant , an example of this is that the intangibles agenda is central to the OECD Innovation Strategy.


Characteristics and Implications of Intangible Investments

The Four ‘S’ of Intangible Investments:

Scalability: Intangible assets can usually be used over and over in multiple places at the same time. The idea that knowledge is scalable is not new and it has been studied extensively , it sits at the heart of Endogenous Growth Theory. In an economy where investments are highly scalable:

1. There will be some Intangible-Intensive companies that have grown very large.
2. A relative small numbers of dominant large companies
3. Business looking to compete with the owners of scalable assets are in a tough position. Winner-takes-all scenarios are likely the norm


SunkenNess: If a business makes an intangible investment and later on decides it wants to back out, it’s often hard to reverse the decision and try to get back the investment’s cost by selling the created asset, it is usually a Sunken Cost.

If intangibles are generally sunken costs, then why invest? Because some of the returns might be very high. But also, an investment in knowledge , even if it fails to create a marketable asset directly, might still be valuable if it creates information that resolves uncertainty form the firm. What is called “Option Value”and the Options approach to Capital Investment.

SpillOvers: It is relatively easy for other businesses to take advantage of intangible investments they don’t make themselves.

As a civilization we have been making rules about the ownership of tangible investments since at least 4,000 years ( there is evidence in ancient clay tablets from Mesopotamia).

With intangible investments is more recent with the development of industrial patents, countries started to tweak their patent and copyright systems to encourage more invention.

There is a premium on the ability to manage spillovers: companies that can make the most of their own intangibles, or that are especially good at exploiting spillovers from others investments will do particularly well.

A significant part of the strategy of intangible-rich companies is combining and managing their intangibles in such a way as to minimize the spillovers and maximize the benefits they get from them

Being well networked, knowing about important developments in ones field, and having the standing to bring together collaborations, ask for favors, and coordinate partnerships become more important in a business where investments have greater spillovers

All this means that in an “intangible-intensive” economy, the ability to make good the problem of spillovers becomes very important. This calls for a particular range of skills:
-Technical Skills or Engineering Knowledge
-In some cases, legal expertise or a talent for deal-making
-Softer Skills like leadership and networking.

Synergies: Ideas and other ideas go well together: This is especially true in the field of technology.

Brian Arthur in his 2009 book “The nature of technology” states that technological Innovations are “combinatorial”. Any given technology depends on the bringing together of already-existing ideas. “Every novel technology is created from existing ones, and therefore….every technology stands upon a pyramid of others that made it possible in a succession that goes back to the earliest phenomena that humans captured”.

Intangible investments also show synergies with tangible assets, in particular information technologies. The relationship between investment in computers (tangible) and investment in processes, supply chain development, and organizational change (all intangibles), has been documented in detail by Erik Brynjolfsson. In his 2002 paper “Intangible Assets: Computers and Organizational Capital” he concludes that the business that got the most out of their software were the ones that invested in organizational change too and that the organizational complements to firms’ installed computer capital are treated by investors as intangible assets.


The intangible investments explanation to Secular Stagnation

Secular Stagnation is a condition when there is negligible or no economic growth in a market-based economy, when growth is measured based on the level of investments, it is a puzzle for some economists when there is a low level of investment even when there are Low Interest Rates.

However it is somehow strange that:
-corporate profits are higher than ever.
-profits are not evenly distributed
-Decrease in Productivity

An intangible explanation:
1. Mismeasurement: Intangible investment is not included in national accounts.
2. Leaders are better are appropiating spillovers and Laggards have low incentives to invest.


Financing the intangible economy: How all these affects banks?

Intangible investments also will have an impact in the financial services industry. If one of the main criterias to lend to businesses is to analyze if there is tangible investments that can be used as collateral to minimize risk. We should expect the following tendencies:

-Shift away from bank lending as a means for financing business or design new debt products secured against intellectual property

-Shift toward the use of equity

-Changes in financial accounting standards to include intangible investments in balance sheets.

-Increase in private companies, to avoid disclosure because of spillover-rich intangibles.

-Or promote block investing in an ecosistem even if there is spillovers, it wouldn matter

Competing, Maging and Investing in the Intangible Economy

What will succesful companies look like in an intangible-rich economy, and how can managers an investors create and invest in them?


