Aligning Risk Tolerance to Meet the Demands of Complex Strategic Problems

Earlier this year, The Strategy Bridge asked university and professional military education students to participate in our first annual writing contest by sending us their thoughts on strategy.

Now, we are pleased to present one of the essays selected for honorable mention, from Nicholas Drake of Stanford University and the United States Army’s Command and General Staff College.


The accelerating pace of global change is creating a level of complexity that many believe has the potential to overwhelm the ability of national security leaders to effectively manage strategic risk. When testifying to the Senate Armed Services Committee in July 2015, the Chairman of the Joint Chiefs of Staff, General Martin Dempsey, stated that he was observing rapid changes across the entirety of an already complex strategic landscape which was contributing to a global security environment he described as “uncertain as I’ve ever seen it.”[1] To effectively respond to this great uncertainty, leaders must engage in taking risks in order to develop and implement innovative responses to emerging challenges that will allow the United States to gain and maintain strategic initiative.

Gen. Martin Dempsey, as Chairman of the Joint Chiefs of Staff. (DOD photo)

Leaders in the national security community must remedy the incapacitating risk aversion which has permeated both the civilian and military ranks of the defense establishment if they are to successfully respond to the inherent uncertainty of future conflicts. Risk aversion stifles creativity, cedes the initiative to our adversaries, and presents a real, significant, and imminent threat to American national security. However, with the proper application of existing tools and an appropriate organizational comfort with uncertainty, strategic leaders can overcome the challenges posed by an increasingly complex world.

Risk in a Changing World

“U.S. defense strategists and planners must dispense with outdated strategic assumptions about the United States, its global position, and the rules that govern the exercise of contemporary power.”
—U.S. Army War College Study, "Outplayed: Regaining Strategic Initiative in the Gray Zone"[2]

The strategic advantages the United States has enjoyed since the end of the Cold War are progressively eroding in the face of a rapidly changing contemporary security environment. The extensive spread of newly developed technologies, while driving positive breakthroughs in many spheres, is serving to undermine American technical superiority and conventional military dominance. Persistent trends such as globalization, urbanization, and climate change, combined with an ever evolving geopolitical landscape, have ratcheted up global complexity to an extent that threatens to exceed our collective ability to anticipate future events or even clearly understand present circumstances.

Against this backdrop our adversaries, both state and non-state, are working to put the United States at further strategic disadvantage by operating under the threshold of traditional armed conflict in domains in which they hold a comparative advantage and by manipulating or circumventing the rules based order which has shaped national security policy-making since the end of the Second World War. As past strategic assumptions continue to be invalidated by emerging circumstances, senior leaders and strategists inevitably will need to grapple with increasing uncertainty in the future. In these uncertain situations, the effective calculation and management of risk becomes essential as policy makers and military leaders weigh how to best apply the nation’s finite resources to mitigate threats and exploit opportunities.

The basic process of managing risk is a relatively simple one and is applied by leaders at every level across the national security apparatus. Organizations employ analysts to examine relevant facts, indicators, and assumptions in order to provide decision makers with a best estimate of potential threats and opportunities. These decision makers then assess how these threats and opportunities impact the organization’s mission. From this they determine where to take prudent risks to either mitigate potential hazards or exploit emerging favorable conditions.[3] If done properly this process can help organizations efficiently employ their resources to achieve their desired ends and, more importantly, gain and maintain the initiative despite uncertainty. While the process becomes challenging in the face of determined adversaries and the friction inherent to complex and dangerous operating environments, organizations typically rely on some variation of this simple formula in response to uncertain circumstances. This simplified construct of managing uncertainty and risk is common not only across the military but also a wide variety of organizations, particularly in the business world.

