Shahin Khan and Doug Garnett interviewed JP Castlin about Adaptive Strategy, Efficiency, and Resilience for their Marketing Podcast #41 (5 April 2024).
Shahin Khan»»»
Hi everybody. Marketing podcast episode number 41. I’m here with Doug Garnett as usual. This is Shahin Khan and we have a very special guest, none other than JP Castlin. You should go to his website jpcastlin.com. JP, thanks for being here. How are you, Doug? Let’s start.
Doug Garnett»»»
I’m doing well. I’ve spent a week in paradise in Central Oregon. It’s been rough, but somebody had to do it.
Shahin Khan»»»
And JP in beautiful Sweden. Tell us.
JP Castlin»»»
First of all, thank you for having me. Beautiful Sweden is looking decent, but I won’t be here for much longer. I’m in a very hectic traveling period of my life at the moment, but glad to be home for the time being anyway.
Shahin Khan»»»
Excellent. So for everybody you’re a global name and you’re your own brand and everybody knows you. JP started out as a corporate finance lawyer. Next thing he’s leading strategy for a lot of big brands around the world. Very well known. Always gets awards for his speeches and keynotes. He has a newsletter called Strategy in Praxis that you should go subscribe to. He writes articles that are always very impactful. He’s also writing a book about adaptive strategy. We live in a very complex world, so maybe that would be our entrée. Let’s talk about complexity. Doug, you’re writing a book about complexity, so you guys can definitely have a meeting of the minds there. But I also want to double-click on the word praxis because when you use strategy in praxis, rather than in practice, you’re not just looking for a harder word to say practice.
JP Castlin»»»
So typically the sort of the traditional dichotomy is between theory and practice. We’re all familiar with that. Praxis is theory-informed practice. In other words you start with a theory you try it out in practice then you learn. You change your theory. You adapt and you sort of improve over time. And there are lots of benefits to this because if you don’t understand a theory you won’t be able to scale the practice. Right? You just do stuff. And so praxis is—again—you start with a theory and then the theory leads to all the practicalities and all the pragmatics and then you learn and you adapt and you sort of evolve over time. That’s the idea anyway.
Shahin Khan»»»
Yeah, that’s excellent. I always took it as: how do you actually implement? And you can’t implement if you haven’t practiced it. If you understood it, it’s like the next stage sort of a thing right. Doug, what’s your view on this and also complexity?
Doug Garnett»»»
First of all, we should let the audience know that JP and I have conversations every few weeks and have both been working on our books in parallel. And JP’s focus is strategy. I’m focused on a kind of a broader sense of doing business with complexity in mind. And so that’s always been really valuable. I think the praxis idea weaves more in, I suppose to my mind, between kind of that theory and taking a serious look at how does it work in practice. There’s a tendency among practitioners to say I did this, it works, that’s all that matters. But I think that we all need a bit bigger sense of it which is I did this, it works, how does that relate to theory? should I be changing theory? should I be adapting the theory? what should I be doing? And that’s, I think, a lot of it. And I think what JP has done with it has been really beneficial for the world of strategy. Especially getting away from the formality of strategy that has been worked into this place where it’s become dull. And I hear a lot of people talk about strategy and I’m like, Great, no thanks. Can we talk about the real stuff? And I think that JP’s writing and talking and work on it is bringing a new life to what should it be and how should it matter in business.
Shahin Khan»»»
Do you get the sense that there is a growing awareness of strategy as something that people need to take seriously, and do well? And of course, you guys are doing your part to do that. Where do you think strategy is in its life cycle and its market adoption, if you will?
JP Castlin»»»
Oh, that’s a very good question. It depends on who you ask, right? And everyone likes to believe that their particular brand of strategy is sort of hitting the early majority. It feels like at the moment, I think we’re starting to see a shift away from the traditional strategic planning modes. Because we had business process re-engineering in the 80s. And now we’re sort of shifting towards something else, but I think we’re probably stuck with the current phase for a bit longer because paradigm shifts don’t tend to happen until the behemoths die out, which basically means that we have certain companies that need to fail and we have certain thinkers that need to—how to put it delicately—stop thinking.