Competing
How can firms improve performance that is sustainable? By Doing something distinctive or having a distinctive asset. It’s more likely that intangible assets can be distinctive, things as Reputation, Product Design and Trained employees providing customer service.

Even more valuable, weaving all these assets together make the organization itself an intangible asset.

Managing
1. In “Synergistic” firms, maybe only the managers know whats going on, since only the managers can see the big picture and realize how the synergies might link up.
2. In intangible-intensive firms there will be a premium on managers who can share information both up and down the organization and keep loyal workers sticking to the firm.
A well managed organization:
-Continuously monitoring & improving processes.
-Setting Comprehensive and stretching targets
-Promoting high performing employees or fixing underperforming ones
How can managers build a good organization in an intangible intensive firm?
Choosing the right organizational design, depending on whether your organizational predominantly uses or produces intangible assets.

Producer: Allows information to flow, promotes serendipitous interactions, keep key talent, promote skills to manage the innovation process.

User: More hierarchies, shor-term targets.

The intangible economy will place a premium on good organization and management. With more sunk costs, spillovers, and the opportunity for scale and synergies, the need for additional coordination rises, and so good organization and management will be in higher demand.

Are you creating intangible assets (writing software, doing design, producing research)?. If so, you probably want a flat organization with more autonomy, fewer targets, and more access to the boss. This allows information to flow, helps serendipitous interactions, and keeps the key talent.


Investing:
How can an outside investor detect if a firm is building its intangible assets?
Can investors get information about intangibles from accounting data? Baruch Lev answers this question ins his 2016 book The End of Accounting (excerpt from the book in the WSJ can be found here). According to Lev, much of companies intangible investments are hidden from view, because by current accounting standards, intangible investments are expended (charge the entire cost of the asset in one year to costs) when they should be capitalized (recognizing that the spending created and asset) . In consequence financial accounts have become much less informative of company earnings.

So what should investors do? One option is to avoid the problem of finding out the information altogether and buy shares in every company. i.e. Diversify.

But also an alternative strategy arises for investors who can identify good intangible investments and back companies that make them. Asset Managers can serve investors by being much more canny about a firm, going beyond the information in the accounts. Understanding the deep innards of the company and the way that external conditions will allow it to use it’s intangible assets will be a highly valued skill.

Conclusions

Intangible investments theory has been studied by more than two decades, I guess the interest in intangible investments has gained relevance because we have more evidence that the hypothesis proposed in the original research seems to be correct.

Recently , Michael J. Mauboussin from Morgan Stanley published an excellent paper where he analyzes the implications for the investment management profession. The key insight: Understanding the magnitude and return on investment provides an investor with a better understanding of a company’s future earnings. The challenge is that the mix of investment has shifted over time and is today more intangible than tangible. That means the recording of investments has largely migrated from the balance sheet to the income statement. An investor’s job has not changed but the analytical approach has.

Sarah Ponczek from Bloomberg also published an article where she writes about the influence on intangible investments in the recent market rally, a remarkable example: “The value of Moderna Inc.’s intangible assets heavily rely on the biotech firm’s ability to develop and distribute a coronavirus vaccine. Consider the math: Moderna’s market-cap amounts to about $28 billion, yet the company’s tangible book value (what can be found on its balance sheet) is less than $1.2 billion. That means $26.9 billion — or 96% — of Moderna’s market value is derived from intangibles.”

Besides the valuation and economic implications I found the book very useful for professionals whose jobs revolves around, Digital Transformation , Strategy/Business Development or Portafolio/Program Management , since it gives a robust explanation of the relevance of Business Process Engineering , Managing correctly the intangible investment process in Software Projects, Managing correctly the innovation process through Open Innovation Programs, and how companies should treat Employee Training Spending as an Investment



Book Notes: Thinking in Bets

Decision Making is a Key Skill in Management and Life, however in the last years it has become a well known fact that human beings are far from being rational creatures, and our thought process is full of cognitive bias.

Annie Duke Book gives you some tips on how to become better decision makers based on her experience as a professional poker player.

In this book she explains how you can apply some of the techniques and “tricks” of poker playing in avoiding those biases and making better decisions.

These are some of my notes from the book.

Resulting and Hindsight Bias

It is very common to equate the quality of a decisión with the quality of an outcome. When this happens we might decide to change the way we make decisions or change a strategy that has been correctly analyzed and defined.