If military commands, national security policy-makers and business executives follow a similar process to assess and manage risk, what is it that separates those organizations that do so effectively and those that fail? A primary discriminator can be found in the organization’s risk tolerance. Risk tolerance represents the collective willingness of an organization to assume deliberate risks in order to achieve their strategic objectives. As to be expected with a hierarchical organization such as the military, this tolerance is highly dependent upon individual leaders within the chain of command’s comfort in coping with uncertainty.

In addition to the power of senior commander or leader influence, organizational culture can substantially shape the willingness of individuals to assume or refuse risks.

Historical examples of leaders adopting the improper risk tolerance for their circumstances abound and stand out as case studies on how both hubris and indecision can lead to failure. In addition to the power of senior commander or leader influence, organizational culture can substantially shape the willingness of individuals to assume or refuse risks. Organizational culture is the shared patterns of behavior that are reinforced by the various institutional incentives, norms, and values, both professed and manifest, of the organization.[4] Subtle differences in leader preferences and organizational culture can and do produce significantly different actions when the organization is faced with the challenge of making decisions about risk. Tailoring these elements which shape risk tolerance to align with strategy can be the difference between success and failure, in both the business world and the battlefield. 

While there have been substantial advancements in the American military’s ability to collect and analyze information in the past several years, the growing complexity and constant friction of armed conflict ensures that uncertainty will remain an enduring element of the nature of war. This will perhaps be most pronounced in land warfare, where the complicated interplay of technology, physical environment, and human terrain present a uniquely wicked problem for strategists, even before considering the challenges posed by determined and adaptive foes. Leaders in these complicated ground conflicts will continue to be called upon to take calculated risks in response to uncertainty in order to enable their units to seize the initiative from their adversaries and exploit fleeting opportunities when they appear.[5]

U.S. Army Chief of Staff, Gen. Mark A. Milley, talks with Observer Controllers at the U.S. Army National Training Center, Ft. Irwin, Calif., November 6, 2016. (U.S. Army Photo/SFC Chuck Burden)

To meet these strategic demands the U.S. Army would be wise to forge an organizational culture, consistent with the concept of mission command, “where mutual trust and the concomitant willingness to accept prudent risk govern.”[6] Despite the impending demands of future conflict and the Army’s emphasis on the importance of embracing risk in the face of uncertainty, General Mark Milley, Army Chief of Staff, recently stated that the Army has become “over-centralized, overly bureaucratic, and overly risk-averse,” a product of an intensely compliance-based culture.[7] This reluctance to assume risk can be poisonous at every level in the force in varying degrees, but perhaps most critically at the senior leader level, where it is in stark contrast to the organizational culture demands of developing and implementing innovative strategic solutions to the complex problems presented by the emerging security environment and has the potential to gravely compromise trust in the chain of command.

Aligning Strategy and Culture: The Congruence Model

“Because innovation involves unpredictability, risk taking, and nonstandard solutions—factors not easily managed by formal control systems—the effective management of culture lies at the heart of organizational innovation.”
—Michael Tushman and Charles O’Reilly, Winning Through Innovation

In recent years the accelerating pace of global change has not only created an increasingly complicated global security environment but has also yielded numerous disruptive market developments that presented even well established and successful firms with a grim ultimatum: innovate or die. According to Harvard Professor Michael Tushman and Stanford Professor Charles O’Reilly, who have focused their collaborative work on the challenge of innovation, many of these once thriving companies failed to adapt at a disturbingly high rate, despite having access to substantial resources and talented personnel.[8] Their research provides some useful tools for examining why so many firms fail to respond to market changes as well as advice for organizations in the midst of the trials of change. While direct application of insights from the world of business to the military and national security strategy realm is not always relevant or even possible, the cases presented by Tushman and O’Reilly do offer some pertinent lessons about organizational culture and risk, particularly for the U.S. Army as it develops and implements strategy in response to disruptive changes in the national security environment.

