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Every Great Business Person Has The Same Mental Model of Business

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This is a preview of the members only post An Extracted Tacit Mental Model of Business Expertise. It is also part of a series on business expertise.

If you’re a long time reader of Commonplace, you’re probably familiar with my obsession with tacit knowledge — the idea that certain types of expertise is locked up in the heads of experts, that they can’t really put such expertise into words, and that you should pursue techniques to acquire tacit expertise — methods like emulation, scenario training, and apprenticeship.

In my first piece in the series, I wrote:

It is not reasonable to wait for an expert systems revival, nor is it fruitful to expect CDM to be applied to your field, or for a Boyd-like genius to appear. We should act as if tacit knowledge were a fact, because it is more useful to think about ways to gain that tacit knowledge directly, instead of hoping for some breakthrough to make tacit knowledge explicit.

Over the course of writing this series, however, I’ve come around to the idea that it might be possible to extract tacit knowledge from the heads of experts around you. The turning point was my discovery of the ACTA paper, which teaches a radically simplified method for cognitive task analysis. (Cognitive task analysis, or CTA, is the set of techniques that Naturalistic Decision Making (NDM) researchers use to extract tacit mental models of expertise from the heads of subject matter experts).

That said, it’s nearly always more fruitful to mine the literature for already-extracted mental models of expertise. A few weeks ago, I learnt of Lia DiBello, an NDM researcher who specialises in the extraction of tacit mental models of business expertise.

DiBello’s findings are extremely compelling. She writes, in The Oxford Handbook of Expertise:

After several years using different methods, we noticed that highly talented business performers are very similar to each other. That is, they have decoded the domain of business much like chess masters had decoded chess. This led us to realise that —as a domain—business itself is an orderly closed system of relations between principles, and that so-called intuitive experts in business have an implicit grasp of this. If this is the case, it would follow that all highly skilled business experts should recognise each other and share a common mental model of these principles, although they may manifest differently in different industries. Since business has been evolving in recent years, this model would have to be very robust, running deeper than recent societal changes. (emphasis mine)

These claims sound ridiculous. A closed system of relations between principles? A shared common mental model of those principles? No way.

As a result of that chapter, I dove into DiBello’s publication history. This turned out to be relatively easy — I quickly learnt that DiBello has published a relatively small number of papers, especially when compared against the research output of some expertise researchers. Initially, I found this frustrating, but then I realised that she has spent the bulk of the past 20 years consulting for big companies, applying her research to the real world. (During her interview on the NDM podcast, she says (54:04) somewhat ruefully, “Because of how I wanted to get a lot of data, I ended up selling my soul to big business, and I made a lot of rich people richer. But it was how I got to prove that what we do works.”). She spends more time today attempting to adapt her training methods for broader uses, to make them available to businesspeople who might not be able to afford a full consultation. To my mind, this makes her more, not less, believable.

And what a body of work she has.

This piece is a high-level summary of what I’ve found. It marks the start of a new series on tacit business expertise; I intend to dive deep into some of the more subtle implications of her work in the next handful of posts. I’ll also include a full list of citations and links to papers, along with a scan I made of her chapter in The Oxford Handbook of Expertise.

Let’s start out with what DiBello found.

The Oxford Handbook is a remarkably chonky book.

DiBello's Main Ideas

DiBello’s work is remarkable because she gets business. In her NDM podcast interview she explains that she came from a business family; naturally, she gravitated to the study of business experts after her PhD.

The bulk of her work follows from these three big ideas:

  1. Business expertise consists of a handful of properties: (a) it is team-based — meaning that business expertise is actually a form of distributed cognition, with expertise spread amongst an executive team; (b) it consists of two things: domain-specific mental models of the business and cognitive agility; and (c) there is a deeper mental model that underpins those domain-specific mental models, which explains how good business people are able to recognise other good business people, even if they are from different industries.
  2. She argues that general problem solving ability does not matter so much in business so much as a property she describes as cognitive agility — which is the ability to update mental models in light of new information.
  3. Her primary innovation is an intervention known as the FutureView Profiler. The Profiler is able to evaluate the shared mental models of an executive team: it is able to (a) identify blind spots in the executive team’s model of the business, (b) able to evaluate cognitive agility, and (c) able to measure expertise in business primarily because it asks business people to do year-by-year predictions of similar companies within their own industries.

