Recently in Strategic Foresight Category

Australian comedian and raconteur Andrew Denton finishes his six-year running interview show Enough Rope.  Denton's production company Zapruder's Other Films announces Project Next for 2009: finding "the next bunch of original thinkers, movers, mischief-makers and cage-rattlers."

The Journal of Futures Studies (Tamkang University, Taiwan) has published a 'trialogue' on Integral Futures between colleagues Josh Floyd, Jose Ramos and myself.

The trialogue is an exploratory method that the late ethnobotanist Terence McKenna used at the Esalen Institute and Omega Institute to cocreate new knowledge informed by interdisciplinary expertise.  McKenna's trialogues featured mathematician Ralph Abraham and biologist Rupert Sheldrake.  More recently, Erik Davis and Douglas Rushkoff have continued the tradition.  The theoretical physicist David Bohm developed a similar method for dialogue and group work.

Floyd, Ramos and I discussed this approach in February-April 2006 after taking three different iterations of Advanced Professional Praxis a 'capstone' project unit in Swinburne University's Strategic Foresight program.  Richard Slaughter provided a focal point as he assembled papers for a special issue of the journal Futures (Elsevier) on Integral Futures Methodologies (November, 2007).  For over a decade, Slaughter had synthesised a Futures knowledge base of new frameworks, methodologies and visions.  Informed by Ken Wilber's Integral vision, Slaughter proposed Integral Futures as a "broader and deeper" horizon for Futures work.  Wilber and Slaughter galvanised a new cohort of practitioners to develop new Integral Futures methodologies.  Yet new creative horizons may create new problems.

How can Integral Futures practitioners be ethically informed about their new methods?  Our trialogue proposes Embodied Foresight as one possible way to achieve this: the cultivation of ethical sensitivity, situation awareness about the Teacher-Student relationship and pedagogical barriers, and self-reflection on the transformative potential of initiatory knowledge and wisdom traditions.  Or, "foresight-in-context" may anticipate and prevent hazards that might have unforeseen consequences.

The trialogue creates a space for each of us to bring theoretical frameworks and practitioner reflections into the discussion.  Floyd brings expertise in Zen Buddhism, cognitive science and phenomenology, and a familiarity with Wilber and Evan Thompson's research.  Ramos brings transcultural experiences in Futures, action research, and postcolonial insights on "model monopolies".  I added some insights from mid-1990s exploration of the Gurdjieff Work and the Temple of Set, and experiences during Masters studies, publishing and research projects.

From our trialogue's conclusion:

Embodied Foresight offers some emergent solutions for the individual practitioner to the challenges and difficulties of Integral Futures practice. These reflexive 'problems' are part of diffusion, initiation and knowledge transfer in many wisdom traditions. Our 'trialogue' has raised several 'reflexive' problems-from Teacher-Student relationships and pedagogical barriers to the archetypal dangers of Phobos and Thanatos-that each of us has personally experienced within the Futures Studies community and in other initiatory and wisdom traditions.

I recently blogged about a presentation the 2008 Communications Policy Research Forum in Sydney on disruptive innovation in the music industry.

You can now download an Adobe PDF version of the PowerPoint slides here.

The refereed paper has been published in the Proceedings of the Communications Policy Research Forum 2008 (pp. 155-175 or PDF file pp. 179-199).  You can also download a local copy of the paper here.

The paper's case study examines why Radiohead and Nine Inch Nails released their new albums as digital downloads.  I suggest a major reason why, and one that was overlooked by Web 2.0 pundits, is that each artist was in the 'label shopping phase' of a new contract and defected after negotiation problems with their major labels.  This fits a pattern in mergers and acquisitions: the major labels lost artists due to integration problems in a merger or acquisition.  Terra Firma Capital Partners has since partially confirmed this hypothesis: the private equity firm endures more post-acquisition integration problems with EMI and is fighting against government regulation of Great Britain's financial services sector.

The paper's data appendices contrast the artists' strategies with signficant events and innovations in music industry contracts, conglomerate mergers and deal structures.  Somehow I missed U2's March 2008 deal with Live Nation: I found out about it in an October 2008 announcement.  Guns n' Roses also finally released Chinese Democracy (MySpace audio stream): a new album that has taken 15 years, a rumoured US$14 million budget and 14 recording studios in New York, Los Angeles, Las Vegas and London.  I may write a paper on it . . .