Their basic theory of what separates those firms that successfully adapt to disruptive changes and those that fail is an alignment, or congruence, between the organization’s strategy and four key building blocks—critical tasks, formal organization, people, and culture. This congruence model can be used as a tool to examine the relationships between these elements to determine if they fit together in a mutually supporting fashion to implement the organization’s strategy. Where these elements are not aligned, one can then determine the root causes of performance gaps, identify obstacles to achieving strategic objectives, and subsequently develop means to bring them into congruence.[9]

Tushman and O’Reilly present the case of a German chemical plant that was losing market share to competitors with lower production costs and struggling to develop new products, despite being a well established facility with a highly trained work force. As the management attempted to turn the plant around they found that the formal organization, a strictly regimented seven-layered bureaucracy, and the culture, characterized by strict compliance with protocols and stove-piped channels of communication, were not aligned with the plant’s goal of increasing integration across its various functional areas to reduce costs and identify potential new products. The plant’s formal organization and culture had long served to create an efficient and safe environment, but as the management started on the path to turn around the plant’s losses these elements were no longer properly aligned with the demands of the business’s strategy and thus required revision.

...two essential ingredients in promoting creativity are 1) support for risk taking and change, and 2) tolerance of mistakes.

Tushman and O’Reilly further examine how successful firms leverage their organizational culture to create the innovative environment needed to respond to disruptive change. They hold that the two essential ingredients in promoting creativity are 1) support for risk taking and change, and 2) tolerance of mistakes.[10] Often well established firms find that many of the aspects of the organizational culture that help make them competitive and profitable in the short term are in direct conflict with promoting the creativity needed for sustaining success over the long term. Most established businesses working to retain their market share and increase profits look to promote a culture which reinforces efficiency, stability, and compliance. However, when faced with disruptive changes, this organizational culture can also be resistant to change and risk averse; a critical incongruence between strategy and culture that makes many successful firms vulnerable in the long term to evolving market conditions. The challenge, Tushman and O’Reilly point out, is for established organizations and their leaders to become ambidextrous—capable of striking a balance between encouraging a culture which maximizes short term successes while also fostering the exploratory culture which embraces risk and failures to chart a new path.[11]

When one considers the United States defense establishment numerous parallels to the successful firms studied by Tushman and O’Reilly emerge. Since the end of the Cold War there are few forces which could challenge the U.S. military’s position as the dominant military power and President Obama, in his farewell address, went as far as to name it as “the greatest military in the history of the world.”[12] In its ranks are some of the most talented people the nation has to offer and it has longstanding systems that support everything from leader development to logistics. The military’s organizational culture, like a mature business, is largely oriented to maintaining this advantage in the short term. Like most of Tushman and O’Reilly’s business cases though, the defense establishment is facing numerous disruptive changes which threaten to undermine its global dominance which poses an important question. In the face of a rapidly changing security environment, is the U.S. military’s organizational culture aligned to support the risk-taking that will be required to support the development of innovative strategic solutions to tomorrow’s complex challenges?

Shaping Risk Tolerance for Future Armed Conflict         

“‘There are no silver bullets for this, only lead bullets.’… There was no other way out. No window, no hole, no escape hatch, no back door. We had to go through the front door and deal with the big, ugly guy blocking it. Lead bullets.”
—Ben Horowitz, The Hard Thing about Hard Things[13]

Attempting to predict the character of future war is a problematic undertaking, however recent conflicts have alluded towards some of the demands that will be placed upon leaders as they weigh decisions about risk. Adversaries that refuse to operate within traditional strategic and legal paradigms of war will present circumstances to decision makers which don't fit neatly into existing formulas for deterrence and reaction. These unclear situations, coupled with ambiguous response thresholds for emerging threats, can lead to a polarized risk dilemma where the only apparent options are concession or reactions that could trigger perilous escalations. This paralyzing position allows our foes to seize the strategic initiative and aggressively play a weak hand to achieve their limited or regional aims. To defeat this, American civilian and military leaders alike will need to strive to look at the world slightly askew to generate options to defeat our opponents, while also becoming increasingly comfortable with acting swiftly and decisively in uncertain circumstances.