Doug Garnett»»»
At least stop publishing.
JP Castlin»»»
Yeah, but I think we’re heading in the right direction… The speed is what’s up for debate. But I see progress.
Doug Garnett»»»
Well I think we’re seeing right now, too, a better and better understanding that when you take strategy and combine it with strategic planning which is a lot of companies imply the two together, I think when they say strategy they’re talking about a very formal kind of rigid process of planning that still is out there and still dominating even though it’s been around for 20 or 30 years. But we’re beginning to get more and more research that shows that that planning process impedes progress often as much as or more than it helps. And there’s lots of stories about disasters that have come through that process and I think the more those come out and are well-known, people will look for new ways to approach strategy like JP’s bringing us.
JP Castlin»»»
Yeah. I mean I can talk at length about why plans fail, right? But the way that most companies use them in practice feels like, to me anyway, is to have like laundry lists of goals. So if you work in manufacturing you have one plan. And then you work in marketing you have another plan. And if you work in sales you have a third plan. And there’s no synchronization between them and so you end up with even if you do manage to get some positive results they’re just positive for whoever came up with them, not the actual organization as a whole. And that’s a huge problem when people conflate strategy of planning.
Shahin Khan»»»
One thing I wanted to get your take on was the relationship between marketing and strategy. You could certainly make a case that strategy and marketing like are the same. And you could also make a case that strategy is a much wider thing, and marketing just does its part… Can we speak to that and what your take is on it?
JP Castlin»»»
Yeah sure. I mean, I think that marketing in a broad sense speaking of marketing as the full 4 Ps, which it isn’t these days, but for the sake of the argument I think if that’s your view of marketing, then I think marketing will always be a part of a broader strategic conversation. If you just reduce marketing into comms then I think you have an issue. But let’s for the sake of the argument, let’s say that it’s a full 4 Ps. Now within that, you have product, obviously, and I think the Apple problem is one that we’ve seen quite a few times before whereby you get to a point where it’s the wet dream of a conventional strategic planning. Right? Conventional strategy which is that you achieve a monopoly. And then what tends to happen is that you get really good at defending your position for various reasons. You have such power within the market, but actually you lose innovative capacities and capabilities. And I think that’s what we’re seeing with Apple at the moment. Because, God knows, their innovation of late hasn’t been that impressive. Doug, what are your thoughts?
Doug Garnett»»»
Yeah, I concur on Apple. First, I see them as still living off of the innovations from the past and cashing them in. It’s the cash cow for them. And their new innovations have been technically some of them have been technically striking—but I haven’t seen them be as valuable to customers. But yeah, that’s I mean that’s my sense of it. Some of what you’re describing, which is everybody would really love to have a monopoly market if they could get there at some level. But also I think there’s another element that’s entered and I think somewhat it’s entered with digitization and with digital people like Apple or eBay or Google or Amazon, which is this increasing returns as pointed out by Brian Arthur, in Complexity and the Economy, which is that when you’re in a market where there’s a tremendous amount based on knowledge and achievement, once a company reaches a certain size or domination in the market it becomes ever increasingly harder for anybody to unseat them. And I think that’s what I actually think is missing from U.S. antitrust, understanding that this is a thing that happens. But that a lot of the law is based on these ideas like well if there’s low prices it must not be an abuse of power. And I don’t agree with that. I think if we want healthy markets we want a wide range of prices and we want a lot of those things. And there’s these other issues that bring abuse of power. Because I think you could take that increasing returns and say why is Google so hard to challenge. Well they reached an increasing returns point where it’s over a hump it almost nobody could ever really seriously challenge them. Facebook same thing. Amazon same thing. I suppose so with Apple, although I have questions about this antitrust suit.
Shahin Khan»»»
So, part of that problem, of course, is that price is so easily measurable and quality isn’t. So you just standardize on price and you miss a bunch of variables and values as a result. And you’re right, that absolutely is the case. But is this a marketing problem or a strategy problem?
