In 2000, Cisco was selling into severe shortages. Customers who expected partial fulfillment ordered more equipment than they needed. As orders and backlog surged, Cisco and its suppliers expanded supply in response. By the time that supply arrived, the shortage had eased, protective orders disappeared, and apparent demand collapsed.
A Theory of Enterprise Coherence
Companies are dumber than the people who run them.
How intelligently a company behaves is a systems property, and systems can be improved.
A company is stupid to the degree it acts contrary to its own purpose.
Most stupidity stems from misreading reality.
At enterprise scale, it’s really hard to read reality.
Much enterprise stupidity has recurring diagnosable causes that make it addressable.
AI improves some aspects of enterprise cognition, yet plays a limited role in making companies smarter.
Small improvements to enterprise cognition compound into large increases in value.
Smart people, dumb companies
Given the informational scale, logistical burden, and dynamic complexity involved, it is remarkable that large organizations function as well as they do.
Many dumb behaviors result from smart people and competent systems doing the rational thing from each local perspective and producing something stupid at enterprise scale.
Sony entered the digital music era with the Walkman franchise, elite consumer electronics capability, and its own major music business. Sony’s hardware business pushed toward connected devices and hard-drive players. Sony Music wanted tighter control over copying. In trying to placate both, Sony built products around proprietary formats, restrictive rights management, and cumbersome software that made digital music harder to load, move, and use.
Both Cisco and Sony misread reality in consequential ways while intelligent people inside each company acted rationally on what they saw.
Definition
Rational incoherence describes behavior that makes sense locally even as it creates materially worse outcomes for the enterprise.
The stupidity does not necessarily belong to any person, function, system, or individual decision. It emerges in how the parts compose, and in how that composition misfits the reality that the enterprise is navigating.
Calling a company smart or dumb only makes sense relative to what it is trying to accomplish. Every enterprise is purposive, and purpose does not contain its own path to realization. Reality hands the organization a set of opportunities and constraints.
How well the organization navigates reality is the deciding factor for how well it realizes its goals.
The following chapters show what enterprise cognition is made from, how it works, and why it’s often dumb. Once we understand it better, we’ll be ready for targeted interventions that make a company smarter.
Cohere to reality+
When an enterprise behaves in dumb ways, we call that incoherence. Coherence is the degree to which a company’s behavior fits the reality governing achievement of its purpose. Incoherence is misfit behavior.
Internal consistency is a legitimate but narrower definition of coherence. Internal consistency asks whether everything inside a system agrees. Coherence, as we define it in this work, asks whether the system fits reality to achieve its purpose. A company can be internally consistent and still incoherent with reality.
- If I need to get somewhere in a hurry and I slash my own tires, that’s incoherent.×
- If I take the wrong freeway, that’s incoherent, even if I believed it was the correct one.×
- If I take the fastest route and a drunk driver crashes into me, that’s still coherent, because randomness exists.✓
Coherent action gives us our best shot at the outcome we want. It never guarantees it.
Incoherence may be obvious, visible only in hindsight, or never visible at all. In many everyday human situations, incoherence tends to be blatant. In enterprise, it can be really difficult to spot, especially in real time.
Coherence is judged at the enterprise level. For example, if a department advanced its own agenda while materially harming the company, that would be incoherent.
Read the (reality) room+
Companies pursue growth, margin, resilience, service, safety, capability, and strategic freedom.
Relative to its aims, the enterprise must: read opportunities, obstacles, and options; discover or construct a viable path; commit; act; observe results; revise when new evidence warrants.
At every stage, the enterprise works from some treatment of the reality bearing on its purpose.
The different ways a want can meet reality
Possibility. How achievable something is. Reality may make a want easy to fulfill, difficult, conditionally possible, or impossible. It may afford one viable route, several, or none yet visible.
Legibility. How obvious the route is to a goal. A viable path may be obvious, partly visible, hidden, or discoverable only through inquiry, experimentation, or invention.
