Many successful entrepreneurs have ignored conventional strategic planning processes. One reason for this is that strategic planning assumes that strategy formulation is a linear calculus based on drawing a line through past and present performance to determine an organization’s future. Strategic planning requires a stable environment, and the modern business environment rarely shows signs of being a “steady state.” Strategic thinking has replaced strategic planning as the new watchword, and the new lexicon includes such terms as core competencies and the resource-based view of the firm.
Strategic thinking in a turbulent environment requires understanding that environmental changes are non-linear. They are created by interactions among a myriad of complex systems. Profound knowledge about each system is held by the communities of practice operating within that system. Extracting profound knowledge is no simple task because a significant portion of this knowledge is tacit and, therefore, may not easily be isolated and explained.
The ability to identify complex interactions across systems is complicated further because communities of practice rarely extend beyond system boundaries. Because tacit knowledge is often isolated in one system or another, significant interactions across systems may go unobserved. Strategic thinking, therefore, becomes an exercise in grappling with tacit complexity, a combination of tacit knowledge and complexity theory.
This article seeks to explain the concept of tacit complexity as a way to encourage moving strategic thinking from the conceptual level into practice. Tacit knowledge and complexity theory will be discussed, and then combined. Practical examples will be offered to aid understanding, and possible roles for appearing insane and luck will be noted.
Tacit Knowledge is Valuable Yet Elusive
Two types of knowledge exist, explicit and tacit. Explicit knowledge can be transferred through written means without interpersonal interaction. Tacit knowledge, on the other hand, is gathered through personal experience and is not easily expressed in writing. An individual may not know that he or she possesses tacit knowledge until called on to use it. Tacit knowledge is typically communicated through personal interactions.
Tacit knowledge-based routines are held at what has been referred to as the automatic stage. The first learning stage, the procedural stage, is when new routines or procedures are learned as distinct steps, as a checklist, recipe, or instruction set. Two or three distinct steps are combined into single and fluid actions in the second learning stage, the compilation stage. For example, the behaviors of turning a light on, and checking to see that it is on, are combined into one fluid process. The compiled procedures are further combined into one, integrated routine in the third learning stage – automatic learning. Individual steps and combinations of individual steps within a routine are not consciously considered. The routine is conceptualized as a singular action such as tying shoes or riding a bicycle.
The difficulty of transferring tacit, or automatically-held, knowledge can be demonstrated by asking an adult to instruct another adult on how to tie shoe laces, especially if the one giving directions cannot see the one tying. Both participants know at the automatic level how to tie the laces yet both can become frustrated attempting to transfer the knowledge. Denying visual cues increases the reliance on the instructor’s explicit knowledge. The steps to tying ones shoes were learned at the procedural stage as a child, they have become compiled over time, and now are embedded within an automatic routine.
Expertise about organizational and environmental systems is gained through similar processes. Users and managers learn the individual process steps, integrate those steps into compiled sets, and then assimilate the tacitly-held system knowledge. W. Edwards Deming referred to tacit knowledge as, “profound knowledge,” and suggested that it lies between “the known and the unknowable.” Transferring tacit knowledge requires personal interaction between the teacher and the learner. Nonaka & Takeuchi have pointed out that such interaction relies on socialization and exchanging conceptual and practical knowledge.
Complex Systems Reveal Underlying Patterns
James Gleick has described how complexity theory has emerged over the past forty years as a means to explain complex interactions that create apparently random outcomes. Complexity theory’s central thesis is that the outcomes are not random, but are non-apparent patterns produced by system interactions. An example is illustrated in Figure 1.
The data appear to be random, fluctuating between 85 and 112 with no apparent pattern. However, a pattern does exist. The data represents the day of the year for Easter Sunday between 1987 and 2002 (Table 1).
|Year||Date of Easter Sunday||Days Since Start of Year|
Easter Sunday is determined as the first Sunday following the first full moon after the vernal or spring equinox. As a result, Easter Sunday is determined by the interaction of three systems: solar (vernal equinox), lunar (full moon), and historical (the Julian calendar which places Sunday as the first day of the week). This interaction produces an apparently random distribution (Figure 1) unless the underlying systems and their interaction are understood.