Doug Garnett»»»
For the company, I think it’s both. They go hand in hand. You can’t do a company strategy without a thorough look at marketing with whatever we want to call it—a big M or little m. The truth of the 4 Ps, whether they’re in your marketing department or not, you’ve got to deal with all the 4 Ps. They influence and adapt and change around whatever strategy you pick as a company, so they have to be very integral to it. It’s hard for me to separate them and say well we got a marketing strategy and I think we have good ideas about marketing but what’s our corporate strategy has to be the dominant factor. Because how we approach our marketing work has to influence it. I don’t know. JP, what’s your thought?
JP Castlin»»»
I would agree. I think the other thing though that I would add is that most strategies do not take into account the company’s own success if that makes sense. That’s never considered in the strategy process. So what tends to happen, and this has to do with complexity and adaptive systems in general, is that, the more successful you are, the more confident you are in your knowledge, the more you tend to discount change and signals and anomalies and whatever else so you can become trapped within your own strategy, if that makes sense.
Doug Garnett»»»
When you say it didn’t take into account, I’m not sure. That struck me as one of those, like, “Wait, what?” But I know you. I know that you’re got some really good thought underneath. So maybe explain a bit more because I’m still circling around it.
JP Castlin»»»
Yeah. So if you’re talking about things like the implications of having a monopoly position in the market, of complacency, the problems that come with success. I mean traditional strategy tends to be your applied resources over time to achieve change. And then ideally you get to a point where magically all your problems have been solved. What you don’t consider is that situation, that place in and of itself, could be a problem. Right? I made a point before of saying that strategy ultimately is about movement. In my world of adaptive strategy, you want to move in a certain direction at the right speed and tempo. But strategic planning and conventional strategy is always concerned with getting to a certain point, which implies the cessation of movement. You stop. But if you stop you’re dead. So there’s things like the dynamics within strategy. I mean, they are meta-problems if you’re honest, but nonetheless you don’t factor in your own success, so to speak. And everything that comes out of that.
Shahin Khan»»»
So there are no destinations, just rest areas.
JP Castlin»»»
My co-author for the new book, Steve, likes to call it the Garden of Eden strategy, in which we get to a point where magically we’re in paradise and all the problems have been solved. And then there are no competitors and no issues and this, that, and the other. But that never, ever happens in practice.
Shahin Khan»»»
So, tell us a bit more about the book. What’s it about? What can you share at this point?
JP Castlin»»»
Yeah sure. The book is called What to Do When You Don’t Know What to Do. It’s on adaptive strategy in our current world of uncertainty. And there are three parts to the book. The first part of the book is everything that got us to this point going back in history to Newton and ??? and Multhus and the core ideas of neo-classical economic theory into strategic management theory with people like Taylor and then later Drucker and whatever else. And how these ideas and assumptions have sort of permeated throughout history and got us to the point where we are at the moment. And that point that we are at the moment, is that a lot of strategies fail. Or most fail. And all plans eventually fail. And so we talk about, what are the manifestations of all of this? That’s second part of the book. And then the last big thing is… OK, so what do we do about it? And it’s we’re very clear on it. So if you just want to work with adaptive strategy and sort of run the exercise and build this kind of strategy and use the ABCD framework and whatever else just read that part of the book. But if you want to teach it, if you want to work with it as a consultant, then you need the theory. So I suppose in a way the book is also about that idea of praxis theory and the histrionics and whatever else. And then, OK, so what do we do about it in practice? So that’s the idea. It’s a very hands-on, pragmatic, you can pick it up and start working with it kind of book.
Doug and I speak every fortnight or so. Our view—and you know, I hope I’m not speaking out of turn here, I’m putting words in your mouth—but our view is that most business books are a 10-page idea stretched into 300 pages. Right? And there are reasons why you do that. And that’s typically because you don’t make any money off the book. You make money off of the keynote speeches that follow. And then the 10 pages work quite well as a keynote. Our book is not like that at all. It’s just like every chapter could be its own book and then some. So it’s quite heavy on information, but again it’s very practical and has all the exercises and all the frameworks and blah blah blah.