Probability. How likely something is to work. Even a known and viable path may be uncertain to deliver. Possibility does not imply certainty.
| Want | Possibility | Legibility | Probability |
|---|---|---|---|
| Scratch an itch on your belly | Easy | Obvious | Near-certain |
| Make a three-pointer | Achievable | Obvious | Somewhat |
| Improvise the CO₂ scrubber adapter during Apollo 13 | Achievable within severe material constraints | Non-obvious; a viable configuration had to be constructed from the materials on board | High once developed and tested |
| Get an object out of a tree branch slightly out of jumping reach | Achievable | Several obvious routes | High |
| Lift a 2,000 lb boulder with brute force, alone | Impossible | Obvious | N/A |
| Execute a movie-style heist | Conditionally possible | Illegible initially; clever criminals may devise a path | Low; many ways to go wrong |
| A fly buzzing against a windowpane with an open window nearby | Impossible via current route; easy via alternate route | Obvious to an observer, not to the fly | Current route: none; adjacent route: certain |
At enterprise scale, reality is distributed and largely illegible. More on this below.
Which parts of reality matter to achieving a want?
Reality is vast. Almost all of it is irrelevant to any particular purpose.
The enterprise has to exclude nearly all of reality while retaining what actually bears on realization. That boundary is not static. Conditions that matter little at one stage may become decisive later, and action itself can change which conditions matter.
We do not decide what is relevant. Reality does.
Three questions matter most:
- Which parts of reality actually bear on realization?
- Which of those parts can we identify and know, and which remain unavailable?
- Given those limits, how much confidence is justified?
If you want a glass of water in your kitchen, the relevant reality is narrow: the faucet, the glass, whether water is available, whether it is drinkable. The orbital velocity of Pluto and the mating patterns of the Tibetan yak can be ignored with confidence.
If you want a successful hiking vacation in the Dolomites, the boundary expands. Weather, airline logistics, trail conditions, lodging, health, transportation, and other conditions matter. Some are knowable in advance. Others remain uncertain. You have some sense of a set of factors that matter, and you have a larger sense that a whole lot of other conditions matter, even if you don’t know what those are (known knowns, known unknowns, unknown unknowns).
Now suppose you want to get home from the grocery store and make dinner as quickly as possible. You choose the checkout line that appears fastest. The person ahead then needs a complicated return and a price check. A condition that mattered to your objective existed, but it was not knowable from the information available to you.
Good judgment requires excluding enormous amounts of reality without excluding something consequential. It also requires knowing what is knowable, recognizing what is not, and redrawing the boundary when new evidence makes the old one obsolete.
The brainless company
The enterprise has no brain. There’s no main processor of company intelligence. No technology is the company’s cognition. And its humans aren’t it, either. Yet the enterprise clearly manages to make decisions, take action, and carry on.
So where does the thinking happen?
Nobody thinks for the company
The CEO doesn’t think for the company. The company thinks through the CEO.
The same is true for every role. Human intelligence does not sit above the company and think on its behalf. It is one part of what the enterprise thinks with.
By the time something reaches an executive, the enterprise has already thought it into shape. The executive does not receive reality raw, but as something the enterprise has already predigested. Then the enterprise uses the executive to keep on thinking.
The company uses you+
From the company’s perspective, people are part of its machinery. The enterprise uses human intelligence as one component of its massive thinking capability.
You’re being used by your company, even if you are the CEO. Your role and function are necessary ingredients to its cognition.
And while the company is using an executive to think, the executive can change how the company thinks. Executive roles occupy that privileged place in the machinery of cognition that can alter the machinery itself, and can even alter how the machinery thinks about the machinery.
In that case, you’re being used to improve enterprise thinking so that the company can more efficiently use you in pursuit of its goals.
Since your compensation and career improve from the company’s improvement, you should be happy to be used in this way.
Nobody knows what the company knows
No one could inventory everything an enterprise knows. Its knowledge is distributed across people, systems, operations, history, and relationships. No single view or catalogue contains it.
The company’s knowledge does not fit inside it.
