If you like systems thinking, you’ve probably heard that the optimal amount of fraud is non-zero.Footnote 1Patrick McKenzie, “The optimal amount of fraud is non-zero” (opens in new tab). The argument is that at a certain point, the cost of eliminating the next dollar of fraud costs more than the dollar saved, and businesses naturally land here because they already internalize fraud loss.
Where else might the optimal amount of a bad thing be non-zero? Strategy frameworks look like a good candidate, but the way they actually operate is different from what you might expect.
Inverting frameworks
In a previous post (opens in new tab) I talked about the strategic value of interrogating the metaphors you live by to identify where they’re most distorted. My suggestion was to imagine the strengths, weaknesses, and conditions of possibility that arise from the logical inverse of your situation. Now I’d like to test this idea against management strategy itself, which is its own kind of metaphor and is therefore susceptible to lensing effects.
Let’s start with Prahalad and Hamel’s core competencies. In “The Core Competence of the Corporation”, they frame success as a coordination problem by asking what a firm does well uniquely, not necessarily within a business line but across lines. To the authors, competencies boil down to providing broad potential market access, contributing to perceived customer benefits, and being difficult to imitate.
This is the standard reading. But what if we flip this conception of the org on its head? Imagine an organization with literally no core competencies, proficient only in common, easily copied areas. Surely such a firm would utterly fail to differentiate itself. But there’s actually a trivial counterexample that interrupts the metaphor. Picture an organization that has access to no markets beyond its own and that is trivially easy to imitate. This sounds a lot like a public utility! Your energy utility does precisely one thing, is entirely uninterested in competing in other areas, isn’t directly downstream of most market incentives, and probably does things that most industry competitors could match on a technical and operational level.
You may protest the fairness of this point, since utilities exist due to statutory fiat, not because they’re necessarily any good at the job. But that causal logic is actually backwards: the mandate creates the need to provide a good enough service, and in this context even a mundane service is unintuitively valuable. Your water utility serves you a plentiful resource in a completely imitable way, but the plenitude of water is precisely what makes it valuable to provide at cost and at scale.
You might also object that this inversion suggests only that entrepreneurs shouldn’t try to start a business that supplies a town with water. And that’s probably true! But again, our real point is that the inverse of a traditionally “successful” business can be consistent with success too — it just depends on how you define your market. And this illustrates the real underlying condition, that the core competency model rests on a shaky assumption about your boundary conditions. Success can be selected for by political factors, not just economic factors.
Flow asymmetry
So frameworks are a bounded metaphor for organizational success, but we shouldn’t exchange meaning between metaphor and analysis.Footnote 2If you do, your bank might resurrect a 2008-era value-at-risk model or your shoe company might start selling AI compute. This line of reasoning suggests that frameworks are unhelpful, or more charitably, that they’re overused in strategic contexts. But I’d like to argue in favour of suboptimal frameworks — or at least explain why they exist at your natural equilibrium point.
The obvious reason why you might want to use a bad framework analogizes McKenzie’s fraud case: better frameworks impose a coordination tax that could exceed the marginal increase in strategic value. Let’s take VRIO:Footnote 3VRIO (opens in new tab) on Wikipedia. on some level it doesn’t matter that this framework produces “wrong” intuitions about utilities if you can’t agree with your colleagues about how to improve upon it. What parts of VRIO still work — can we just apply VIO, or is it RIO, or maybe one-half of each? If you need to write an HBR article just to figure out which fractions of a framework to use, then you’ve wasted everyone’s time. So agreeing on someone’s VRIO analysis — no matter how much we might privately question the framework’s fitness for purpose — saves us the tax by maximizing the surface area of our shared assumptions.
But this is only true to a first approximation.Not surprisingly, “vague is actually good” is a tough sell for a systems thinking blog. Early in law school, I questioned the value of adopting Driedger’s ruleFootnote 4The purposive approach (opens in new tab) on Wikipedia. or the purposive interpretation approach on the basis that it papers over language that’s essentially contestable. And why would anyone prefer incrementalist, judge-made common law when the neatly mathematical and dispute-preempting civil law exists? To some extent, these objections are valid! While precision has a cost that my common-law-advocating readers may point to — maintaining a civil code requires heavy machinery — it also confers significant benefits. And the cost of that precision is displaced onto two substantially resourced branches of government. This is a structurally neat solution because the population that would otherwise bear the cost of vague laws actually elects the legislature, which closes the accountability feedback loop. Things are a bit worse in your organization. There are the coordination-tax costs to precision that we discussed above, sure. But more importantly there are costs to vagueness, and they’re systemically trickier to solve because of flow asymmetry. When strategists make a vaguely articulated decision, your operational teams scramble and your analysts write a post-hoc justification for the play. But the strategists don’t feel any of this; at their level, vague language retains optionality and can be reinterpreted without cost as consultancy,Whence many of the suboptimal management strategy frameworks we’ve been discussing! whereas a more precise framework provides no such direct benefit. (There are certainly second-order benefits to clearly articulating your strategy à la civil code, but these eat into your time, and it’s unclear if they’d offset the loss of the first-order optionality that the vaguer strategy unlocks.) And unlike in the civil law, there’s no accountability loop to speak of, because an institution that bears the precision cost actually shifts it back onto those who set the framework. The suboptimal framework calcifies due to the asymmetry of cost and benefit flows. The catch is that both pressures we’ve discussed — between political and market effects in our utility example, and between precision and the cost of framework maintenance — both encode the same accountability mechanism. Business framework developers don’t gain much by controlling for non-market-captured players because public choice theory is a separate domain, for better or worse. And a big-picture strategist doesn’t directly benefit by handing the analysts a more precise playbook. In both cases, the party who’s best placed to improve the framework isn’t accountable to the party who would benefit from the fix. This is exactly the gamed counterweight problem (opens in new tab) that I wrote about, just in another field. In both cases we’re missing an arm’s-length institution with the right incentive structure to preempt path-dependence toward the bad-strategy equilibrium.
So if the framework owner pays the cost of imprecision, the optimum is non-zero. If they don’t, the optimum only looks that way. The systems fix has many names — call it foresight or environmental scanning or a strategy red team or a VSM S4Footnote 5Viable system model (opens in new tab) on Wikipedia. — but the name doesn’t matter as much as its placement and what it’s accountable for. Only relocating who pays for framework wrongness can shift the equilibrium toward zero.