The New Yorker's James Surowiecki provides an overview of volatility in the global food market.  Three insights emerge for me:

(1) Differences between policymakers and food security experts at the problem diagnosis stage may have complicated the implementation of structural adjustment programs.  Food security poses solutions that are potentially counterintuitive to policymakers: the former will value food stocks to ensure stability in sovereign nation-state the international political economy whereas the latter may prioritise food flows for international trade, to hedge commodities and currency risks.  Surowiecki explores a contemporary scenario of potential market failure due to demand-supply, pricing and other distortions with the allocation mechanisms.

(2) David Ricardo's theory of comparative advantage - in which each nation specialises in the efficient production of goods and services to trade with others for maximum payoff - may not be scalable in its simple form to a complex, interconnected and global system.  Surowiecki's analysis suggests tha the over-reliance on a few countries for specific foods will undermine the global system's resilience and capacity to cope with exogenous shocks and volatility.

(3) Paramaters for investor and market models of the global food market using Vensim simulation software: production supply, demand volatility, pricing, subsidies/tariffs, stocks and flows, and leverage points.  Undertake different short- and long-run simulations noting the role of capacities, dynamics and thresholds, and the impacts of exogenous shocks and volatility.

Recently I posed two questions about Foresight in Organisations: What are are the intervention points?  After five or six years, who are the teachable case studies for successful implementation of the foresight function?

I've only read the Los Angeles Times and New York Times reviews but Charles D. Ellis's The Partnership: The Making of Goldman Sachs (Penguin Press HC, New York, 2008) has some answers to both questions.

Ellis suggests Goldman Sachs has three intervention points to cultivate a foresight function: (1) a human resources function staffed by A+ people who recruit "A+++ people" usually in computational finance, financial engineering and statistical arbitrage; (2) an organisational culture tolerant of the "longer-term view" that is linked to the "[operational] details" necessary for strategic execution; and (3) a creative tension between past excellence and new frontiers.  Intriguingly, the "longer-term view" or "forward view" in Foresight parlance, emerges from people in a supportive culture who are faced with challenge at the boundary of the firm and the external competitive environment.

Two other biographies partially validate Ellis's insights.

Perry Mehrling's biography Fischer Black and the Revolutionary Idea of Finance (New York: John Wiley & Sons, 2005) and his working paper 'Understanding Fischer Black' describe why Goldman Sachs recruited the economist Black: to tap his academic knowledge to design new financial instruments, and use his influence as coauthor of the Black-Scholes equation in finance to impress clients.

Emanuel Derman describes his Goldman Sachs collaboration with Black in My Life As A Quant: Reflections on Physics and Finance (New York: John Wiley & Sons, 2004) and how the firm benefited from the influx of PhD graduates in the 1980s.  Derman was bored at AT&T Bell Labs which had a reactive culture of research management.  He transitioned into Goldman Sachs' fixed income division in 1985 and then moved to equities in 1990 where he thrived for the next decade in a culture that appreciated how conceptual expertise can underpin a firm's competitive advantage in new growth markets.

The contrast was so different that I pointed Derman's experience out in a private submission to Australia's National Innovation System Review (aka Cutler Innovation Review) in comments about the institutional design and research management culture of Cooperative Research Centre consortia.  Maybe given the subprime fallout CRCs can also learn something from Goldman Sachs and Berkshire Hathaway's Warren Buffett who has now taken a $US5 billion equity stake in Sachs' foresight culture.

A few years ago I took a Masters unit of study about Foresight in Organisations.  In its early iteration the unit covered several topics:

∙ Conceptual theories of strategic planning: Alfred Chandler's structure and strategy, Michael Porter's 5 Forces model and contributions to industrial economics, Gary Hamel & C.K. Prahalad's early work on core competencies and industry whitespaces, and Henry Mintzberg's eloquent critique of the strategic planning function.

∙ The operational span of strategic planning including an overview of business units, corporate level strategy, and multi-national conglomerates.

∙ Good practices in change management and organisational interventions such as Elliott Jacques' requisite organisation, Ralph Stacey's shadow or informal networks in organisations, Richard Hames' strategic navigation, and Peter Senge's view on learning organisations.

