What if....? instead of If only....

by Emmie Alexander

Banking systems near collapse. Auto makers facing bankruptcy. Record unemployment and foreclosures. Your 401(k) in the cellar. A very small number of very smart people have brought our economy to a standstill. What were they thinking? That's the question I hear most often when the discussion turns to the home mortgage mess, or the Wall Street banks, or Citigroup, or AIG, or GM, or borrowers who bought more house than they could afford.


In this AHA! Moment newsletter, we'll be discussing the current crisis as a failure to think strategically, and in the next we'll address the challenge of creating a culture where asking strategic questions is rewarded instead of punished.

What were they thinking? The question I want to ask is How were they thinking?
Did they think analytically? creatively? critically? "outside the box?" systemically? Long term as well as short term? Did they think strategically?

While no one can be certain what went on in the board rooms and corner offices when AIG decided to bet the farm on insuring those sexy credit default swaps, it certainly appears that there was an absence of robust critical strategic thinking. New York Times reporter Joe Nocera says "They thought there would be no losses. They thought this was free money." So when those AIG leaders were thinking of this rosy future, who in that room put up his or her hand and said, "Yeah, but what if...?" Apparently no one. And now they --and we the taxpayers --are left saying "If only..."

I'll leave it to the economics experts to figure out what went wrong with the financial system, and to the philosophers to comment on the ethics of those who deliberately defrauded others. I'm interested in what went wrong in the minds of the leaders who made disastrous decisions, and in the processes they used to vet those decisions with others. I believe there is a lesson in this for all leaders. How can leaders learn to think more strategically?

What is strategic thinking?

Strategic thinking is often cited as a critical leadership competency. It is often defined as the ability to think long term and "big picture." I see it as the ability to imagine a "discontinuous future" --one that cannot be projected linearly from the present; to imagine the unimaginable; to dream of possibilities. To be sure, thinking strategically requires intuition, creativity, and optimism.

But imagining the future also includes imagining what could go wrong, anticipating even unimaginable consequences. Thinking strategically also requires a heavy dose of cool-headed critical analysis and pessimism. Remember Murphy's Law? Murphy was a strategic thinker. Where was Murphy when AIG leaders decided to exploit the unregulated loophole of not being required to have any reserves behind those jazzy new financial products?
So why did so many smart people make so many dumb decisions? Are strategic thinkers born or made? Well, both. Some people do seem to have a greater tendency to use and trust their intuition and creativity, and seem to focus more easily on possible futures, while others tend to trust the reality of experience, the verifiable world of actual events and situations. This second group lives more in the present and tends to have a shorter horizon and is often more skilled at tactical operations. Yet the talents of both can contribute to the strategic thinking process, and both can learn to use strategic thinking tools and processes more effectively.

The aim of strategic thinking is to imagine a future in which your company has no competition --and thus to invent possibilities for redefining the playing field before your competitors do. Successful leaders are constantly scanning the environment and the far horizon for early indications of unexplored possibilities. The tactical thinkers need to regularly disengage from the daily grind and engage with their more intuitive colleagues in strategic thinking exercises that stretch their intuitive and creative muscles. And the intuitive thinkers need their realistic, practical counterparts to help them vet their ideas.

Royal Dutch/Shell taught us how to think about the future.

One approach for learning strategic thinking is the process of creating Future Scenarios, a technique successfully pioneered in business by Royal Dutch/Shell in the 1970s. Through the process of identifying drivers of change and creating alternative scenarios based on assumptions about those drivers, a management team can learn together how to think about a future that is not just an extrapolation of the past and present. This "learning to think together" better prepares them for managing whatever the real future has in store. And the strength of the process is that it requires multiple scenarios, some of which assume a not-so-rosy outcome. Thus the future scenario process disciplines leaders to check their "irrational exuberance" through rigorous exploration of a range of possible negative outcomes, going beyond the seductive simplicity of only best and worst cases.