The author gives two examples:

  • NFL  Seattle Seahawks Coach Pete Carroll on his 2015 Super Bowl XLIX call against New England, to pass the bowl (instead of running) in the closing seconds of the game.  Since the ball was intercepted and Seattle lost the game. Everybody judged the decisión has some of the “worst in NFL History!”.

  • A CEO firing the president of his company: The search for the new president didn’t go well. Sales started to fall. Already two different people on the job. But the decision itself was the result of the prior president’s poor performance and his inability to improve his leadership skills.

Both examples are bad results, not bad decisions.  When we judge based only on results, we are “resulting”(it is called like that in the poker world), we do this because of hindsight bias.

Pressure to be absolutely certain before acting.

We usually get only one try at any given decision , and that puts great pressure on us to feel we have to be certain before acting, a certainty that necessary will overlook the influences of hidden information and luck.

What makes a  decision great is not that it has a great outcome. A great decision is the result of a good process , and that process must include an attempt to accurately represent our own state of knowledge.  That state of knowledge, in turn, is some variation of “I’m not sure”.

 But we are taught that “not knowing” is a bad thing. We have to take away the negative connotation.

Good poker players and good decision-makers have in common their comfort with the world being an uncertain and unpredictable place. They embrace that uncertainty, and instead of focusing on being sure, they try to figure out how unsure they are, making their best guess at the changes that different outcomes will occur. Focusing on the Process, not only on the outcome.

We have to redefine wrong, but also redefine right: If we aren’t wrong just because things didn’t work out, then we aren’t right just because things turned out well.

Treat Decisions as Bets, and also  reinforce the belief formation process with a bet question.

Since there is potential opportunity cost in any chance we forgo, we could treat decisions as bets.  We could identify the following “betting elements” of decisions: Choice, Probability, Risk etc.

Most decisions are bets against our-selves.  But our bets are only as good as our own beliefs. The problem is that by nature,  we believe everything to be true, and once a belief is lodged it is difficult to dislodge. It takes a life of its own, leading us to notice and seek out evidence confirming our belief,  we rarely challenge the validity of confirming evidence, and ignore or work hard to actively discredit information contradicting the belief.  This is called  Motivated Reasoning. How can you prevent it? By “thinking in bets”:

When we are analyzing the “soundness” of a belief,  what about asking yourself- Wanna bet?  (i.e. Am I sure enough of this particular belief that I would accept a bet on it?)  Then , if the pattern of “beliefs formation” is:

  1. We hear something
  2. We believe it.

    Asking wanna bet? Adds a third step.

  3. Think about it?
    • Vet it, determining whether or not it is true?
    • How do I know this
    • Where did i get this information
    • What is the quality of my sources
    • How much I trust them

Self serving bias and Outcome Fielding.

When analyzing the qualities of our decision, we should try to classify outcomes (of our decisions) to identify luck vs skill. This is called fielding of outcomes or Outcome Fielding. If done well , it allows us to focus on experiences that have something to teach us (skills) and ignore those that don’t (luck)

Because self serving bias we are bad at outcome fielding. Once again, treating outcome fielding as a bet can accomplish the mindset shift necessary to reshape habit. If someone challenged us to a meaningful bet on how we fielded an outcome, we would find ourselves quickly moving beyond self serving bias.

Thinking in bets, triggers a more open minded exploration of alternative hypotheses, of reasons supporting conclusions opposite to the routine of self serving bias. It also triggers “prospect taking” comparing how we field our own outcomes vs other outcomes.

A group of trusted advisors: The Buddy System.

So besides treating decisions as bets, how do we beat motivated reasoning and self-serving bias? We know our decision-making can improve if we find other people to join us in truth seeking. 

Motivated reasoning and self-serving bias are two habits of mind that are deeply rooted in how our brains work. We have huge investment in confirmatory thought, and we fall into these biases all the time without even knowing it. Confirmatory thought is hard to spot, hard to change, and, if we do try changing it, hard to self-reinforce.  It is one thing to commit to reward ourselves for thinking in bets, but it is a lot easier if we get others to do the work of rewarding us.