Doug Garnett»»»
I think that’s the irony of people’s assumption about business books is they expect them to be these simple kind of checklists. Like you come out of the book with six things to do. But my experience is there’s a lot that people can do from just simply being informed, understanding, seeing examples of what other people have done, and essentially put them in a position to be real managers, which is to look at what’s around them and make choices. Because that’s what we’re good at if we’re managers. And I think that’s it’s in interesting to be around the book industry right now because there are publishers who understand that and there’s publishers who are so committed to the six points coming out of the book or the seven habits, whichever you prefer. I mean I think we’re in a place where the business writing is impoverished today… I mean I’m a scholarly type and I will tell you I have rarely read a business book that I found stimulating and interesting that deals with the reality that I had to work with and that’s a shame.
Shahin Khan»»»
So we talked about Apple. They’re missing some things. They certainly missed the boat by the way on AI. And they’re like trying to catch up. And that’s like inexcusable in some ways, but they also have a lot money in the bank so they can buy their way back into it, perhaps. But there was also news on Amazon. And there was some topic that seemed worthy. Do you want to tell us what they did Doug and what your take is?
Doug Garnett»»»
We are in the middle of the Amazon Spring sale. And it’s actually striking that they did this because for a long time Amazon had Prime Day, and that was the only thing we saw from them; they would have one event. Well, apparently that’s become so popular I believe this is their third event now this year, instead of one event a year. And essentially it’s a discounters event, which is they try to draw a whole bunch of people in with promise of low prices and create a feeding frenzy at Amazon to drive a ton of sales, in theory. Of course there’s a lot to be fearful of in that, which is discounting means giving up profit. And there’s some ways I look at this as how fast can you pay people to take your product week. And I’m not sure that’s entirely fair, but I think there’s an aspect to it. But what’s going on is they have a big week of sales, very much like Prime Day. And some of the other things they’ve done are a little concerning because this is the kind of stuff you don’t expect to see from Amazon. And my first question was who has to make their metrics because it has the feel of somebody has a metric somewhere that says oh you know what we got to have this much this year and they run around they’re like you know what if our revenue metric needs to be that, we’ll do another sale. That’ll get us there. Of course, it may not be very healthy for the company.
JP Castlin»»»
Yeah, I would agree. I mean one of the things that I see a lot with retailers is that they become addicted to discounts. And part of it is the revenue stuff but also what tends to happen when you run these kinds of sales you effectively you pull purchase up in time. Right? So if you bought a new lawnmower at a discount you’re not going to buy another one two weeks later just because that’s when you thought you’d buy the thing, right? But I think in terms of Amazon I have a slightly different view on it, and I think perhaps this ties back to the Apple example and market manipulation in a way, if we just do the basic maths for these kinds of things.
So to your point, as everyone knows, if you lower the price you need to make it up somewhere else. So if you look at retail—and again I don’t have the figures for Amazon to take this with a grain of salt—but if you look at retail, the average price elasticity is around minus 2.6. S so what this means say in translation is that if you lower your price by 10%, you should stimulate a volume increase of around 26% on average. And this can go higher if you actually announce the sale, statistically speaking. So if you say we’re going to have a huge sale you can get a price elasticity upwards of minus five. Which basically means that 10% cut leads to a 50% increase in volume. Now what you have to do again is you have to factor in the current margin. So the theory goes. The reasoning around these kinds of events is if your gross margin is, let’s say, 30%, you have to sell 50% more to break even at a 10% discount. So if the margin is say 20% and you lower your prices by 10% you have to sell 100% more to break even.
And so at this point people go okay so if we think about price elasticity and this thing over here, this is how much we need to make in order to make up our margins and whatever else. And you see this with financial analysts all the time but what you don’t think about is the fact that, again, you need to factor in your entire baseline sales. Because all of your sales of that thing will come at a discount, so the actual cost on your margins tends to be a lot higher.
OK. So what does this mean for Amazon? Well if you look at their Q3 figures, I think net income was $13.2 billion. OK, I think most of us would be happy with that. But we also know that making money off of e-commerce is very difficult. Not to sort of reference my own work too much, but in a white paper that I wrote in 2021 with James Hankins, we could establish that the higher your penetration online, the lower your profit margin is as a rule. And there are reasons why that is that we can go into… but nonetheless that’s the rule.
