In this blog post, I’ll propose a new way for companies to understand, frame and create long-term strategies. The new way is based on identifying core premises behind important strategic choices.

There are two different approaches how companies implicitly or knowingly approach their core premises. Either they consider these premises to be changeless invariants, in which case I call the company an “Angel”, or the premise itself is a discontinuity, in which case I call the company a “Demon”.

Invariant is a function, which remains unchanged when a specified transformation is applied. Finnish elevator manufacturer KONE — an Angel — believes that urbanization that drives their market size will continue no matter what.

Discontinuity is point at which a function is not continuous. Between 2008 and 2013, electric charging station startup Better Place — a Demon — raised 850 million dollars of venture capital and established a chain of 400 charging stations in Denmark, Israel and California on the premise that electric cars are just around the corner.

I want to emphasize that the division to Angels and Demons is not the same as the division to incumbents and startups: both can be both. But to be successful, a company needs to understand if it’s an Angel or a Demon, because the outcome of the selected role is totally different set of strategic choices. Further, companies fail when they categorize themselves in a wrong way.

Amazon’s core premises and its path from hell to heaven

The core premise of a company is a basic business fundamental, e.g. “people need elevators” or “trains are a useful means of travel”. Angels are companies whose business is based on premises that are considered invariant: their strategic choices on their core premise reflect that they consider themselves immutable. For example, Amazon is an Angel as their strategic choices are to provide cheap products and vast offering, delivered as fast as possible. Thus, their premises, such as

1) Customers want cheap products,

2) Customers like large selection of products, and

3) Customers want them as fast as possible

led them to make a series of strategic choices from establishing a huge delivery network to developing new dynamic pricing mechanisms. These are good core premises: they are unlikely to change.

However, earlier Amazon had been a Demon. Demons are companies whose core premise in business is a discontinuity. Amazon — especially Jeff Bezos himself — betted the whole company on a discontinuity in retail markets that digitalization would break the traditional value chains and purchasing habits. They were right on the bet.

Companies are, and perceive to be, either Angels or Demons

For example, the Finnish elevator manufacturer KONE is basing their business on a core premise that urbanization especially in the US and Asia is an invariant trend. Thus, they perceive themselves as a typical Angel company. But it’s possible that the premise is incorrect. Automated cars, electric skateboards and enhanced virtual reality interactions could, at least in theory, reverse the urbanization trend. This would make the path forward for KONE much more challenging, especially if they don’t realize that the trend is changing.

Dream analysis answers the most important question for Angels

The most important question for all the Angels is “Are we really an Angel”? Luckily, this can be tested by testing the coherence of their leaders’ mental business models and by writing out their core premises. I have been prototyping ways to do this by separating and modeling the perceived business instead of the actual business for years. I call this approach “Dream Analysis” because the analysis is used to make companies wake up and potentially end dangerous sleepwalking. The name also sounds nice. Currently, I’m looking for possible cases to try the approach with curious business units. Interested? Email me!

Why “Dream analysis”? The current strategy paradigm for both big and small companies emphasizes heavily the decision-makers intuition. Crucially, this intuition operates in the perceived model of business.

Thus, it is very important to distinguish the actual business and the actual business environment, aka “the real world”, from the mental (business) model constructed in the head of the CEO. By conducting a thorough — numeric! — analysis and modeling of the perceived business models and mental operating environment, we can get a holistic idea of how the business is perceived to be operating. This allows us to identify and correct severe management biases before they cause major harm, and to learn if the management hypotheses are beneficial in the first place! Further, by making this analysis we get a list of core premises. Merely the list of core premises can help us to challenge them. Later on, getting a scientific panel or a group of startup founders to estimate the likelihoods of a discontinuity can provide important additional information.

In “Dream analysis”, all the decision-makers of a selected business unit or corporation are guided through a series of detailed questions about the kind of decisions they make in their work. A special emphasis is put to understand the expected numeric outcomes of these decisions in different situations. I’m able to draw a detailed causality map based on their answers to the questions such as “what is your goal?”, “what decisions you do to get to this goal?” and “what is the anticipated effect of your decision?”. The detailed causality map shows how different managers actually perceive the operation of the business unit.