Daniel Gross, author of Dumb Money: How Our greatest Financial Minds Bankrupted the Nation, says, "During bubbles, we always conclude that Something Fundamental Has changed, and that the recent party is a mere prelude to even greater revels. I call it Pro Forma disease. The main symptom is a compulsive tendency to extrapolate results of recent fat years endlessly into the future." Leaders who practice developing future scenarios learn to disconnect the future from the past and present. If only...

A butterfly flaps its wings in Brazil and sets off a tornado in Texas.

One observer of the current scene said that AIG was at "the center of a spider's web... if there's a tear in the center, the whole web collapses." Systems thinking helps leaders understand the complex interconnectedness of all the elements in life --events and decisions have far reaching long term results, usually unexpected. Leaders need to learn that effects are often separated from causes by time and space, such that it may be almost impossible to recognize how their decisions led to unhappy consequences. One of the first lessons of systems thinking is that "we have met the enemy and he is us." Leaders need to learn to look back upstream to identify how the problems of today are caused by the decisions of yesterday, and to look far downstream to imagine how today's decisions likely will cause tomorrow's problems.
In The Logic of Failure, German psychologist Dietrich Dorner acknowledges the seductiveness of lazy thinking, but warns, "To deal with a system as if it were a bundle of unrelated individual systems is, on the one hand, the method that saves the most cognitive energy. On the other hand, it is the method that guarantees neglect of side effects and repercussions and therefore guarantees failure." If only...

Living near ground zero

I once helped design and implement training for supervisors of teams of nuclear reactor control room operators. These folks spend one week out of every five training in the simulator, rehearsing over and over how they will handle possible "incidents" (their euphemism for nuclear disasters). Since I live just around the bend of the river from one of these reactors, I'm comforted in knowing that these guys spend every waking minute thinking about risk. I learned from them that risk is a mathematical function of probability and severity. Though the probability of a nuclear disaster is relatively low, the severity could be horrific. Thus the constant attention.

The financial geniuses who got us into this mess appeared to have focused only on what they believed was the very small probability that anything could go wrong, and overlooked the severity of the outcome if it did. If only...
Even in the relatively peaceful and benign world of manufacturing, engineers use a process called Failure Mode and Effects Analysis to produce higher and higher quality goods. They calculate a risk priority number (probability x severity x detection --the likelihood the problem will be detected before it reaches the end customer). This number guides their efforts to prevent problems. Leaders in the financial world - and indeed in all types of businesses -- need to learn this type of thinking from their manufacturing counterparts.

Putting on all the hats

Many of the efforts to teach leaders to think strategically focus only on the creative, intuitive process. We believe there is greater value to learning an array of thinking skills that not only includes both creative and critical processes, but also includes thinking about thinking. That is, consciously choosing how to think in different situations.
Dr. Edward De Bono has spent decades preaching the message that "thinking can and should be taught if we are to meet the needs of today's fast-paced and changing world." His book Six Thinking Hats describes five different types of thinking needed to address complex problems --plus the sixth hat: thinking about thinking and choosing the right type at the right time. De Bono's thinking courses have been taught all over the world. I'd vote to make attendance mandatory for the top leaders of any company that receives bailout or stimulus money.

If only...
So you and I look at our 401(k) statements and think, if only...
You may not be a Wall Street banker or the CEO of an auto manufacturer, but you too need to learn the tools and skills of strategic thinking. What are the important decisions facing you? What are the upstream contributing factors, and what are the downstream implications? Where are the opportunities? What options occur to you, and how can you imagine others? What if you implemented each of these --what then? What would a future look like that is not just a projection from the present? Who can help you to challenge your own assumptions? What are the risks, and the probability and severity of those risks? How will you avoid or mitigate those risks?

Learning to think about and ask the right questions is a first step. If only it were that easy. In our next newsletter we'll examine what else it takes for you as a leader to build a culture where thinking strategically - both creatively and critically - is encouraged, supported, and expected.