Once we are in a group that regularly reinforces exploratory thought, the routine becomes reflexive, running on its own. Exploratory thought becomes a new habit of mind, the new routine, and one that is self-reinforced. In a Pavlovian way, after enough approval from the group for doing the hard work of thinking in bets, we get the same good feeling from focusing on accuracy on our own. We internalize the group’s approval, and, as a matter of habit, we begin to do the kind of things that would earn it when we are away from the group (which is, after all, most of the time).

Even research communities of highly intelligent and well-meaning individuals can fall prey to confirmation bias, as IQ is positively correlated with the number of reasons people find to support their own side in an argument. That’s how robust these biases are. We see that even judges and scientists succumb to these biases. We shouldn’t feel bad, whatever our situation, about admitting that we also need help.

A growing number of businesses are, in fact, implementing betting markets to solve for the difficulties in getting and encouraging contrary opinions. Companies implementing prediction markets to test decisions include: Google, Microsoft, GE, Eli Lilly, Pfizer, and Siemens. People are more willing to offer their opinion when the goal is to win a bet rather than get along with people in a room.

Rules of engagement

What are the rules of engagement that the group should practice? CUDOS

Communism:
Be a data Sharer. That’s what experts do. We are naturally reluctant  to share information that could encourage others to find fault in our decision-making. Agree to be a data sharer and reward others in your decision group for telling more of the story.

Universalism:  Nearly any group can create an exercise to develop and reinforce the open-mindedness universalism requires.
If we hear an account from someone we like, imagine if someone we didn’t like told us the same story, and vice versa.
That requires open-mindedness of the messages that come from paces we don’t like.

Disinterestedness: Avoid conflict of interests.  If two people disagree, a referee can get them to each argue the other’s position with the goal of being the best debater.

Organized Skepticism: Skepticism gets a bump rap because it tends to be associated with negative character traits. Someone who disagrees could be considered “disagreeable”. Someone who disagrees could be considered “disagreeable”. Someone who dissents may be creating “dissention” Maybe part of it is that “skeptical” sounds like “cynical”. Yet true skepticism is consistent with good manners, civil discourse, and friendly communications.

Also Bring your past and future self to the decision table.

Just as we can recruit other people to be our decision buddies, we can recruit other versions of ourselves to act as our own decision buddies.

The best poker players develop practical ways to incorporate their long-term strategic goals into their in-the-moment decisions.

Night Jerry: This tendency we all have to favor our present-self at the expense of our future-self is called temporal discounting. We are willing to take an irrationally large discount to get a reward now instead of waiting for a bigger reward later. Bringing our future-self into the decision gets us started thinking about the future consequences of those in-the-moment decisions. “Hey, don’t forget about me. I’m going to exist and I´d like you to please take that into account”.

Moving regret in front of our decisions: Business journalist and author Suzy Welch developed a popular tool known as 10-10-10 that has the effect of bringing future-us into more of our in-the-moment decisions. What are the consequences of each of my options in ten minutes? In ten months? In ten years?

Backcasting: When it comes to advanced thinking, standing at the end and looking backward is much more effective than looking forward from the beginning. When we identify the goal and work backward from there to “remember” how we got there, the research shows that we do better.  “Prospective hindsight”, imagining that an event has already occurred, increases the ability to correctly identify reasons from outcomes by 30%.

Premortems: A premortem is an investigation into something awful, but before it happens. We all like to bask in an optimistic view of the future. We are generally biased to overestimate the probability of good things happening. Despite the popular wisdom that we achieve success through positive visualization, it turns out that incorporating negative visualization makes us more likely to achieve our goals.

Book Notes: Good Strategy Bad Strategy

Because of my current role  I have been asked several times to think “strategically” , to develop a strategic plan, or asked to explain how a transformation plan fit in the overall strategy of the company.

Reading  these articles  , about the tendency of companies not doing hard enough work in developing and stating in a clear and concise way their strategy made me understand that it is a very frequent challenge: What is Strategy?  How does strategy forms withing a company? Who defines strategy?

Trying to better understand all those questions  I decided to find what are the best references.  As both articles state, there are hundreds of books but I decided to start with this book.

GoodStrategyBadStrategy

I guess I liked it because it treats the subject in general guidelines rather than being a prescriptive, “fill in the blanks” strategy book (which is just what the author refers to  as an example of “bad strategy”).

The book is divided in three sections:

  1. What is Bad and Good Strategy
  2. Sources of Power: If good strategy key element is finding and using sources of power. What are those fundamental sources?
  3. How to gain proficiency in thinking like a Strategist

I will try to summarize those ideas in this blog post.

