The Cynefin Portfolio Framework | The Acquirer's Multiple®

In this recent episode of the VALUE: After Hours Podcast, Jake Taylor, Bill Brewster, and Tobias Carlisle discuss The Cynefin Portfolio Framework. Here’s an excerpt from the episode:

Jake: Sure. Do some veggies. So, I recently came across this decision-making framework, that’s called Cynefin and its spelled C-Y-N-E-F-I-N. So, nothing like what you would say, reading it and say Cynefin. That is because it is a Welsh word for habitat or maybe familiar. So, a lot of this is a was created by this guy named Dave Snowden, who worked at IBM in the 1990s, and he was looking for ways to help categorize their IP.

They had like almost a university-ish arm at IBM at that time. Anyway, and he wrote it up in a Harvard Business Review 2007 article that was called a Leaders Framework for Decision-making. What it is, is basically like trying to understand the environment that you’re in before choosing your leadership style, and decision-making style. So, he categorizes it into five different domains. Simple, complicated, complex, chaotic, and disorder. So, I thought we might work through some of these to see like, what are the differences and what might be applicable.

The first environment is what he would call like simple, obvious, or clear, or maybe what Rumsfeld would have called Known Knowns. So, in this place like rules and best practices are what are called for. It’s gets clear cause and effect. It’s mechanical in nature, often how things are connected. You can reduce things to their constituent parts, and then put them back together, and that will then allow you to understand– There’s not a lot of slot of slack and slop in the system. So, in that they call it like sense, categorize, and respond.

What you have to be careful there is like be careful about complacency. So, I think, when you look at where 3G has done well, it has been in businesses that I think that are a little bit more like this, where it’s more simple and obvious beer brewing, and maybe some food. But as things have moved into these other domains, perhaps their style doesn’t maybe match as well. So, this is all about efficiencies and zero-based budgeting makes perfect sense in this kind of world. There’s a really good book actually, that’s why it’s probably 10 years old now, but off the beaten path. But it’s called Work the System. It is basically like, anytime a problem comes up, like you write a procedure to figure out how to solve it so that you don’t spend time like reinventing the wheel and you can create a very efficient organization, I think, it works well in that environment.

Okay, the next one is called complicated, and this is what Rumsfeld might call Known Unknowns. So, here’s where expertise is useful. Engineers, surgeons, lawyers, like you hear the knocking in the engine, but you don’t really know exactly which part is wrong, like you need a mechanic to figure that out and fix it for you, it’s complicated. Where you can fall into problems, there is analysis paralysis, and in this, they say to like sense, analyze, and then respond. So, it’s not so much categorizing, but is really digging in and analyzing, making it the complicated, less complicated.

Then the next one is complex, which we’ve talked about this a lot before, right? Complexity and different environments, and these would be the Unknown Unknowns, and it’s impervious to reductionism. Like you can’t take the parts. You can’t take all of the parts, and separate them, and look at them, and then put it back together, and think that you understand it. There’s an emergence to it. Complicated would be a Ferrari and complex would be like a rainforest. Or, as Tlaib has said like, “That’s the difference between a cat and a washing machine.”

A lot of times maybe our financial overlords view things more as a washing machine when it might be more like a cat and you can’t really take it apart the way that they do. This would describe things like battlefields in markets and ecosystems, and cause and effect are really only deducible in retrospect. So, I think, this is probably where you want to look more to bet on optionality, and maybe this gets back to what you were talking about Bill with having–

I think maybe like a more staunch sort of maybe even academic value lens of the world. It makes you a little bit blind to optionality of what things could turn into. So, if you’re operating in a very simple, obvious, clear environment, then yeah, buy something that’s cheap. That’s the only answer. It’s very proceduralisable, and it makes some sense. Even if complicated like, “Oh, I could take this business apart, and I could see that it’s, you know, I’m going to count the cash that’s going to be available, and now I can put it back together, and maybe a bankruptcy or something.”

But when you start getting into complex environments, it gets really hard to take it apart. Therefore, you might be better off sometimes betting on optionality. So, in this, they would say to probe, sense, and then respond. So, you really have to look at it and make little adjustments along the way, and just try to baby step your way through it, because there’s no clear path through a complex environment.

The fourth one is called chaotic, and this is like cause and effect are completely unclear. You basically need to take action first and then find stability somewhere like find a sense of stability, and then respond to the chaos, and try to turn that chaos into maybe back towards complexity or maybe complicated. So, this was like one of the examples they use is like, Rudy Giuliani at 9/11 was obviously a hugely chaotic event. New York turn into like a crazy place for a short period of time, and Giuliani’s top down command and control approach actually worked well. It was just like, “We got to do something now.”

