In Search of “Optimizationism”

Key Takeaways

• Determine your primary assets and assess your vulnerabilities to a sudden decline in one or more of them.
• Challenge strategic assumptions, stress test your businesses and extend limits.
• If every idea your people have is a good one, it means you have too few ideas.

I spend my time, on the one hand, analyzing Chinese politics and economics in the media and, on the other hand, advising international companies on their strategies and tactics for doing business in China. My work has led me to view political systems founded on fundamental ideologies, particularly capitalism and socialism, as 19th century relics that wrought havoc in the 20th century and are useless in the 21st century. What all enlightened governments today do—or what they should do today—is to figure out optimum policies to deal with the hyper-complex, interconnected and ever-changing realities that characterize the global economy.

“Optimum” means achieving an ideal outcome, balancing myriad parameters and criteria. Optimum is usually not the “maximum” outcome, but it may be the “best” outcome. It’s a bit like flying a helicopter and having it hover. Just because the helicopter doesn’t move does not mean the pilot is doing nothing. In fact, the pilot must make multiple, small adjustments continuously just to keep the inherently unstable craft conditionally stable.

It’s like that with modern economies. What the government should or should not do, and what the private sector should or should not do is not codified in an ancient text nor can it be answered in the abstract. Only tightly targeted, situation-specific microanalysis can provide solutions to problems. These solutions will never be perfect and they will change frequently. Maximization is futile. Optimization is the key.

“The color of the cat, black or white, does not matter; a cat that catches mice is a good cat.”

Corporate Optimizing

How might Optimizationism impact corporations? Following are five principles for optimizing business organizations. These are not necessarily the best such principles, but they exemplify a way of thinking that can be applied in diverse situations. Appreciating ways of thinking is always superior to applying specific precepts; situations differ and adaptations are often necessary.

1. Nothing continues forever. Never assume that a current strategy, no matter how effective or a current product, no matter how strong, will go on in the future the same way it has in the past. To forecast the future by extrapolating the past is, in today’s volatile world, a recipe for disaster. Take IBM’s decision to sell its PC division, a wise decision in hindsight, one that Hewlett-Packard (HP) may come to envy.
2. People are neither perfect nor permanent. Never assume that you can find ideal managers or, that when you have good people, they will remain so. Situations change; people change. The Yahoo board, tasking themselves with finding a new position for the once-dominant portal in a world suddenly conquered by Google, Facebook and Apple, certainly must have thought about this when they fired CEO Carol Bartz.
3. Challenge strategic assumptions. Every corporate strategy is based on a series of assumptions regarding market, product, pricing, competition and the like—and the longer such assumptions have guided strategy, the more you should challenge them. One approach is to create so-called Blue and Red teams to challenge each other with each assigned to defend contrasting assumptions. Such scenario testing is commonly used in war games. To pick on HP again, they were forced to discontinue their TouchPad tablet within weeks of launch—a crisis that might have been avoided through better internal vetting.
4. Stress test your company. “Stress Testing” came to prominence in the aftermath of the recent financial crisis, when banks were analyzed to assess how much erosion of their assets, primarily mortgages, they could withstand before collapsing. Companies should do the same type of assessment. Determine your primary asset—assets in the broadest sense including products, personnel, customers, foreign markets, whatever—and then assess your vulnerabilities to a sudden decline in one or more of them. What are the weak links and how can you strengthen those weak links and, thus, mitigate risks? It may sound obvious, but this type of risk management is very often neglected—witness Enron and Lehman Brothers.
5. Extend limits. Force your managers to think beyond current boundaries. Play simulation games that develop new markets, products and concepts—whole new ways of doing business. If every idea your people have is a good one, don’t be so proud—it means you have too few ideas. Never get comfortable. IBM’s conversion from hardware to software is one of the great transformations in business history.

What is the core commonality linking these five principles? They all seek to improve corporate strategy by making changes to the status quo; and, as such, they are all optimizing processes.

On the Color of Cats

Deng Xiaoping, China’s great architect of reform and the “paramount leader” of China’s economic resurgence put it best. After the death of Mao Zedong (1976), the visionary Deng, who had been purged by Mao three times, saw that the only way that China could ever develop its economy was to put aside all the heated theoretical debates about what was or what was not socialism. (To hire three workers was socialism, some had argued, but to hire four was capitalism—and must be forbidden. To own five chickens is socialism; to own six is capitalism…. You get the absurdity.)

Accordingly, Deng, a man of diminutive body but giant spirit, figured out Optimizationism—meaning that it is not the label on the policy that counts, but only the effectiveness of its output. Of course, Deng was sufficiently savvy not to coin such an obtuse-sounding neologism as my “optimizationism.” He hit pay dirt by applying an earthy aphorism from his native Sichuan province; and, because almost everyone in China got the point, it shall come to pass in the not-too-distant future that China, in only its fourth decade of reform, will become the largest economy on earth.

Deng famously said: “The color of the cat, black or white, does not matter; a cat that catches mice is a good cat.”