I’ve highlighted the most immediately useful elements of her work above, but I want to note that the ideas sit on top of a few other contributions that are novel from an expertise research perspective:

  1. DiBello’s insight that domain-specific prediction tasks are a useful way to evaluate business skill is a huge contribution to the literature on expertise. She spends a few paragraphs in her 2010 paper [2] discussing why the Profiler works, and why other assessments of business skill do not. (The gist of the argument is that you want to evaluate how a business person’s mental models update in response to a dynamic context; you do not want to evaluate what currently exists in their heads).
  2. Her company, Workplace Technology Research Inc (WTRI), has spent years implementing company training simulations in virtual worlds. Apart from the obvious technical effort (she explains [3] that they decided to code a full world of their own, on a game engine of their choice, mostly because existing companies they collaborated with kept getting acquired or shut down) — she has novel insights on the pedagogical effectiveness of using virtual game worlds to teach business simulations.
  3. Last, but perhaps most importantly, DiBello argues that business expertise is primarily a matter of organisation. She writes, in the Oxford Handbook: “Like experts in other domains, business experts rely not on greater analysis or greater information, but better ways of structuring or organising their knowledge. Further, a business expert differs in the manner in which he or she looks at the business landscape, particularly with regard to what is linked with what and what is important to manipulate.” As a result, the bulk of DiBello’s training methods aim to do what is called ‘cognitive reorganisation’ — that is, WTRI does not seek to teach business people new concepts about their domain per se, but to instead reorganise existing domain-specific mental models in their heads.

These ideas — in particular the observation about cognitive reorganisation — are conceptually interesting, and important if you want to implement DiBello’s training methods in your company. But they aren’t necessary for our current discussion, and they are difficult to grok. (In fact, it appears to be an open question if one is able to recreate WTRI’s training methods; DiBello has said that many have tried — even with assistance! — and failed).

I’ll set these ideas aside for now, and spend the rest of this piece examining the tacit mental model of business expertise that DiBello successfully extracted two decades ago.

The Mental Model of Business

In the Oxford Handbook, DiBello writes:

In a study funded by the National Science Foundation conducted over four years (NSF Award ENG 9548631) we found that those who show considerable and consistent talent in business have such a mental model, shown in predictable ways of making use of information. Leveraging our relationships with companies and clients, we had unusual personal access to study a large number of highly placed leaders. Doing in-depth studies of talented business leaders who were repeat successes—even in very challenging markets—and who had risen to very high positions (such as chairmen of large corporations) and maintained that level of position even as business itself has grown much more complex, we discovered a shared mental model among all of them. [1]

That shared mental model is essentially a triad:

Our research revealed that people who have achieved a high level of business expertise have a deep understanding of the following three core areas: (1) factors involved in effective operations, (2) forces influencing the market, and (3) those driving business finance and economic climates. Consistently successful business leaders have been shown to intuitively understand these areas and their impact on each other, and to pay attention to this fundamental triad in a uniquely dynamic way within a guiding context of business strategy. For example, these experts are able to sense that market conditions change based on environmental indications that others may fail to notice. Further, they foresee the consequences to their business operations and finances, and thus make necessary adjustments proactively. Unlike most business professionals, they are attuned to the early indicators of widespread change. Beyond this, they are expert at keeping the triad in balance, or shifting the balance when external conditions are conducive to do so (e.g., focusing on marketing during favourable economic times). (emphasis added) [2]

Throughout the paper, DiBello describes the triad using different names. One way of describing it is ‘supply/demand/capital’. Another is ‘leadership/strategy/finance’. To summarise:

  1. Supply, or leadership — These represent operational concerns related to the business, what DiBello calls ‘factors involved in effective operations’. Naturally, how the operational concerns are expressed depends on the industry (e.g. you have to be good at product development if you’re in consumer software, and you must have competent manufacturing if you’re Chobani). Think expansively when it comes to each category of the triad — this category includes things like org design, incentive structures, execution cadence, and even the ability to get things done within the company (e.g. execs must have good mental models of the org and its people, and the ability to push through plans given internal politics).
  2. Demand, or strategy — These represent the exec’s understanding of the market, what DiBello calls ‘forces influencing the market’. Of course, market dynamics is a very broad category, and includes everything from market shape, competitive analysis, positioning, changing consumer demand, and the ‘path to power’ that we’ve talked about in our discussion of 7 Powers.
  3. Capital, or finance — At the basic level this represents the exec’s understanding of basic financial concepts like cash flow lockup, return on invested capital, margins, and their relationship with the other two categories (what DiBello calls ‘factors driving business finance and economic climates’). The factors here may be equally expansive — depending on the business, the capital leg of the triad may include expertise with raising capital (e.g. equity financing, debt) or the ability to understand the implications of changes in the capital environment (e.g. John Malone was amongst the first in the cable industry to take advantage of junk bonds in order to finance expansion; a more contemporary example might be startup founders who understand how to manipulate extremely liquid private markets to their advantage).

As DiBello mentions, the key property of business expertise is in understanding how a change in one leg of the triad affects the other two legs, at least within the context of one’s specific industry. Experts are able to notice cues in the environment long before novices are able to, and are then able to forward-simulate what must be done to the other two legs of the triad. So, for example, if there is a change in the capital environment, an expert businessperson might ask how that affects competition (this is the market — the demand leg of the triad). And they might immediately ask what changes the company must make in response to those market shifts? (This is the supply leg of the triad).