The company thinks beyond its formal boundary via suppliers, partners, customers, and external systems.
Some of what the company knows isn’t known anywhere.
A company contains many facts that live in a specific place and can be looked up. A company knows other important things by inference and interpretation only. These things might not be captured and stored, even though many of the supporting facts are.
People inside the company know things the company doesn’t.
Private human thoughts are not enterprise cognition until they participate in the cognitive machinery of the company. The enterprise’s people know many things that the enterprise should know, but doesn’t.
The company has everything required to know something, and still doesn’t know it.
The company possesses every input for an important inference to occur, but the inference never occurs.
Unintelligent BI+
Business intelligence is not enterprise cognition. A company’s immaculate dashboards might propagate stupidity and blindness if they’re not calibrated to the reality that matters. Dashboards sit downstream of assumptions, selections, representations, and other predigested cognition. They can make a good picture clearer, or a bad picture more convincing.
At its best, BI participates in enterprise cognition while remaining one component of it.
Some thoughts weigh 20,000 pounds
Can a CNC machine think? No, but the company thinks through it. The machine doesn’t need a mind, because it’s already part of the company’s cognitive apparatus.
An enterprise has no separate layer where thinking happens. It thinks through the same distributed system through which it acts. Physical operations are part of that system.
Improve how the company thinks, and you improve how it acts.
Thinking is action, but not all action is thinking.
All enterprise cognition occurs through enterprise activity. Much activity happens that delivers no cognitive value.
For activity to participate in cognition, something about it has to become available to the company’s thinking. It needs to be measured, observed, captured, compared, interpreted, inferred from, or otherwise carried forward.
A person walking 50,000 steps a day across a factory floor generates activity. If those movements are recorded and used to expose wasted travel, the same activity also participates in cognition.
A plant reverses two production steps and throughput jumps. That can remain nothing more than an operational event. Or the result can be noticed, interpreted, carried forward, and used to change how the plant sequences work in the future. The same action has now contributed to what the enterprise knows and how it operates.
Enterprises contain enormous amounts of unharvested cognitive potential in activity that never becomes available to cognition.
It is like paying for lessons you never learn.
Coming soon
Further chapters will explore the implications of enterprise cognition and how it can be improved, including:
- Why companies have selective blindness
- Why companies are really smart at some things and really dumb at others
- Why spotting patterns of stupidity is the path to making an enterprise more intelligent
- Best practices for enterprise cognition
- The role of AI in enterprise cognition, and where it can’t help
Purpose, representation, and distributed cognition
- Herbert A. Simon, The Sciences of the Artificial (1969; 3rd ed., 1996)
- F. A. Hayek, “The Use of Knowledge in Society” (1945)
- Edwin Hutchins, Cognition in the Wild (1995)
- Richard L. Daft and Karl E. Weick, “Toward a Model of Organizations as Interpretation Systems” (1984)
- William Ocasio, “Towards an Attention-Based View of the Firm” (1997)
Systemicity, configuration, and dynamics
- Herbert A. Simon, “The Architecture of Complexity” (1962)
- Paul Milgrom and John Roberts, “Complementarities and Fit: Strategy, Structure, and Organizational Change in Manufacturing” (1995)
- Rebecca M. Henderson and Kim B. Clark, “Architectural Innovation” (1990)
- John D. Sterman, “Learning in and about Complex Systems” (1994)
- Ron Adner, “Ecosystem as Structure: An Actionable Construct for Strategy” (2017)
- Jens Rasmussen, “Risk Management in a Dynamic Society: A Modelling Problem” (1997)
Learning, adaptation, and path dependence
- Peter F. Drucker, “The Theory of the Business” (1994)
- Wesley M. Cohen and Daniel A. Levinthal, “Absorptive Capacity: A New Perspective on Learning and Innovation” (1990)
- Chris Argyris, “Double Loop Learning in Organizations” (1977)
- James P. Walsh and Gerardo Rivera Ungson, “Organizational Memory” (1991)
- Donald T. Campbell, Assessing the Impact of Planned Social Change (1976)