1. What is Bad and Good Strategy

Bad Strategy

The concept of bad strategy was  first discussed by the author in a seminar of the “The Center for Strategic and Budget Assessments (CSBA)” to study the Decline in the quality of Strategy work at the national level .   The full study is available on line, I highly recommend reading it: It’s 68 pages long, and mostly about US National Security Strategy but I think is worth the time, to gain insight in how to outline a Strategic Analysis outside of a business context.

According to the book bad strategy is above all the tendency to avoid analyzing in depth the current external trends, and the current internal situation of your company to define what the current challenge is. It is also a lack of focus and the inability to make hard choices as to where to focus the limited resources of a company . How to recognize it?

The author provides some guidelines:

Fluff: Fluff is a form of gibberish masquerading as strategic concepts or arguments. It uses “Sunday” words and apparently esoteric concepts to create the illusion of high level thinking

Failure to face the challenge: Bad Strategy fails to recognize or define the challenge. When you cannot define the challenge, you cannot evaluate a strategy or improve it.

Mistaking goals for strategy: Many bad strategies are just statements of desire rather than plans for overcoming obstacles.

Bad strategic objectives: A strategic objective is set by a leader as means to and end. Strategic objectives are “bad” when they fail to address critical issues or when they are impracticable.

As a consequence companies end up with a list of disparate generic goals:

Leaders may create bad strategy by mistakenly treating strategy work as an exercise in goal-setting  rather than problem solving. Or they may avoid hard choices because they do not wish to offend anyone”

Bad strategy is not the same thing as no strategy or strategy that fails rather than succeeds”.   A lot of emphasis is made in different sections of the book to the challenges companies face in making decisions that prioritize resources. Anyone working in defining and implementing transformation plans as a part of a strategic plan would be familiar with this paragraph:

…The unwillingness or inability to choose. Strategies focus resources, energy, and attention on some objectives rather than others. Unless collective ruin is imminent, a change in strategy will make some people worse off. Hence, there will be powerful forces opposed to almost any change in strategy. This is the fate of many strategic initiatives in large organizations. There may be talk about focusing on this or pushing on that, but at the end of the day no one wants to change what they are doing very much.

Additionally the author tries to make clear, that some things that are considered or labeled as “strategic” not necessarily are part of strategy in a wider sense.  

In business, most M&A, investments in expensive new facilities, negotiations with suppliers and customers and organizational design are normally considered “strategic”. Rather the term “strategy” should mean a cohesive response to an important challenge.

Good Strategy

In essence, strategy is about analyzing , about discovering and designing:

The core of Strategy work  is always the same: Discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors

To avoid abstract and generic definitions, emphasis must be made that a good strategy must include a set of actions to follow.

 But defining strategy as a broad concept, living out action, creates a wide chasm between “strategy” and “implementation”.A good strategy includes a set of coherent actions. A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component.

Since bad strategy is so common, there is a natural advantage in at least trying to develop a good strategy.

The first natural advantage of good strategy arises because other organizations often don’t have one. And because they don’t expect you to have one either.

A recurrent theme in the book is the relevance of concentrating resources when defining and executing Strategy:

Most complex organization’s spread rather than concentrate resources, acting to placate and pay off internal and external interest. Thus,  we are surprised when a complex organization such as Apple or the US Army actually focuses its actions. Not because of secrecy but because good  strategy itself is unexpected.

Despite these most organizations will not create focused strategies instead they will generate laundry list of desirable outcomes and, at the same time, ignore the need for genuine competence in coordinating and focusing their resources. Good strategy requires leaders who are willing and able to say no to a wide variety of actions and interests. Strategy is at least as much about what an organization does not do as it is about what it does.

As in a lot of aspects of management there is no silver bullet, every company is different, each industry has its own challenges so the book tries to avoid giving specific solutions but it gives general guidance as to what is the very minimum a good strategy must have. The author calls this The Kernel:

Good strategy is coherent action backed up by an argument, an effective mixture of thought and action with a basic underlying structure I call the Kernel. A good strategy may consist of more than the Kernel, but if the kernel is absent or misshappen then there is a serious problem.