But then later, as it was putting the pieces back together, and more elections, and trying to find back to some semblance of running New York, his command and control of a complex system didn’t really work very well, and he was viewed as a dictator, and draconian, and got kicked out basically. So, the leadership style didn’t match what was called for at that time period. What’s ironic maybe is the in that chaotic place that it’s actually the ripest for innovation, because there’s the most sort of degrees of freedom to try new things.

Then the last place is called disorder, which is, that’s basically if you just not even sure which of the four categories that you’re in, you’re in this no man’s land of like who knows what the hell’s going on here. I don’t even know where we are on the map, more or less, which domain so. You’re trying to get out of that and find which domain you’re into. So, I thought it was an interesting breakdown of different decision-making environments and maybe just keeping that in the back of your head, whatever you’re navigating like what’s one of these might be called for based on the environment that I’m in?

Tobias: Can you just run through them, again? Yeah, sorry. There are four and then the fifth one is you don’t know which one you’re in?

Jake: Yeah. fifth one is kind of like the empty set. We don’t even know what are the four we’re in but it’s simple. complicated, complex and chaotic, and then disorder.

Tobias: Your first step is to try and figure out which one you’re in, and if it’s obvious, then you’re in whichever one you’re in. If you can’t figure it out, you’re in disorder, and you’re probably going to treat it like it’s chaotic until you figure it out. You use that same process maybe to figure out where you are.

Jake: Right. Yeah, and then figuring out which one you’re in will dictate what style like how you should approach trying to wrap your mind around it, and what’s the smart thing to do at that juncture.

Tobias: When you encounter a chaotic in an investment context? NFTs.

Jake: [laughs] Yeah. Well, I would probably say like a market meltdown, probably would fall into the chaotic. You almost need to take some action to just stabilize yourself a little bit and figure out where you are and what your game plan is. Ideally, you’ve already thought about that, and your pre-planning, at least like some kind of a game plan will allow you to shift what would be chaotic, maybe more towards complex or complicated as opposed to just fully like, I don’t even know where the next punch is coming from.

But it can be difficult. Like especially, if you’re trying to be opportunistic, you don’t know what’s going to go on sale or why, and how convincing is the reason behind it, and it’s a lot easier always in retrospect to think that, “Oh, yeah, I saw those prices at that time, of course, I would have been a buyer.”

Tobias: Yeah.

Jake: How many people nailed March of last year very well and just tip talk or–

Tobias and Jake: Bottom ticked.

Jake: March of 2020. Not? Probably less than who say they did, right? [laughs]

Tobias: Yeah, I need to audit that one. Yeah, I feel like value’s probably somewhere between simple and complicated, and I think if you’re looking at growth stuff, it’s probably more at the complex end of it, where you’re better off taking little positions and letting them grow on themselves. It’s that self-iteration or the self-reinforcement is the thing that creates the really good growth stories.

Jake: Yeah, that’s right, and that’s a big takeaway is because it complex requires iterative thinking, because it’s always changing on you, and you don’t know exactly how the pieces are going to interact as the story unfolds.

Tobias: But you want that optionality, right? You want to buy that optionality. So, you got to come up with some way of like working out what the opportunities there. Like what’s the upside, what’s the cost of playing here, what’s the likelihood of success?

Jake: Yeah, and especially, if you can figure out like, if that optionality is being discounted, I think, you could probably make the argument that 2015, there’s a fair amount of optionality in some growthier companies that was not being appropriately priced.

Tobias: Right. Yes, as we’ve pointed out-

Jake: In hindsight.

Tobias: -in awful times, ironic at that one.

Jake: Nailed it.

Tobias: What’s the book called?

Jake: This is not a book. This was just an article in some Wikipedia, [chuckles] googling that I did.

Tobias: What’s the word that we use? Can you just spell that word, again?

Jake: Yeah, it’s C-Y-N-E-F-I-N, Cynefin. Actually, where I saw, there was a woman from the CIA, who had been working there for 30 years, who did a presentation, that was like a pet-ish talk, but she talked about this, and it was the first I’d heard of it. So, it’s like, “Oh, okay, I’ll go kick the tires on that a little bit,” and it turned out it was interesting.

Tobias: Yeah, that’s very interesting. Look for a hedge fund with that name.

Jake: Oh, yeah. Except, it’s so hard to say. [laughs] No one’s going to get it right. Well, that doesn’t stop them.

Tobias: I was going to say throw you jokes in, three questions in.

Jake: Jokes were even better.

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