OK. So we start looking at the figures, right? In the same quarter Amazon web services (AWS) the revenue was $ 24.2 billion, at a margin roughly 30% according to the financials. The net income is $7.2 billion. Then they have the advertising business which came at $14.7 billion revenue. Now I’ve worked in adtech quite a bit especially early on when I did consultancies, but also in retail media of late, and so retail media gross margin tends to be 70 to 90%. And so I would estimate that the net margin for Amazon on their advertising business is probably somewhere between 60 and 80%. Let’s say 60. Let’s be conservative. So that equals a net income of $8.82 billion. In other words, if you subtract it, what you discover is that Amazon was $ 2.82 billion in the red from the retail site. Right? So actually the figures weren’t that great. But, and here’s the kicker, Amazon can afford it. So there is a potential point of running these kinds of promotions because it pulls everyone else into a price war, effectively playing a game that Amazon is much better at. Because, I mean, we’re talking about competition and price and whatever else. And the fact of the matter is that by lowering your prices you can fuck up the market just as well. So it might be, even though it looks like a short-term play, it could potentially be a long-term play where you undermine competition by essentially running sales that they just cannot match.
Doug Garnett»»»
The question about abuse of power—this is worth going back to, because I’ve maintained at some level this is what Amazon has done with the retail like portion of their market since the beginning. Initially they negotiated long payment terms with suppliers which gave them lots of free cash which is part of why we were focused on cash flow because that let them lose all kinds of money. But as long as they continue to grow cash flow was always a good thing. They would always be cash flow positive. Because each quarter they were getting more and more revenue. As long as that kept happening then they were able to bootstrap themselves up with outrageously low prices. And their investors were getting returns because the stock went up, not because the company was a strong company in a market in a sense.
I actually I published a blog post a few years ago pondering whether Amazon had been abusing power from the beginning, but escaped prosecution because they used low prices to do it and that which takes us back to a fundamental belief in the Department of Justice: low price equals healthy market. I think that one’s worth talking about because the more I work, the more I think that the low-price market is a market is dying. Once you reach a point where prices are always low the market is either a commodity market (like fuel oil or gas or electricity) or it’s a dying market because nobody wants it. There’s not enough activity to drive significant investment and interest in the market. So I think that this idea of low price is wrong. One last thought on that is, OK, so where did that come from? It comes from traditional economics which are based on commodities so all the traditional economic equations are entropy equations from physics, I believe, that assumes fundamentally that you’ve got only so much and that it has got to decay to a best price, and that best price has to be low. And while that’s true in commodities, it’s not true many other places. That’s a problem with the U.S. antitrust law. It started with the right idea, which is prevent abuses of power, but has been sidetracked into some specific ways of defining them.
Shahin Khan»»»
Why is it the case in commodities? Because quality is pretty fixed and like it is what it is?
Doug Garnett»»»
Yeah, I think if quality is pretty fixed and you’ve got people competing with fundamentally the same quality product there’s a natural way that it levels out… And JP’s probably going to correct me a bunch here because he’s looked at this a bit more than I have. But anyway, that’s my fundamental sense of it. Yeah, that’s the fundamental equations. And then you’ve got people coming out of complexity in economics. Everybody shakes their head and goes, oh my God it’s a problem because sometimes that’s true and a lot of times it’s not.
Shahin Khan»»»
The other thing that comes across to me as I hear you guys talk about the finances and the complexity of like managing those numbers etc. is really the importance of what you were saying Doug a couple episodes ago on how marketing and mathematics and finance really are pretty well blended. So really the advice to all the marketing practitioners who might listen to this is like don’t be afraid of numbers. Don’t be afraid of equations. Just like delve in and it’ll really make you a better marketing person. Because at the end it really is about the of analysis that we just heard you guys provide with the margins and the competitiveness and what like the complexity is real.
Doug Garnett»»»
I’m a curmudgeon when it comes to metrics because they get abused so badly. But that’s when they’re used as goals. Right? The minute a number becomes a goal it has changed considerably. But, in fact, numbers give us tremendous power to understand. They can help us understand what’s going on give us the ability to help other people see it. There’s a lot of value to them. It’s just we also abuse them in business a lot.