The Kernel of a Strategy contains three elements:

  1. A diagnosis that defines or explains the nature of the challenge. A good diagnosis simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as critical.
  2. A guiding policy for dealing with the challenge. This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis.
  3. A set of coherent actions that are designed to carry out the guiding policy. These are steps that are coordinated with one another to work together in accomplishing the guiding policy.

2. Sources of power.

In “Good Strategy”  a key element is finding the critical aspects that make a difference and concentrating resources to try to make a difference,  those critical aspects are referred in the book as sources of power. What are those fundamental sources?
There are extensive examples and frameworks in Strategy literature , but the author highlights in the book just a few of them  (……”chosen for both their generality and freshness”)

A brief Summary (the rest of this section is mostly quoted directly from the book):

  1. Leverage:  A strategic leverage arises from a mixture of anticipation, insight into what is most pivotal or critical in a situation, and making a concentrated application of effort.
  2. Proximate Objectives: One of the leader’s most powerful tools is the creation of a good proximate objective -one that is close enough at hand to be feasible. A proximate objective names a target that the organization can reasonably be expected to hit, even overwhelm. An important duty of any leader is to absorb large part of the complexity and ambiguity, passing on to the organization a simpler problem – one that is solvable. Many leaders fail badly at this responsibility, announcing ambitious goals without resolving a good chunk of ambiguity about the specific obstacles to be overcome. To take responsibility is more than a willingness to accept the blame. It is setting proximate objectives and handling the organization a problem it can actually solve.
  3. Chain-Link Systems: A system has a chain-link logic when its performance  is limited by its weakest subunit, or “link”. When there is a weak ling, a chain is not made stronger by strengthening the other links. There are portions of organizations, and even of economies, that are chain linked. When each link is managed somewhat separately, the system can get stuck in a low-effectiveness state.  Chain-link systems can be changed and made excellent. It takes insight into the key bottlenecks. Plus, it takes leadership and the willingness to absorb short-term losses in the quest for future gains.
  4. Using Design:  Three very relevant aspects of strategy are: Premeditation., The anticipation of other behavior, and the purposeful Design of coordinated actions.
    It is often said that strategy is a choice or a decision. The words “choice” and “decision” evoke an image of someone considering a list of alternatives and then selecting one of them. The problem with this view is that you are rarely handed a clear set of alternatives.  Effective strategies are more designs than decisions. When someone says “Managers are decision makers”, they are not talking about master strategists, for a master strategist is a designer.
    A design-type strategy is an adroit configuration of resources and actions that yields an advantage in a challenging situation. Given a set  bundle of resources, the greater the competitive challenge, the greater the need for the clever, tight integration of resources and actions.   The greater the challenge, the greater the need for a good, coherent, design-type strategy.A more recent HBR article about the relation between design and strategy can be found here.
  5. Focus: Attacking a segment of the market with a business system supplying more value to that segment than the other players can -is called focus. But the truth is that many companies, especially large complex companies, don’t really have strategies. At the core, strategy is about focus, and most complex organizations don’t focus their resources. Instead they pursue multiple goals at once, not concentrating enough resources to achieve a breakthrough in any of them.

  6. Growth: From what is explained in this section of the book, you can see the author is not in favor of inorganic growth (through M&A) : Healthy growth is not engineered. It is the outcome of growing demand for special capabilities or fo expanded or extended capabilities. It is the outcome of a firm having superior productos and skills. It is the reward for successful innovation, cleverness, efficiency, and creativity. This kind of growth is not just an industry phenomenon. It normally shows up as a gain in market share that is simultaneous with a superior rate of profit.

  7. Using Advantage: In real rivalry, there are an uncountable number of asymmetries. It is the leader’s job ti identify which asymmetries are critical, which can be turned into important advantages.
    Increasing Value and finding and promoting Value-Creating Changes requieres a strategy for progress on at least one of four different fronts:

    • Deepening advantages: One must reexamine each aspect of product and process, casting aside the comfortable assumption that everyone knows what they are doing. Today, this approach to information flows and business processes is sometimes called “reengineering” or “business-process transformation”. Whatever it is called, the underlying principle is that improvements come from reexamining the details of how work is done, not just from cost controls or incentives.
    • Broadening the extent of advantages: Extending an existing competitive advantage brings it into new fields and new competitions. Extending a competitive advantage requires looking away from products, buyers, and competitors and looking instead at the special skills and resources that underlie a competitive advantage. In other words, “Build on your Strengths”. The basis for productive extensions often resides within complex pools of knowledge and know-how.
    • Creating higher demand for advantaged product or services: A competitive advantage becomes more valuable when the number of buyers grows and/or when the quantity demanded by each buyer increases. Note that higher demand will increase long-term profits only if a business already possess scarce resources that create a stable competitive advantage.
      Because son many strategy theorists have mistakenly equated value creating strategy with “having” a sustainable competitivo advantage, they have largely ignored the process of engineering increases in demand. Engineering higher demand for the services of scarce resources is actually the most basic of business stratagems.
    • Strengthening the isolating  mechanism that block easy replication and imitation by competitors: An isolating mechanism inhibits competitors from duplicating your product or the resources underlying your competitive advantage. If you can create new isolating mechanism, or strengthen existing ones, you can increase the value of the business. The most obvious approach to strengthening isolating mechanisms is working on stronger patents, brand-name protections, and copyrights. When a new product os developed, its protection may be strengthened by stretching an already powerful brand bane to cover it.
      Another broad approach to strengthening isolating mechanisms is to have a moving target for imitators. If you can continually improve, or simply alter your methods and products, rivals will have a much harder time with imitation.
  8. Using Dynamics: In classical military  strategy the defender prefers the high ground. It is harder to attack and easier to defend. The high ground constitutes a natural asymmetry that can form the basis of an advantage.
    Much of academic strategy theory concerns more and more intricate explanations for why certain types of economic high ground area valuable. But such discussions sidestep an even more important question: how do you attain such an advantaged position in the first place? One way to find fresh undefended high ground is by creating it yourself through pure innovation.
    You exploit a wave of change by understanding the likely evolution of the landscape and then channeling resources and innovation toward positions that will become high ground, become valuable and defensible as the dynamics play out.
    When change occurs, most people focus on the main effects -the spurts in growth of new types of products and the falling demand for others You must dig beneath this surface reality to understand the forces underlying the main effect and develop a pint of view about the second-order and derivative changes that have been set into motion.There is no simple theory or framework for analyzing waves of change. Working with industry-wide or economy-wide change is even more advanced that particle physics -understanding and predicting patterns of theses dynamics is difficult and chancy. Fortunately, a leader doe not need to get it totally right -the organization strategy merely has to be more right that those of its rivals.
  9. Inertia and Entropy: Even with its engines on hard reverse, a supertanker can take one mile to come to a stop. This property of mass -resistance to a change in motion- is inertia. In business, inertia is an organization’s unwillingness or inability to adapt to changing circumstances. Even with change programs running at full throttle, it can take many years to alter a large company’s basic functioning.  But, another force, entropy, is also at work.  In science, entropy measures a physical system’s degree of disorder, and the second law of thermodynamics states that entropy always increases in an isolated physical system. Similarly, weakly managed organizations tend to become less organized and focused.An organization’s greatest challenge may not be external threat or opportunities, but instead the effects of entropy and inertia. Leaders must diagnose the causes and effects of entropy and inertia, create a sensible guiding policy for effecting change, and design a set of coherent actions designed to alter routines, culture, and the structure of power and influence.
    • INERTIA: Successful strategies often owe a great deal to the inertia an inefficiency of rivals. Understanding the inertia of rivals may be just as vital as understanding your own strengths:
      • Inertia of Routine: An organization of some size and age rest on layer upon layer of impacted knowledge and experience, encapsulated in routines -the “way things are done”.
        If senior leaders become convinced that new routines are essential, change can be quick. The standard instruments are hiring managers from firms using better methods, acquiring a firm with superior methods, using consultants, or simply redesigning the firms routines.
      • Inertia of Culture: The first step in breaking organizational culture inertia is simplification. Strip out excess layers of administration and halt nonessential operations.
      • Inertia by Proxy: A business may choose to not respond to change or attack because responding would undermine still-valuable streams of profit. Inertia by proxy disappears when the organization decides that adapting to changed circumstances is more important than hanging on to old profit streams (Studied in detail by Clayton Christensen in his seminal book: The Innovator’s Dilemma)
    • ENTROPY:    It is not hard to see entropy at work. With the passage of time, great works of art blur and crumble, the original intent fading unless skillful restorers do their work. Despite all the high-level concepts consultants advertise, the bread and butter of every consultants business is undoing entropy -cleaning up the debris and weeds that grow in every organizational garden.Planning and planting a garden is always more interesting and stimulating than weeding it, but without constant weeding and maintenance the pattern that defines a garden -the imposition of a special order on nature -fades away and disappears.