An example of perceived business model from actual case

Moreover, numeric values and the estimated functions (in input-output terms) for each operation are described to create a dynamic model. To emphasize once more, this model does not describe the business, it describes the perceived model of the business. After the model has been built, a simulation is made to show how the model corresponds to different changes in the environment. Then, it is fruitful to have another conversation on how the simulation and discussions have changed the perceived model of business. The first model typically demonstrates multiple management biases and increases the certainty on whether the company is an Angel or a Demon. Seeing it in action helps companies to realign their decision-making and perception of the environment.

Demons attack with radical contingencies

A Demon is a company characterized by its core premise that is a discontinuity. A discontinuity is required to disrupt a market. Because the future is not deterministic, demons have more tricks in their pockets than mere “hoping for the best”. On top of finding new contingencies, companies can work to enable their emergence, sometimes in radically aggressive ways.

The strategy process for a Demon starts by discovering variants that others consider invariants. A good variant is something that seems to have stayed the same for a long time, but actually hasn’t. Think CDs, or Euro currency.

Then, one needs to identify discontinuity points. What are the circumstances that a common eurozone would seize to exist?

Third, it is important to think how one can benefit from the potential discontinuity if it realizes. Here it is good to follow the guidelines of Nicholas Nassim Taleb and try to identify concave curves where the losses are limited (in the case of no discontinuity) but wins (in the case of discontinuity) are unlimited. For example, one could found a company that sells new digital currency systems to countries’ central banks. And if one wants to go all the way, the digital currency systems are sold in the worthless national digital money: the seller only gets the benefit if the system is taken to use. Then the profits are only realized if the contingency plan is activated, but then again there is no upper limit to the price when selling, as the money is worthless in that moment of time.

By constructing this system the company has already made the discontinuity much more likely. If such a system would not exist, the central bank might not have any way to even consider a euroexit. But now, with their brand new plan B, they might very well go about it in one of the countries. From the perspective of the buyer, this is called the contingency planning fallacy. From the perspective of the seller, it’s “creating your own success”.

Thinking about the things that don’t change

It’s bizarre how little foresight thinkers think about the invariants and delays (which are essentially the same thing). Nevertheless, there are some thumb rules for finding things and aspects that really won’t change. Think about a teacup: you can construct it from a different material, but it requires quite a strange and scalable idea to make them as a concept to vanish. Likewise, there are ways to identify things that would on the first thought seem to be very immobile but actually might not be. An example of this could be trams: can they compete against the automated transportation?

One very good rule, again from Nicholas Nassim Taleb, actually, is that the shorter time the phenomena has been around, the more likely it is to disappear. Finland is more likely to vanish from the map than France, Springles more likely to disappear from the menu than potatoes.

Another helpful approach is to look at delays. Even if there would be a groundbreaking innovation to replace a teacup, it would take quite a while for it to replace all the teacups of the world. It takes some 15 years on average to replace most cars so even if there would be a quick adoption of automated vehicles (which I find unlikely), there will be old gas-driven Toyotas in the streets 30 years from now. It takes some 100 years to replace most buildings, and much longer to replace all the buildings. Given a long enough timeline, almost everything is replaceable. Both eating as a cultural thing, and healthcare as a concept can be reasonably argued to disappear during the next decades — it might not be plausible or probable, but it is possible.

Key takeaways

Angels are companies whose strategy is based on (implicit) core premise that something will remain the same. Demons are companies whose strategy is based on the core premise that something will change drastically.

Because it is crucial for Angels to understand what are their core premises and biases in their perceived model of business, I recommend them to conduct a routine “Dream analysis” as described broadly above. This analysis should be conducted with outsiders and its purpose is, quite bluntly, to avoid disruptive collapses. Even if this kind of analysis clarifies the business as a perceived business and helps especially companies who think they don’t have any threats, it is a useful tool also to companies who know their operating environment is changing but are not able to react to that. There are currently many industries that are as delusional as the whole media industry was for the best part of the last 20 years.

For Demons, to enable a strategy that is based on finding, exploiting and enabling radical contingencies I recommend a seasonal radical contingency analysis, also described broadly above. This kind of analysis can be helpful to Angels as well.

Last but not least, it is important to identify which role a company perceives to have — an Angel or a Demon — but also challenge that assumption from time to time. This is because in a long enough timeline all the Angels fall and some of the Demons may rise.