An overly risk averse organizational culture that is in conflict with the demands of strategic innovation in this dynamic security environment could yield catastrophic outcomes. The issue is not a new problem but is a product of various stimuli that have, over time, shaped the Army’s organizational culture, in particular that of senior leaders, in a manner that is not aligned to meet the demands of modern conflict. Factors such as the extremely competitive promotion system, relatively narrow career paths to senior commands, reliance on technology, and emphasis on force protection and safety have helped the Army to be an efficient and effective fighting force in the past. These factors however, along with numerous others, have also contributed to an organizational culture that may profess to encourage innovation and prudent risks, but in fact drives leaders to tend towards avoiding risk and lack faith that reasonable risks taken in good faith will be underwritten by superiors when their bets don’t pay off. While many have lamented the many policies and systems that have contributed to this current state of affairs with respect to risk and the idea of mission command, it is perhaps more helpful to avoid this extended examination of Chesterton’s Fence and proceed to how the Army can form an organizational culture that is ambidextrous and aligned to meet tomorrow’s strategic demands.

Shaping an organization’s culture does not lend itself well to silver bullet solutions. Individual actions like a speech to senior leaders, an additional metric on evaluation reports, or a new class in the professional training pipeline are not enough on their own to shape cultural norms, particularly when the existing culture is deeply ingrained and resistant to change as many often are in well established organizations. If the Army and the broader national security establishment are to shift their organizational culture away from risk aversion towards a more balanced position in line with strategic demands, they must deliberately employ numerous simultaneous measures to achieve positive effects. These measures need not be expensive or sweeping, in fact it is more important is that they be targeted, consistent, and persistent—lots and lots of “lead bullets.”

Shaping an organization’s culture does not lend itself well to silver bullet solutions.

Charles O’Reilly identifies four primary levers for influencing organizational culture that the Army should employ to bring about change. First and foremost is aligning the words and actions of senior management to support the desired cultural outcome. Just as every military leader is under constant scrutiny from their subordinates, so too are executives and managers in the business world, and this constant inspection demands leaders be authentic in word and deed. Savvy junior leaders can detect hypocrisy and lip-service to a cause and will resist changes where they perceive a lack of commitment on the part of their superiors. The second lever is building systems of involvement which give individuals a stake in the cultural changes and ownership of the overall outcome. The third lever is clear, vivid, and relentless communication up and down the organization about cultural expectations of what is, and is not, acceptable behavior, especially when the desired behavior challenges the status quo. The final lever is establishing appropriate incentives to reinforce the direction of cultural change. This can be formal measures such as monetary incentives or accelerated promotion, but often times informal means, such as publicly praising teams that developed creative solutions even if they ultimately fell short of expectations, carry greater weight when influencing culture. Leaders must exercise these levers deliberately and consistently to counter risk aversion.

A comprehensive approach for the Army should strive to create an organizational culture which supports mutual trust up and down the chain of command and builds leader comfort with assuming informed risks. Organizational incentives should recognize and reward creativity and novel solutions to complex problems, even when they don't necessarily achieve their desired outcomes, so long as they are calculated actions, are earnestly executed, can provide lessons learned, and are within the senior commander’s intent. These incentives should span from formal and individual, such as favorable evaluation reports and awards, to informal and collective, such as highly publicized recognition of units that assume prudent risks in training or operations. In order to build a culture that is confident when dealing with uncertainty, training should be adapted to support the development of leaders who are comfortable with taking risks in order to accomplish their missions.

Integrating managing uncertainty and weighing operational risks into exercises in both professional military education and unit training has the potential to greatly increase both individual leader confidence and trust between various echelons of command. Also critical to reducing risk aversion in the Army is changing the way operational risk is communicated and approved within the chain of command. A methodical process similar in formality to the existing accidental and environmental risk used in training environments could facilitate a more clear sharing of information between the members of the chain of command as they seek to evaluate, communicate, and approve risks. This would have the added benefit of supporting the development of trust between leaders by introducing risk boundaries and providing both leaders with a means to frankly discuss the benefits of certain risks and what costs are acceptable given the strategic objective.