This mental model of business is incredibly high-level, but it tells us a lot.

For instance, it tells us that expertise may be evaluated according to the facility an exec has with each of the three categories. DiBello writes:

In contrast, competent managers (one level down from experts) tend to be very talented in only one or two of these areas; however, they often do not understand the dynamics between these areas as well as the “superstars” do. Competent managers are likely to be very successful when larger market or economic trends are favourable to their specific skills. (emphasis added) [2]

The implication is that if you want to get really good at business, you should systematically acquire skills in each of the three categories, specific to your particular business, and then — more importantly — grok the relationships between the three categories.

It also explains another observation that DiBello makes:

Experts in the same domain easily identify each other. Even if they don’t agree with another expert’s choices, they easily recognise that they share a common perceptual experience within their area of expertise. [2]

With the triad model, we may begin to understand how an experienced businessperson is able to recognise another experienced businessperson from a different industry, despite having no idea of the specifics of the other expert’s business or market. The answer to this puzzle is that they are able to recognise the intuitive facility with which the other person reasons about supply, demand, and capital in their own businesses! When I read DiBello’s articulation of the model, I thought back to certain businesspeople who have told me that they can tell if someone ‘gets it’, even if they can’t articulate how; what I now think is happening is that their brains must be attuned to the existence of a triad in the other person’s head.

Do I buy this model of business expertise? Yes, I do. Nearly everything I know about business lines up with the model. To my mind, this explains a handful of unrelated phenomena that I’ve long puzzled over. For instance:

  • Why are fresh MBA grads unable to grok the implications of, say, cash flow in a given business, despite learning it in their courses? The answer is obvious: they have yet to internalise the relationships between a) market conditions and b) operational realities with c) the financial concepts they learnt in school. Every business is a system, and developing intuition for a system requires you to watch that system in action. Business students who have no real world experience of a business do not usually have such a mental model. DiBello writes, as part of a consulting engagement: ‘As a process check, we administered the same instrument to an equal of number of business-knowledgeable controls (BS or MBA business students who were not yet functioning managers or consultants and had not ever actually run a company of any size). Their performance was much lower. This, too, was an expected result.’ [2]
  • How many different ways are there to build Power in business? I used to think that companies with better products would win, and then I believed that companies with better distribution would win, and then I ran a business for awhile and realised that businesses have won from differentiated product or differentiated distribution or differentiated access to capital; the possibilities were more varied than I had originally imagined. With the triad, it’s clearer to me that temporary competitive advantage may emerge from any of the three categories: you could gain a temporary edge from operational excellence (supply/leadership), or from exploiting some market opportunity (through product innovation or repositioning into a new category — this is demand/strategy), or even from exploiting some change in the capital environment that others in your industry do not realise exists (e.g. Malone with debt-funded, tax-sheltered expansion — this is capital/finance).
  • Buffett’s quote “I am a better investor because I am a businessman, and a better businessman because I am an investor” makes more sense when seen through the lens of the triad — it's likely that exposure to equity investing or actual business operations would shore up one or more of the three categories. As a trivial example, a businessperson without a competent understanding of capital markets is missing one leg of the triad; an investor without a sufficiently realistic understanding of business operations (supply) is missing another.
  • Everything in An MBA for Business Operators may be organised neatly into one of these three categories. In fact, if you look at Permanent Equity’s checklist through the lens of the triad, you’d realise that it is a mix of supply and capital considerations … but leaves out demand. This makes sense — to a private equity fund like PE, the demand/strategy side of things is the bit that is most specific to the individual business, and cannot be generalised.
  • Can management consultants or former VCs become good business operators? With the triad in mind, we can be more specific about what must happen: management consultants are likely better equipped in the demand leg of the triad, with some understanding of the finance leg; VCs are better equipped in the finance leg, and somewhat skilled in the demand leg. How well they do is how quickly they level up on the supply leg of the triad, and how well they internalise the relationships between all three.

To reiterate the most important point again: DiBello’s explication of the triad mental model tells us that it is the relationships between the three that we need to pay attention to; expertise in each leg of the triad is more commonplace when we rise through the stages of business ability.



Sign up as a member to read the full version of this piece. The full version contains:

  • What Cognitive Agility is, and why it matters for business expertise.
  • How DiBello et al evaluates business expertise through their FutureView Profiler.
  • Why I find DiBello's work believable, according to my hierarchy of practical evidence.
  • PDF copies of all the publications I've drawn on for this piece.

In addition, members will be able to ask questions they want answered in the forum; I'm looking to do a podcast interview with Lia in a month's time. That podcast will be freely available at the end of August — I firmly believe more people should know about DiBello's work.

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