Culture Eats Strategy: Personal Incentives Set the Menu

“Ideally all this should work beautifully and harmoniously…[E]verything is planned and anticipated in advance, there is simply no way for shortage to occur…[T]his isn’t the market, where the producers work without knowing the precise size of society’s needs. And in the end, if a shortage somehow occurs owing to force majeure, isn’t it possible to correct the plan?  The answer is simple to the point of banality: no, it is not possible.” — Prof Nikoli Shmelev and Vladimir Popov, Senior Soviet economists, on a hierarchical command economy, 1989.

One of the largest experiments in controlling a complex environment with top-down planning was the communist Soviet Union. A planned economy seems more plausible than the chaos of the markets, but history has demonstrated that markets better serve the system as a whole. So, why do militaries believe that a top-down hierarchy will be the most efficient resource allocation structure? And how does this structure influence and incentivise individuals further down the structure to innovate and adapt?

Adam Smith was one of the first to successfully describe the complexity of economic systems, famously describing that the self-interest of individuals creates a coherent network. Smith’s ‘invisible hand’ is an emergent quality, as the system allocates resources more efficiently and effectively than individuals could plan. As part of a King’s College London Masters by Research, I sought to understand bottom-up adaptation within a military context, looking at individual actors and their incentives as the basic building block. The current COVID-19 crisis has to some extent limited the data gathered by the study, but several challenges appear when considering barriers to innovation, adaptability and agility.

Challenge 1: The Explore – Exploit Dilemma.

Computer scientists have simple and well-defined meanings for the words explore and exploit. To explore is to gather new information and to exploit is to use the information that you have to get a known good result. In life, we can intuitively see that there is a balance to be struck. You cannot have a favourite restaurant without trying a few first, or a favourite song without listening to a range of alternatives. But if you sit back, relax and enjoy a ‘Greatest Hits’ album you are using that exploration to create an enjoyable moment, to computer scientists you are exploiting.

Psychologists investigating this phenomenon have demonstrated that a reduction in the time horizon leads people to focus more on exploiting, rather than exploring. A tension may therefore develop between individuals in the military, with a tour length of two to three years, and the system that seeks to provide National Defence for an infinite future. While there are nodes of Defence specifically designed to explore, such as DSTL, individuals throughout the system may over-focus on delivering known tasks with known resources. Systemically, this may limit innovation and adaptation.

Challenge 2: Incentivising Collaboration versus Competition.

Since 2000, the dominant theme within the strategic management of private companies has evolved from ‘Outcompeting’ to ‘Cooperating’. This change in strategy has seen the emphasis move from ‘the firm’ to ‘the network’, and a shift in organisational objectives from ‘possessing the most valuable resources’ to ‘orchestrating effective innovation eco-systems’. Analysts suggest that this evolution explains the superior performance of High-Tech companies that have embraced the philosophy. Within this paradigm of co-operation, human resources comprising of capacity for communication and collaboration are a vital ingredient.

The battlefield provides an extreme incentive for military personnel to collaborate, lives are on the line, but a more delicate balance exists within home headquarters. Career competition and the reporting and promotion mechanisms can have an insidious effect. Our research indicates that all personnel behave differently in front of their reporting officers, and the disproportionate impact that reporting officers can have on the career of an individual influences behaviour. There is an environment of co-operation and collaboration within the military. Still, analysis suggests that it is a fragile balance and a small number of actors can disrupt the equilibrium. This dynamic has the potential to incentivise behaviours counter to the overall advancement of the organisation.

Challenge 3: Sacrificing Resources for Efficiency – Resource Maximisation.

Actors, especially entrepreneurs, within a market economy are driven to be profit maximisers. At its most basic, profit is a function of maximising income and minimising outgoings. Maximising profit therefore incentivises efficiency, where actors drive outputs for the minimum inputs. While this may seem to be about money, it is actually about allocation of the underlying resources.

Bureaucracies have no function to maximise profit, so the system incentivises individuals to maximise resources to consolidate power and influence. Our research supports the argument that actors within a military behave as resource maximisers, rather profit maximisers. Participants stated that commanders at all levels would prefer to take on additional tasks, instead of giving up resource. Where commanders do sacrifice resources, it was either: temporarily; because a commander anticipated indirect benefits; or because a commander was pre-empting an inevitable cut. By resisting the release of resources, nodes on the network inhibit adaptation and allocation of resources to their most efficient uses.

Challenge 4: The Separation of Knowledge and Power.

A command hierarchy concentrates the decision-making power to allocate resources within a small number of people, and this creates a fundamental problem: the separation of knowledge and power. The Soviet experience demonstrates that central planners cannot possibly be experts on the full range of resources under their control, and this creates issues when making judgments.

Simon Herbert’s theory of Bounded Rationality has emerged as an essential concept within Behavioural Economics to explain the limitations of human rational decision making. Individual humans cannot obtain, store and process perfect information on a complex scenario. Bounded rationality assumes that complexity is the cost function that prevents the actor from selecting the best course of action. If a hierarchical system concentrates evermore complexity onto ever fewer individuals, it follows that the human limitations of bounded rationality will become more and more stretched. Accessing the knowledge and cognitive processing of many people therefore offers an alternative, one that could combat the complexities of the modern world. If the system can harness that processing power in a controlled manner, it would expand the limits of organisational Bounded Rationality beyond individual humans.

Part 1 of our blog series discussed the nature of money as a motivation, a mechanism for exchange and a metric to standardise judgements. Prices are the key connections that allow a market economy to adapt and evolve, allocating resources to tasks that provide the most utility to the system. A hierarchical system may have seemed the most plausible to the Soviets, but a market system had the emergent qualities of innovation, adaptation, agility and efficiency. Organisational transformation from a bureaucracy of resource maximisers into a network of market-based decision-makers could benefit the military via a similar process. And this does not necessarily mean allowing individuals within the military to trade with each other using the Pound Sterling. Technologies such as Blockchain offer the possibility to have a ledger recording all Defence resources, while providing a secure exchange mechanism to transfer assets. This could provide the links of a network, transforming the hierarchy into a decentralised polyarchy.

Critically, the current system forces junior and mid-level commanders to advocate, rather than act, and focus on delivering today over adapting for tomorrow. This limits innovation, adaptation and agility. This research indicates that military personnel are motivated by making a difference and supporting the staff they lead. Empowering them to act rather than advocate is an incentive in itself. Part 3 of our series explores how the MOD might position itself to empower individuals and harness a self-adaptive network. It would require a bold strategy and change in the culture of what it means to be in command. Individual incentives hold the key. Peter Drucker famously said that “culture eats strategy for breakfast”; economists show us that when faced with complexity, individual incentives set the menu.

This essay is part 2 of 3 of this series.