Aligning Organizational Culture Can’t Wait

General William Tecumseh Sherman (Wikimedia)

“‘Every attempt to make war easy and safe will end in disaster and humiliation.”
—William Tecumseh Sherman

Recognizing that conflicts in the future will be by nature difficult, dangerous, and filled with uncertainty, the United States Army would be best served by cultivating an organizational culture which champions audacity and innovation to meet the challenges that lie ahead. Failure to do so now could leave in place an organizational risk aversion which will be exceptionally tough to overcome in the face of an impending crisis, especially when considering the inertia these norms maintain in well established, successful groups. The United States Army has, when backed against a wall during wartime, proven itself an adaptable organization that is comfortable with assuming great risks to achieve their strategic objectives, but often at great cost in both blood and treasure. To minimize these potential costs steps should be taken now to bring about the slow turn of Army culture before a critical point is upon us. There is no foreseeable silver bullet solution to the problem of risk aversion, however earnest commitment to deliberate cultural changes from senior leaders in the Army could bring about an organization ready to face uncertainty and win.


Nicholas Drake is an officer in the U.S. Army and a student at the Command and General Staff College in Fort Leavenworth, Kansas. He recently received his M.A. from the International Policy Studies Program at Stanford University. The views expressed in this article are the author’s alone, and do not reflect the official position of the U.S. Government, the Department of Defense, or the U.S. Army.


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Header Image: Balancing risk (Zen Wallpaper)


Notes

[1] General Dempsey, Martin, “Hearing to receive testimony on the counter-ISIL strategy”. Testimony to Senate Armed Services Committee. 7 July, 2015. https://www.armed-services.senate.gov/imo/media/doc/15-61%20-%207-7-15.pdf 

[2] Freier, Nathan P. et All. Outplayed: Regaining Strategic Initiative in the Gray Zone. Carlisle Barracks, PA: United States Army War College Press, 2016.

[3] Army Doctrine Publication (ADP) 5-0, The Operations Process, May 2012

[4] O'Reilly, Charles. “Discussion of Risk Tolerance and US Army Culture." Interview by author. May 25, 2017.

[5] ADP 5-0, The Operations Process, May 2012

[6] Williams, Thomas.  “Mission Command Leadership and the U.S. Army” The Strategy Bridge. April 26, 2016. "https://thestrategybridge.org/the-bridge/2016/4/26/mission-command-leadership-and-the-us-army?rq=mission%20command

[7] Barno, David, and Nora Bensahel. "Three Things the Army Chief of Staff Wants You to Know." War on the Rocks. May 23, 2017. https://warontherocks.com/2017/05/three-things-the-army-chief-of-staff-wants-you-to-know/.

[8] O’Reilly, Charles A., and Michael Tushman. Lead and disrupt: how to solve the innovators dilemma. Stanford, CA: Stanford Business Books, 2016. p.4

[9] Tushman, Michael L., and Charles A. OReilly. Winning through innovation: a practical guide to leading organizational change and renewal. Boston, MA: Harvard Business School Press. p.58

[10] Winning through innovation, p.113

[11] Lead and disrupt. p.12

[12] President Barack Obama, "Remarks by the President at Armed Forces Full Honor Review Farewell Ceremony” January 4, 2017. https://obamawhitehouse.archives.gov/the-press-office/2017/01/04/remarks-president-armed-forces-full-honor-review-farewell-ceremony 

[13] Horowitz, Ben. The hard thing about hard things: building a business when there are no easy answers. New York: Harper Business, 2014. p.87

[14] Sherman, William T. Memoirs of General William T. Sherman.