Shahin Khan»»»
That’s right. If it’s measured, it’s gamed.
Doug Garnett»»»
So do you want to correct my economics at all, JP? Or elaborate on them?
JP Castlin»»»
No. I mean I think you’re broadly speaking correct. But my caveat would be that most of the at least neoclassical economic theories do come out of physics… But you end up with calculations that are not necessarily representative of the actual world… It’s all calculations and numbers and very fancy maths and it’s all very tidy and beautiful. But they make sort of fundamental assumptions that just don’t hold up. For example, the ability to pre-state all dated continued Goods. What that means in in sort of plain language is that they think that they can pre-state what the price of a bushel of wheat on a Wednesday in Oregon when it rains a week after the Boston Red Sox have won the World Series where that will be 100 years in advance. And you go, well if you go back 100 years and then some, what is the likelihood that someone would have been able to predict the price of a secondhand iPhone on eBay. They wouldn’t. It’s literally impossible, right? We can go into reasons why… But what we have to remember when we use formulas and numbers and whatever else is that they represent reality—they’re not reality itself, if that makes sense. And as long as we do that, I think we’re fine.
One of the things I really didn’t like when I was in law school was this incessant jab that lawyers were somehow bad with numbers. (And for me that was weird because I’d studied at the Swedish equivalent of the MIT; I’ve done theoretical math and stuff. So I found that slight provocative.) I think people say the same about marketers. It is self-defeating and a self-fulfilling prophecy. They go, well we don’t understand numbers or we have KPIs, but you know and then you end up with all kinds of platitudes and bad calculations and they don’t understand the basics of business strategy or how you calculate the stuff that I mentioned: your margin, for example. And then what ends up happening is that marketing isn’t taken seriously by the of the organization. So you need to be financially literate. You need to have some sort of baseline training, I think, if that makes sense.
Shahin Khan»»»
Yeah, absolutely. I think if you want a seat at the table you need to qualify to have the seat at the table.
Doug Garnett»»»
I wanted to come back a little bit, if we can, to something that’s been circulating here since the beginning of our conversation, but we haven’t called out, which is that a fundamental reality in a complex situation is we cannot predict the future. If you sit down and look at business planning, it’s all predicated on the idea we can predict the future well. We do A then B happens, then we do B and C happens. And then it might split into two options at that point but there’s a lot of idea behind it that we can see a very long way down the road and that having seen that way, we can plot out how to get from here to there as if on a map. When in reality, as we do business, a tremendous amount of what is going to happen remains hidden in the fog of doing business. And a great deal of what does happens can even be accidental. I was doing some writing on hiring people. The reality that when we go out to hire at any point in time, that a company goes out to hire, no more than maybe 5 to 10% of the people that might fit a position will be available. So the company inherently starts with a limitation and it’s accidental which ones are available and which ones aren’t. And the company can take steps to try to groom and attract, but the reality is it’s an accident who’s actually interviewing and who’s actually there. And as companies we make wise choices with that. But we can’t deny the accidental part of what happens.
Shahin Khan»»»
The randomness.
Doug Garnett»»»
The randomness! I could probably get vilified for this at the right business meeting, but fundamentally there’s a lot that you can’t predict. And I think in what JP was talking about with strategy and strategic planning. That’s one of the problems in strategic planning is it assumes we can know what’s going to happen with the price of a bushel of wheat after the Celtics win a game in Oregon on a rainy Monday. Well obviously, you can’t. Statistics help us somewhat because they wash out little bits of noise and help us get some steadiness, but not everything works in a way that statistics are effective. There’s a lot of unusual things that happen that you can’t predict that way. So I think it’s an important part out of complexity. JP and I have talked quite a bit about this challenge.
Shahin Khan»»»
That’s excellent. Let’s talk about strategy and change.
