Seeing what’s next is hard, even when you’re visionary. In strategy planning, managers often look to the past for situations of worst-case scenarios—that is, the most extreme record of past events. They then use it to “stress test” whatever strategy that’s being debated. What gets lost in these debates, of course, is logical consistency. The worst-case scenario, by definition, when it occurred in the distant past, exceeded the worst case of that time.
In other words, the planners have already assumed away any black swan events. All swans were assumed white until people saw a black one. Those are rare events people can’t imagine.
The reverse is also true. Any successful person has had their lucky break, and you certainly want yours to arrive. Same thing is for companies. The iPod was Apple’s lucky break; AWS was Amazon’s. And those big surges are never planned. But here’s a warning. “Make sure that the probability of the unacceptable (i.e., the risk of ruin) is nil,” wrote the legendary investor Ray Dalio.
So, let’s take a hard look at one headline and branch out two opposing views. Such an exercise illustrates not only 1) the importance of having a strong belief but also 2) having a paradoxical willingness to overturn one’s own belief system.
Here’s the question: China is cracking down on its tech giants. Is it stifling innovation or leveling the playing field?
Branching out to two opposing views
Beijing’s regulatory crackdown on tech giants has so far triggered a $1 trillion selloff of Chinese tech stocks. The government’s repeated fines against tech giants have included Alibaba, Baidu, and Tencent for violating antitrust laws. It forestalled the IPO of Ant Group and derailed Didi’s expansion plan. And it has put new restrictions on overseas listings by Chinese companies.
The reasons for the sudden crackdown are unclear. Speculation for its reasons is all over media, from the state-run Global Times to The New York Times. But let’s contrast the two opposing views on the prospect of China’s economy, or more precisely, China’s entrepreneurial scene.
Some suggest the regulations are all about power. The central government is reminding people who drives the country’s agenda. From this view, commentators believe, for example, the crackdown on ride-hailing firm Didi over supposed data security concerns was a mere pretext. It is a prelude for tighter control over China’s thriving tech sector. That triggers the resigning and stepping aside among tech CEOs. These billionaires seek to avoid Beijing’s glare.
Because government cannot innovate by fiat and innovation is a game of chance, the theory goes, in its fervent clampdown, China is “killing its tech golden goose.”
That’s a dim view. But then, you could have a completely different perspective.
A country’s long-term economic strength lies in its ability to rejuvenate—that is, the ability to create new players to disrupt the old. Precisely because innovation cannot be predicted, it cannot rely on a handful of large companies. Japan once had a cluster of vibrant industrial bases. But because it lacks a vibrant venture capital (VC) scene to match, the country was capable of being disruptive only once. The moment companies like Toshiba, Hitachi, Sumitomo, Mitsubishi, and Fujisu ran out of steam, the country entered a long slump.
Compared to the US, its early wave of Silicon Valley disruptors—Intel, HP, Compaq—rose up just at the time when its East Coast counterparts—DEC, NCR, IBM—declined. And then you have Google and Facebook and others that have become the darling of today’s internet world.
From this view, commentors argue that the crackdown on China’s tech giant is a very good thing. First, the funding for early-stage Chinese startups has not slowed. Below is the total number and value of VC investment among China startups as reported by The Information. Over the past months, some $9.3 billion poured into 470 China-based startups.
The policy implication is, VC money is moving toward alternative areas, away from e-commerce, ride-hailing, and online entertainment. Instead, deal flows are going into semiconductors, biotechnology, and industrial robots, where commercial risks are higher and require “patient capital.”
The net result of the crackdown is the resetting China’s VC industry. They will channel more funding toward sectors that the late-stage private equity or stock market can’t.
Twenty years ago, when Alibaba and Tencent were still in their infancy, software and internet companies were a high-risk, high-reward endeavor. Entrepreneurs really didn’t know how to start software companies. The strategies for growth were unclear. There wasn’t much infrastructure in place to support business-building. Investors weren’t sure what metrics mattered. No one knows how to pick winners. That’s original purpose for VC investment.
Today, software investment is mainstream. Enormous flows of capital are financing software development. Without some external shocks, money will always go into the more predictable, high-payback projects and thus deprive capital to new areas ready to take off. One can argue the unintended consequence of the crackdown on tech giants is funneling new growth to the underdogs. It’s leveling the playing field. You cut down the branches of a few big trees to make room for the undergrowth. And the theory would suggest that such an outcome is critical to ensure the innovation engine of a country doesn’t get stuck.