Tacit Knowledge Can Expose Patterns
Strategy has been viewed as the search for economic rents (Rumelt, Schendel, & Teece, 1991), a definition that focuses on outcomes rather than process. A more process-based view of strategy based on the previous discussion could be that strategy is the search for emerging patterns of system interactions not previously apparent that can be leveraged by a firm through application of resources within the environment.
Combining the above process view of strategy with the previous discussion on profound and tacitly-held knowledge suggests that recognition and definition of interaction patterns among systems requires profound, tacitly-held knowledge of multiple systems. Entrepreneurial leaders knowledgeable about multiple systems may be able to detect emerging non-apparent patterns. However, they may not be able to communicate those patterns because recognition is based on tacit knowledge. As a result, these leaders must struggle with tacit complexity.
An illustration of tacit complexity is the genesis of Southwest Airlines. Herb Kelleher, the airline’s founder, was an attorney in Texas who often flew to Washington, D.C. on business in the late 1960s. Kelleher found the high cost of air travel at the time frustrating and the close relationship between the airlines and the federal agency charged with regulating the airlines troubling. The Civil Aeronautics Board (CAB) determined which airlines could service which cities and set the fares airlines could charge. Existing airlines could keep the fares artificially high because of their close working relationships with the CAB and the CAB’s reliance on information supplied by existing airlines for decision-making.
Kelleher recognized that the CAB-regulated airline industry was governed by interactions among the legal, economic, and highway systems. For example, airlines flying interstate routes were subject to CAB regulation, a commercial flight needed to fly between city pairs that would provide sufficient traffic to make the flights profitable, and the interstate highway system nearing completion at the time made driving between cities less than 300 miles apart a realistic alternative if airfares were prohibitive.
As a lawyer, Kelleher also understood the limits of federal regulation. The CAB regulated only interstate air travel, not flights within a state. Few states had multiple cities that were sufficiently distant and had the requisite population to support scheduled commercial flights. However, one exception was Texas. Dallas, Houston, and San Antonio are large cities between 200 and 300 miles apart.
Kelleher recognized the emerging pattern being created by the interaction between federal regulations, the economy, and the highway transportation system. Sensing that an opportunity was being created by the interaction among these systems, he founded Southwest Airlines. Kelleher’s ability to recognize the pattern was partially based on his tacit knowledge of federal regulations.
The halls of business success are filled with other examples of entrepreneurs who recognized emerging patterns because of tacitly-held knowledge. One recent example is Fred Smith, founder of Federal Express, who recognized emerging patterns in postal rates, postal service quality, information technology improvements, and business transaction speed. Another example is Stephen Case at America Online who noticed that many consumers were interested in using the Internet, that many consumers were simultaneously overwhelmed by new technology, and that changes in computer programming and bandwidth would allow him to develop an interface that would allow these users to access the Internet without becoming particularly proficient with computers.
Apparent Insanity and Luck
Entrepreneurial leaders who recognize emerging or non-apparent patterns are seeing what most in society do not see. A normal reaction in a normative society is to classify those who see what others do not as “nuts” or “psychotic.” The perception that a strategy is insane may create temporary barriers to imitation that allow the initiating firm to secure path dependencies in an emerging market. Southwest Airlines embraces its reputation for being “nuts” in its corporate strategy, and CEO Kelleher has co-authored a book entitled Nuts to press the point.
Entrepreneurs do not always recognize all of the emerging patterns before the fact. Sometimes, luck intervenes. Bill Gates at Microsoft did detect an emerging pattern in micro computing. However, Gates did not detect the central role that an operating system would play in defining the new industry. Microsoft became the provider of an operating system as a means of selling application software rather than as a core business. IBM refused to buy an operating system and insisted that Microsoft license MS-DOS on a per user basis. The result was lucky for Microsoft and unlucky for IBM.
Communication Yields Insight
The strategy process in a dynamic world can be viewed as a confluence of tacit knowledge and complexity theories. Strategic options reside within complex interactions among systems. Profound knowledge of these systems and their potential for interaction with other systems is often tacitly held. Formal and informal communication among those who hold tacit knowledge can bring new insight and understanding to an organization in ways that significantly shape strategic thinking.
For more on tacit knowledge, see Teambuilding for Competitive Advantage by Scott Sherman and Miriam Lacey in the Fall 1999 issue of the Graziadio Business Review.