JP Castlin»»»
In the known universe. There are two fundamental laws, right? Well, there are three if you count the fact that it doesn’t matter how good you are at something. There will always be a 12-year-old Japanese girl who can do it better. But beyond that, you’re looking at two fundamental laws. The first one is that resources will always be finite—the law of finite resource. It doesn’t matter how successful or rich or whatever you are. There will always be finite resources. And the other law is the law of continuous change. The world that we live in is one of perpetual change. Always has been, always will be. And so the key to strategy to—well I suppose—life, in a way, is balancing these two things. And the problem is that they’re not necessarily linearly linked, and there a bunch of tradeoffs between them. So if we become really good at managing finite resources—in other words we become efficient—that means we lose our ability to adapt.
And we see this all the time in complexity in nature. Rory Sutherland has one of his favorite examples, the beehive, which I’m for sure you’re familiar with and maybe your listeners are too. But for those who aren’t, basically bees communicate via what’s called a waggle dance. They shake their tails a bit and that tells the other bees where they can find food. But about 20% of bees completely ignore this and this used to drive bee researchers insane because they thought over the 20 odd million years that bees have been around there would have evolved what one might call be compliance officers that ensure that people stuck to the plan and there’s enough nectar collected for the Q3 forecast. But they just do something completely different. And the reason why of course is that if we just focus on the food that we know where it is—if we become efficient—essentially if you optimize the process—then if there’s a surprise something happens to that source, we are fucked. So we need people who go out and do the other stuff. However having said that, if all the bees go out at random they won’t be able to bring back enough food to sustain the hive. Right? So in other words if we put all our money into efficiency, we’ll become brittle and we won’t be able to adapt if something happens we’re fucked. But if we put all our money into adaptation we won’t have enough resources. So you need to balance those two things. And I think that’s going back to this idea of adaptive strategy. I think I’m talking about adaptive strategy from very personal sort of philosophical standpoint. It’s the view of strategy that I have with my co-author Steve McCrone. It’s adaptive strategy, about balancing those two things.
Shahin Khan»»»
Right on. One thing I have experienced is, you’re running a marketing department and you’re super-efficient because you’re you don’t have a lot of resources… But then you lose resilience. It’s like an engine that has no provision for anything going wrong. And then the moment something goes wrong, then you’re like totally hosed.
JP Castlin»»»
Yeah. A good example of this… Were any of you guys traveling, was it Christmas 2022?
Shahin Khan»»»
I did.
JP Castlin»»»
Were you flying Southwest?
Shahin Khan»»»
No.
JP Castlin»»»
For those who aren’t familiar with the story, what happened was there was surprise in the form of weather change. Right? So the weather’s really bad and as a result the sort of the computer system that Southwest Airlines was using to synchronize all the various workers that just broke down. And as a result people were stranded and it ended up costing the company upwards of $1.2 billion. And the conclusion that many people have drawn from this is that, oh it was because the system was old. And yes it was, but the problem was because of the finite nature of resources and the brittleness of systems. You’re talking about a system with end points; you have your confidence envelope and then something happens outside of that. And all kinds of reliable systems eventually fail. It’s the idea of if you had a newer system then I might have been able to handle that thing but if something worse had come along there’s no guarantee that would have worked, and so on and so forth.
One of the examples I use the most that I think a lot of people are familiar with is the Fukushima disaster. Basically, they had the seawall. Along came a big wave and they went, oh okay so we need to increase the level of the seawall so that we can withstand the highest waves that have been. And then another higher wave comes along. And then we get the Fukushima disaster. So all these kinds of systems have breaking points. We need to sort of understand that these exist and we need to increase resilience and we need to do mitigation and all kinds of things so that, and I think going back to Amazon, I think this is what they do really well. They can lose money in their e-commerce thing, but they make money in total from all the other stuff. Most companies don’t have the other stuff, so they just lose money and then eventually they die. They don’t become Amazon, if that makes sense.
Shahin Khan»»»
Yeah, right on.