What this analysis highlights is the impossibility to predict the exact outcome of key events. For investors, that’s when they diversify and don’t make one single bet. That’s also why smart companies always create options.
Why a strong viewpoint is needed even when it’s untrue
To create options, as I’ve argued here before, you need a strong viewpoint. Whichever scenario you believe in, you generate a vivid sense of the nuance of how this will come to life. And the more turbulent and the more unpredictable an industry is, the more important it is for a company to have a firm perspective about how the future will play out. Without such, you can’t even allocate resources. You can’t build new capabilities, nor create any options as a first step. Allocating resources requires substantial logic and rationale.
But then again, you also have to continuously update your mental models. That’s exactly how super forecasters behave. People who can forecast with better accuracy than experts and pundits don’t have more access to insider information, nor are they more intelligent. But they are open-minded enough to keep learning new information and updating their mental models and, in turn, their predictions when additional datapoints come along.
So, it doesn’t matter which scenario you believe will play out in China’s startup scene. But you must be willing to adjust your beliefs. Troubles plague those who are proudly pro-Beijing or China hawks.
This idea of personal beliefs can also be observed at the industry level. You can observe such dynamics on a 2×2 grid and compare that across sectors. It speaks volumes.
There are industries that have historically been stable and slow-moving. Then, there are sectors that are fast-moving and unpredictable. IT is the fruit fly of industries—its lifecycle is short, and companies get displaced all the time. As a result, those who survive are the ones that make bets and pivot fast.
To do so, successful IT companies—think about the tech giants—possess a strong viewpoint with a strong sense of certainty about how that future will play out. But at the same time, they are eager to learn. They are eager to take in new datapoints and to revise their belief systems.
What’s more interesting, of course, is to drill down into an industry and compare companies that are facing new disruptions. Disney and HBO come to mind.
When conviction meets mental flexibility
More than other traditional entertainment companies, Disney has made growth in streaming a top priority. Its flagship streaming service, Disney+, has quickly become one of the main challengers to streaming leader Netflix. As of March 2021, Disney+ had 103.6 million global subscribers, around half of the number at Netflix, which has been in operation for more than a decade.
Disney also owns Hulu. Its subscribers are paying more than twice than Disney+ for the service. Most impressive perhaps, is the latest quarter shows Hulu turning profitable. That helps halve the operating loss for Disney’s streaming division. For the streaming market, that’s a major achievement. Remember, Netflix took on $16billion debt in less than a decade to build up its content library.
Meanwhile, other big entertainment companies have also jumped into the streaming market. AT&T’s WarnerMedia launched HBO Max, and Comcast’s NBCUniversal launched Peacock. The difference here, taking HBO as an example, is that most companies couldn’t achieve a sense of clarity even internally.
HBO, of course, is a nearly 50-year-old pay service that you could only get via cable or satellite until about 10 years ago. Then it built HBO Go, which was a streaming, on-demand version of HBO for anyone who got HBO through cable but wanted to watch it via streaming. HBO Now, another streaming version of HBO, was introduced in 2015 for cord-cutters who wanted HBO but not a cable subscription.
Then, HBO Max came, which was “HBO and much more.” Except no one knows what that means. All the while, consumers already have HBO Go, HBO Now, and HBO as existing choices. When that confusion finally came to an end, the company had already missed out on the subscriber surge during the COVID-19 lockdown. The total number of people who have signed up directly for HBO Max is about 12 million, around one-tenth of Disney’s numbers. Perhaps in desperation, it’s offering a discount package called HBO Max with ads. Talk about nonstop confusion.
What’s the takeaway? To commit to learning, you need a conviction about the world to inform what to learn. But once you start learning more, you must let go of your pre-existing beliefs. Danish philosopher Søren Kierkegaard said, “Life can only be understood backwards, but it must be lived forwards.” The best forecasters don’t just forecast. They revise.
Thank you for reading—stay well.
P.S., To make tough choices, leaders must have a conviction about the future. And yet, they must have a sense of mental flexibility to make sense of the counter evidence, and when needed, pivot away from the original plan. Have you seen a company capable of doing so? How do those leaders behave? Share with us your thoughts. We love hearing from you.
This article has been co-authored with Angelo Boutalikakis, a Research Associate at IMD’s Center For Future Readiness.