∙ Practitioner reflections and post-implementation case studies on creating a foresight function in organisations from Andy Hines, Sohail Inayatullah, Peter Hayward and Joe Voros.

The most fun part was a lunch with Hines around the launch of the Association of Professional Futurists.

The student cohort grasped several hypotheses from these topics: (a) the limits of traditional strategic planning in a complex environment, (b) the emergence of anticipatory management and strategic foresight as two new paradigms, and (c) how the foresight function may be embedded in organisational culture.

In retrospect three broad trends may have influenced the topics and hypotheses:

(1) Hamel & Prahalad's view led a new wave of practitioners to frame the foresight function as a managerial core competence in pragmatic strategic thinking (thanks to Mike McAllum for his practitioner insights on Hamel's influence).  In the contract phase of a consulting engagement this meant the practitioners often linked foresight to growth options, visioning and corporate strategy.  Clients were receptive, partly due to Hamel & Prahalad's solutions at the firm and competition levels.  More broadly, exogenous factors played a major role in creating the macroeconomic climate for client demand: the 10-year Juglar business cycle, the late 1990s Internet bubble and the M&A wave of European industry consolidation.

(2) Hamel & Prahalad's work coincided with the diffusion of new frameworks for organisational interventions from management theorists into consulting firms.  Senge's systems modelling at MIT's Society for Organisational Learning and Arie de Geus's scenarios work at Royal Dutch Shell were two such frameworks.  If Hamel & Prahalad provided the strategic rationale, then Senge, de Geus and others suggested the intervention points: how a forward view and systems awareness could enhance managerial decisions about corporate strategy.  However this alignment of the foresight function with strategic thinking did not explore other potential intervention points: cost management systems, project hurdle rates for risk-return, and operations management.  Attention to these would bridge the strategy|operations divide in organisations that demand quantifiable results.

(3) An alternative route for contract phase buy-in was to connect the foresight function with a hot topic that interested the client.  On the upside, this was a way to raise awareness of dynamics, forces, trends and challenges beyond the firm or market.  On the downside, the buy-in now depended on the currency of the hot topic, the differential diagnosis skills of the practitioner, and the value created by the solutions.  If the hot topic waned, so might the buy-in for the foresight function.

With the benefit of five years hindsight I now see how some barriers to Foresight in Organisations might be avoided.

Foresight in Organisations gives students a grounding philosophy that informs their consulting approach.  However its philosophy is also a relatively young discipline with multiple schools of thought and stances, and in competition from other frameworks, methodologies and stances for client dollars.  This poses translation challenges between the Foresight practitioner and their client that arise in the contract, data collection and implementation phases of a consulting engagement.  Clarity on how philosophy informs rationale may help the engagement go smoothly.

The Foresight practitioner also faces cognitive biases and judgments that can affect their consulting decisions during an organisational intervention.  The Foresight practitioner's enthusiasm for Foresight as a normative stance and silver bullet solution can set them up to fail or give their solutions a shorter half-life.  Specific cognitive biases that the Foresight practitioner may be prone to include positive illusions about their implementation competencies, illusion of control over others, and unrealistic optimism about the likelihood of organisational transformation.  The client may also have a shadow agenda about power and the direction of organisational change which can blindside any intervention.  Finally, as the Foresight practitioner is not embedded in the organisation their enthusiasm for change can trigger defensive routines from others that may delegitimate the practitioner, block the microprocesses for change, or derail the organisational intervention.

I learnt the most from the war stories of other Foresight practitioners: what worked, what didn't, how and why interventions failed, and what was done the next time.  You may mess up as others have messed up before you.  Now I have my own war stories to add . . .

The nuclear strategist Herman Kahn coined the phrase 'thinking about the unthinkable' in a series of black comic Air Force briefings that became On Thermonuclear War (Princeton University Press, 1960).  Faced with a year-long crisis in US credit markets analysts have embraced similar imagery in their forecasts of catastrophic risk.

Several different players in the financial ecosystem rely on the forecasts for multiple payoffs, one for their target audience and the other for themselves:

• Research Analysts: (1) Provide clients with guidance and metrics to the market turbulence; (2) stand out in the pecking order of research firms and competing industry/sectoral analysts to remain relevant.
• Investment Media: (1) Catastrophes as the source of drama and headlines to keep consumers engaged; (2) Financial and operational synergies of convergent media production.
• Fund Managers: (1) An external input to valuation models for visiting potential firms to invest in; (2) A parameter for deciding on the asset classes, diversification and hedging for investment portfolios.