Doug Garnett»»»
I wanted to jump in too because I think there’s another example that many of our listeners might have run into, around stuff like Google. Because one of the hidden brittleness in marketing is the degree to which we all become dependent on these vendors like Google, Meta, the places we’re buying our advertising or getting the bulk of our business through. I had a client who was getting about 25% of their business from one referral source and one day Amazon reclassified them as a bad place, not a good place, and he lost 25% of his business overnight. And that was a hidden thing. I think that’s one of the weird things in the Internet marketing world is there are some hidden dependencies that we do not have control over and that can bite us, and that require that we think about how to be more resilient. We’ve seen it on Amazon where they’ve stopped emphasizing small players, which was their start. And I’ve heard from a lot of people who are frustrated with that because they based their entire business strategy around Amazon and Amazon changes its strategy. And when you’re up against somebody of that size you don’t have any ability to influence it. So you’ve got these weird resiliencies. It doesn’t even have to be the natural disaster like a Fukushima. Absolutely those will happen, but even some of the things that happen we assume the system is going to keep working the way it works, but these tech companies for example have the ability to say no I’m changing my policy, we’re prioritizing search differently, or whatever it is. I hear a lot of stories from people about how they’ve been hurt by those things, not quite as bad as my client that lost 25% of his business overnight.
JP Castlin»»»
I think that’s a rule that is sort of widely applicable. If you apply to, for example, automation, which is the big thing at the moment with the rise of AI. The idea is so if you take retail, for example. You automate your warehouse logistics processing for example. Right? The idea is you automate the manual processes. OK. So that makes us more efficient, however we can’t really trust these systems full out because, again, they fail. So we still need manual processes. We still need maintenance, upscaling, updates. But then you have to start thinking about—exactly to your point—do we just use the one system essentially putting all our eggs into a basket run by someone else? Or do we use many systems and then risk them not being able to speak to one another? And not only that, but what we see is, what Hankins and I call Value Chain Vampire. So you have all these various apps and tools and whatever else that individually claim to increase efficiency, but when you add them all together actually it comes at a surplus cost. So again, idea—the rule, if you will—is applicable across the board pretty much.
Shahin Khan»»
Yeah. So we could do a cartoon, which we didn’t do up front.
Doug Garnett»»»
The cartoon of the week has a board-like meeting, everybody looking formally dressed, nicely sitting around a table… and the comment is “we need to develop a long-term strategy to achieve consistent quick fixes” … I will say my first thought was it lays out one of the classic quandaries about quick and strategy of can strategy work quickly but there’s a lot more to it as we dig into it.
Shahin Khan»»»
My reaction was that it sounds like it’s like a dumb comment that it shouldn’t be made, but then my view was that well hang on a second, maybe that’s not a bad request. Maybe we do need a strategy that gives us that sort of agility. But now, JP, since again you live this sort of stuff, what is your take?
JP Castlin»»»
I mean my take on it is similar to yours. I don’t think it’s a bad idea at all. Because if you work with a proper adaptive strategy you’re not necessarily bound by time. And what I mean by that is again adaptive strategy is about a shared understanding of success and whether we’re heading in the right direction at the at the right speed and time doesn’t necessarily factor into that. The reason why I think time factors so heavily into strategic planning is partly because people want to make sure that are we actually fulfilling or hitting our goals or whatever else. But I think a large part is also because it creates recurring revenue for the consultant. But again if you have this idea of movement then you can do, what Dave Snowden calls, you can adhere to the Frozen Two Rule, which is to do the next right thing right so you can do the quick fixes provided that they’re coherent to the overall direction. And the intention is, does this move us in the right direction? The right speed? If you do that, I think you’re fine. The problem with not doing that is you ignore all the small problems and then eventually something big happens and you’re screwed. And maybe that summarized the entire podcast in this idea of robustness versus resilience, and planning versus adaptation, and so and so forth.
Shahin Khan»»»
That’s excellent. And as you know from our pre-call email exchange I thought this episode would be, so why does this not work in practice?
JP Castlin»»»
Exactly.
Shahin Khan»»»
Alright, so thank you, Doug, JP, thank you for your time. I know with the time difference it’s like pushing late evening on a Friday. Really grateful for your time as always. Such a delight
JP Castlin»»»
Oh thank you. It’s been absolutely my pleasure and yeah hopefully be able to come back sometime in the future.
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