3. How to Gain Proficiency and Think like a Strategist.

The last section gives some advice about how to improve and gain proficiency when working with Strategy Development. I liked the idea analogy of treating Strategy as a hypothesis, An educated prediction of how the world works.

A good business strategy deals with the edge between the known and the unknown. Again, it is competition with others that pushes us to edges of knowledge.

Given that we are working on the edge, asking for a strategy that is guaranteed to work is like asking a scientist for a hypothesis that is guaranteed to be true -it is a dumb request.

A good strategy is, in the end, a hypothesis about what will work. Not a wild theory, but an educated judgment. An educated prediction of how the world works.  Good Strategy work is necessarily empirical and pragmatic.

Science is a method, not an outcome, and the basic method of good business people is intense attention to data and to what works.

In the last years the role of cognitive bias in decision making has become very relevant. The author also recognizes this fact and suggest that a good strategist should try to improve its “own cognitive limitations and biases” .

Today, we are offered a bewildering variety of tools and concepts to aid in analysis and the construction of strategies. Each of these tools envisions the challenge slightly differently. For some it is recognizing advantage; for others it is understanding industry structure. For some it is identifying important trends; for others it is erecting barriers to imitation.  Yet there is a more fundamental challenge common to all contexts. That is the challenge of working around one’s own cognitive limitations and biases – one’s own myopia. Our own myopia is the obstacle  common to all strategic situations.

Being strategic is being less myopic – less shortsighted – than others. You must perceive and take into account what others do not, be they colleagues or rivals. Being less myopic is not the same as pretending you can see the future.  You must work with the facts on the ground, not the vague outlines of the distant future. Whether it is insight into industry structures and trends, anticipating the actions and reactions of competitors, insight into your own competencies and resources, or stretching your own thinking to cover more of the bases and resist your own biases, being “strategic” largely means being less myopic than your undeliberative self.

Finally  the author gives some broad advice to guide your own thinking. 

In strategy work, knowledge is necessary but not sufficient. There are many people with deep knowledge or experience who are poor at strategy. To guide your own thinking in strategy work, you must cultivate three essential skills or habits. First, you must have a variety of tools for fighting your own myopia and for guiding your attention. Second, you must develop the ability to question your own judgment. If your reasoning cannot withstand a vigorous attack, your strategy cannot be expected to stand in the face of real competition. Third, you must cultivate the habit of making and recording judgments so that you can improve.

This las point (recording judgments in order to evaluate and improve) is also suggested as one of the methods to improve the decision making process in Thinking in Bets.

4. Conclusions and Additional Resources:

So, What is Strategy? How does strategy forms within a company?, Who defines strategy?  No doubt it is a broad , complex and fascinating subject. Surely there is a lot more to learn than what is covered in this book, but it is definitively a good starting point and I highly recommend reading this book.

I found particularly interesting the following topics/insights:

  • The profound analysis of the CBSA “Regaining Strategic Competence” study , is a very illustrative Analysis of Strategic Analysis  applied to National Security. The section of What is Strategy is a good Starting point.
  • The relevance of  Business Process Management excellence as an strategic advantage.
  • The section of Inertia and Entropy: The following comment is one of my favorite quotes from the book: “the bread and butter of every consultants business is undoing entropy -cleaning up the debris and weeds that grow in every organizational garden.”

Finally, here is a list of references I found very concise and insightful, not all of them are available for free on line but if you can get them, I am sure you will find them useful too:


Henry Mitzberg on How Strategy Emerges, The Role of Design in Strategy and How Strategy can emerge Bottom Up rather than Top Down:

Patterns of Strategy Formulation

Of Strategies, Deliberate and Emergent

Fall and Rise of Strategic Planning

The role of the Strategy Officer and the creation of the Office of Strategy Management:

Robert S. Kaplan and David P. Norton , The Office of Strategy Management

Creating the Office of Strategy Management

Michael Porter Five Forces and Competitive Advantage:

Michael Porter – What is Strategy  and Andrea Ovans – What is Strategy, Again

Understanding Michael Porter.