Some questions to ask in evaluating any catastrophic forecasts that predict the unthinkable:

• What is the source, type and timeframe of the evidence presented?  The source may be company interviews, earnings calls, investment calls and trade seminars.  The type may be firsthand observation, market rumour, financial model, computer simulation or analyst conjecture.  The timeframe may be historical simulation of past data, quarterly forecasts or a longer time horizon for capital financing, global market entry, innovation pipelines or sustainability projects.  The source enables you to filter any possible agendas, the type refers to the information structure, whilst the timeframe often has embedded assumptions about cause-effect relationships, impacts, and the actions of others.
• Why is the analyst making this forecast and could there be other agendas? Analysts have biases and personal theories that an attention economy might amplify.  At a group level this becomes self-reinforcing collective wisdom that may turn out to be flawed.  In embracing a current meme in a true believer stance analysts create a cognitive frame prevents them from considering alternative outcomes, options and possibilities.  At its most cynical this question is a reminder that forecasts are not objective or value-neutral, especially if the analyst is under pressure to generate earnings revenue or has a different private opinion to their public view.
• What is the analyst's track record in accurate forecasting?  This focuses on the analyst's patterns of thinking and rhetoric in forecasts; how their performance compares to an industry, market or sectoral baseline; and the margin of error in their past forecasts.  This can be used to construct a brains syndicate, to filter out media reports and noise, to surface hidden assumptions and how they affect performance, and as a quality assurance check.
  
• How might the catastrophic forecast be hedged? This shifts the focus from optimistic versus pessimistic views to the risk management focus on mitigative strategies and action planning.  To be effective, this requires an understanding of your risk profile and risk-return needs (risk averse, neutral or seeking), your time horizon, and the nature of the financial instruments, investment portfolio and markets to be used.
  

Could the roots of the 2007 subprime crisis in collateralised debt obligations (CDOs) and residential mortgage-backed securities (RMBS) lie in financial analysts who all used similar assumptions and forecasts in their quantitative models?

Barron's Bill Alpert argues so, pointing to a shift of investment styles after the 2000 dotcom crash from sector-specific, momentum and growth stocks to value investing.  Investment managers who prefer the value approach then constructed their portfolios with 'stocks that were cheap relative to their book value.'  In other words, the value investors exploited several factors --- the gaps in asset valuation, asymmetries in public and private information sources, price discovery mechanisms and market participants --- which contributed to mispriced stocks compared to their true value.

However, the value investing strategy had a blindspot: many of the stocks selected for investment portfolios also had a high exposure to credit and default risk.  The 2007 subprime crisis exposed this blindspot, which adversely affected value investors whose portfolios had stocks with a high degree of positive covariance.

Alpert quotes hedge fund manager Rick Bookstaber who believes that financial engineers have accelerated crises and systemic risks via the complex dynamics of new futures contracts, exotic options and swaps.  These new financial instruments create interlocking markets (capital, commodities, debt, equity, treasuries) which have the second-order effects of larger yield curve spreads and trading volatility.  Alpert and Bookstaber's views echo Susan Strange's warnings a decade ago of 'casino capitalism'  and 'mad money' as unconstrained forces in the international political economy.

Quantitative models also failed to foresee the 2007 subprime crisis due to excessive leverage, difficulties to achieve 'alpha' or above-market returns in market volatility, and the separation of risk management from the modelling process and testing.  Other commentators have raised the first two errors, which have led to changes in portfolio construction and market monitoring.  Nassim Nicholas Taleb has built a second career on the third error, with his Black Swan conjecture of high-impact events, randomness and uncertainty (see Taleb's Long Now Foundation lecture The Future Has Always Been Crazier Than We Thought).

Alpert hints that these three errors may lead to several outcomes: (1) a new 'arms race' between investment managers to find the new 'factors' in order to construct resilient investment portfolios; (2) the integration of Taleb's second-order creative thinking and risk management in the construction of financial models, in new companies and markets such as George Friedman's risk boutique Stratfor; and (3) a new 'best of breed' manager who can make investment decisions in a global and macroeconomic environment of correlated and integrated financial markets.