Strategic Canaries

by Tom Nagle

CanaryAnimal sentinels, such as canaries in coal mines, provide critical warnings to people in vulnerable positions. Because they more quickly succumb to the danger in the environment, they can give crucial time for people to escape when things have gone horribly wrong. Since innovation is a process of evaluating available options, knowing when one option, or a group of options, should be abandoned. Innovation should be carried out with a strategy – a plan to generate long-term value for stakeholders in a rapidly changing environment.

Strategies should be built on theories about how that environment works – these theories capture our understanding of the relationships between the variable(s) we think we can control and variable(s) we are attempting to influence. A specific strategy is built around hypotheses that test how well we can control the relationships we posit in our theories with a given approach. If we are ineffective in influencing the relationship between our variables, hypothesis testing helps us save time and consumable resources and allow us to shift assets to more productive activities – such as trying to control a different independent variable that might achieve the desired result. Perhaps this is because we missed something important in the environment, but this error doesn’t invalidate our entire theory – only that specific application.

What happens when the theory we base our innovative strategy on is wrong? In other words, the entire set of hypotheses that we might develop to help us decide and shift between options is based upon an incorrect understanding of the environment. How do we distinguish an incorrect theory about how the environment works from an individual hypothesis that we failed to uphold? Strategic canaries may help.

Many strategies use some measures of effectiveness or performance. A measure of effectiveness assesses a plan’s ability to achieve some level of desired outcome. It is a measure of accomplishment gained per unit of cost paid. Naïve application of this concept may indicate to some that the willingness to bear high costs indicates that we will achieve a high degree of success. This can prevent a proper cost/benefit analysis.

A measure of performance identifies a pass/fail limit – a minimally acceptable outcome under a given set of conditions to be considered a “success.” This is one step better than only discussing measures of effectiveness – in a sense, it is a way of relating failure rate to an ability to achieve success. However, the minimal performance level is what takes center-stage – we are always invested in achieving what we set out to do.

The critical flaw in both of these, from the point of view of an innovative strategist, is that both of them have a “success bias.” If the use of either of these metrics point toward a degree of success in a strategy, the inclination will be to continue with the same approach. In a rapidly changing environment, however, it is critical to identify when things begin to go wrong, so we can start to develop a new hypothesis and engineer a new strategy. Enter the “measures of failure.”

To counter our tendency towards confirmation bias (wanting to find validation for our strategy, then finding it while discounting disconfirming evidence), then we have to have a “failure bias” at some point in the assessment process. Imagine you are trying to cross a river on a raft to land at a pre-selected point on the opposite shore. We can measure our effectiveness through the shrinking distance between our raft and the shore on the other side – our approach to crossing is creating the desired results. We can measure our performance through stating we want to be half way across within an hour – our approach is successful in relation to the resources (human energy) we are expending. A measure of failure will point out that you are drifting too far down the river to land at the point you wanted to. Maybe it’s because your specific approach – only paddling on one side – was incorrect. Maybe it’s because the environment wasn’t exactly what you thought it was – the current was too strong for the strategy taken. In either case, looking at a measure that has a failure bias can help identify when a new approach is needed.

Organizations interact with environments that are highly unpredictable and can’t be easily bounded. This is why strategies are necessary in the first place. In dealing with such a situation, a limited view of the system (looking for indicators of our success) can blind to the accumulation of undesirable effects. People are reluctant to acknowledge when they are wrong; it is human nature. It is difficult to admit your understanding of the world is fundamentally flawed. The process of innovation has to control for this.

One control should be identification of canaries-in-the-coalmine prior to implementation of a strategy; things that make it clear to all stakeholders when they occur that catastrophe is imminent and the organization is in need of new theories about the environment. These strategic canaries establish falsifiability criteria that will make it difficult to argue for the status-quo approach. It may be hard to identify the canaries that will succumb early enough to provide sufficient time to pull out. Perhaps it is easier to focus on things that might deteriorate that you can’t affect directly, and remove the temptation to “game” the system. Regardless of the approach taken, decision-makers must agree on the key indicator that points out the need to reevaluate their understanding of the environment so they can more quickly innovate.

So, strategists and innovators: what are your strategic canaries?

image credit: steve p2008

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Tom NagleTom Nagle is the author of the leading book on Pricing Strategy – The Strategy and Tacics of Pricing – currently in its 5th edition, coauthored with John Hogan and Joseph Zale. The book is currently available in nine languages. He has consulted and lectured worldwide on pricing and B-to-B marketing. His specialty is Strategic Pricing, particularly in B-to-B and Pharmaceuticals.

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