InnovationLabs Newsletter

January 2023

Happy New Year!
Making Sense of 2023

InnovationLabs Newsletter for January 2023

The arrival of the new year brings us to a natural moment to reflect upon the year that has just passed, and perhaps some time to think about the year which is just beginning. In this newsletter we discuss powerful structural themes that we expect to have significant impact in 2023, and we hope you will find these thoughts illuminating as you prepare yourself and your organization for the new year.

Innovators pay attention to structural themes like the ones we discuss here because the pursuit of innovation always takes place in a strategic context that such structures define. You may know what you want to achieve through innovation, but its relevance for the broader market will be almost always be determined by external events and driving forces, and the structures that underlie them. Hence, social, economic, geographic, geopolitical, and demographic structures usually define the context in which innovations may succeed or fail, and successful innovators pay close attention.

 

So whereas it is often the big news events that tend to grab our attention, there is much more that we need to pay attention to. The metaphor of the iceberg illuminates this difference between the events above the surface that we can see, and the deeper driving forces and the underlying structures of society that most often shape the events of our world.

Here, then, are some thoughts on these deeper structural changes regarding three of the most significant shifts we are facing, and the implications they may hold for us in the new year and beyond.

 

Shift 1:
Ukraine

Among the major events, trends, and catastrophes of 2022, the war in Ukraine stands out not only because of the devastation it’s causing to both the Ukrainian and Russia peoples, but because it indicates a profound structural change in geopolitics. The invasion marks the end of many decades of relative peace, and the return of aggressive militarist imperialism in a land war that many had preferred to believe was inconceivable. Russian President Putin, however, had other ideas.

Throughout the long millennia of human history, war has always been a major source of innovation. Strategies, tactics, propaganda, and war-making hardware have all advanced as the capabilities and aspirations of empires and nations have advanced. In keeping with our innovation focus here at InnovationLabs, we will consider four powerful dimensions of innovation that are now evident in the invasion of Ukraine:

Most obviously, at the combat level the Ukrainian army has displayed significant innovation in military tactics, and by doing so has more than held its own against a much larger and, on paper, more powerful army. The reluctant Russians have been burdened by poor preparation and ineffective battlefield tactics, and for months have been continually out-maneuvered by the nimble and highly motivated Ukrainians.

As the first large-scale land war in many decades, Ukraine is providing many important lessons for military strategists and planners all over the world. For example, this is the first war in which large scale use of drones is a major factor on the battlefield, and military leaders and strategists worldwide are closely studying these lessons to gain insight into their own preparations for the future, as it’s obvious that drone warfare will play an increasingly significant role in future conflicts. The experiences in Ukraine will certainly trigger a very expensive next-generation arms race with autonomous weapons.

While intelligence gathering has traditionally been done quietly and in the background, the role of military intelligence in the conduct of this war has been unusually at the forefront. The US government followed an innovative and unconventional approach in the months prior to the war by openly sharing its intelligence on the preparations of the Russian army, which helped Ukraine by enabling its army to better prepare, and also helped prepare Europeans to support Ukraine. By announcing publicly what might have previously been kept secret, the Biden administration also shifted the balance of global public opinion.

In addition, the war immediately caused a major disruption in global energy markets. (In fact, by merely threatening war early in 2022, Putin was able to scare world oil markets and thereby cause a price spike, which in turn significantly increased Russian oil revenues prior to the invasion, which thus enabled Putin to pay for the first few months of the campaign. A clever if disturbing use of threat as an economic lever.)

In effect, Putin weaponized Russian fossil fuels, which immediately exposed Germany’s strategic reliance on Russian fossil fuels to be a profound strategic vulnerability. As a result, German investment in sustainable energy innovation is being rapidly accelerated, and not only in Germany but throughout Europe. The global energy marketplace of 2023 and beyond will be fundamentally different from that of early 2022.

 

From the perspective of geopolitics, the result of all this is that two generations of relative peace have ended, and Europe must now instead prepare for a prolonged period of hot and cold warfare with an imperialist-minded, militaristic neighbor to the east. As expressed in the words of German Chancellor Olaf Schultz, “The world is facing a Zeitenwende, an epochal tectonic shift. Russia’s war of aggression against Ukraine has put an end to an era.”

In the new era, the definition of war has also been broadened, and so has the definition of a weapon. As the Russians demonstrated in 2016, social media is indeed an effective weapon, as are oil and gas deliveries. British professor Mark Galeotti has captured the essence of this very well in his aptly titled book, “The Weaponization of Everything: A Field Guide to the New Way of War,” in which he describes how technology, culture, finance, fake news, and economic policy have become effective instruments of war, and how disruptive these weapons are to our old mental models and our established institutions. This, too, is part of the new era.

It is important to note that the impact of the new ways of warfare and the tectonic disruptions to established strategies will not be not limited to Europe. Five thousand miles away, the Taiwanese are paying close attention to everything that’s happening on the Ukrainian battlefields, and in the halls of governments throughout Europe, Asia, and the Americas. For like Ukraine, Taiwan has an aggressive and threatening neighbor to contend with, and they hope that Russia’s failures in Ukraine combined with the strength and consistency of the EU and NATO response will perhaps cause the Chinese to reconsider their military ambitions and strategies regarding Taiwan. The war has certainly made it clear that an invasion likely comes with a heavy cost in money, lives, and global opinion, a much heavier cost in all three than Putin had expected.

Indeed, Russia’s invasion has brought many geopolitical assumptions and expectations into question as it has exposed a cascade of flawed assumptions.

For example, based perhaps on his own wishful thinking or propaganda, Putin expected that his (supposedly) well-equipped army would quickly crush Ukraine. Soldiers were told to that a victory would happen within days, and were instructed to bring along their parade uniforms for the triumphal procession into Kyiv. The Ukrainians, however, turned out to be clever innovators on the battlefield and the Russians never got to Kyiv, suffering massive casualties and loss of equipment before retreating.

Putin apparently also thought the invasion would weaken NATO, but exactly the reverse has occurred. Formerly ambivalent Sweden and Finland immediately chose to join NATO precisely to protect themselves from Putin and Russian aggression. At the same time, the invasion transformed NATO from a alliance seemingly without purpose into a fundamentally important aspect of regional and global security, clearly the opposite of what Putin wished for.

Putin also expected that the EU and US would readily abandon Ukraine and choose Russian oil instead, but they have recognized the invasion as a structural threat to their preferred world order and provided billions in military and financial aid to sustain Ukrainian society, empower its military, and uphold the principles of the UN Charter.

History will thus remember Putin not as a great leader he wishes to be known for, but instead as a brutal and self-deceived tyrant, aa terrorist and war criminal.

What remains highly uncertain is how much longer the war will last. As we look forward into 2023 and wonder what will happen, we see endless questions cascading outward from Kyiv, the Kremlin, and the battlefields of Crimea and the Donbas.

• If the war continues to go badly for Russia, will Putin resort to nuclear or chemical weapons as he has threatened to do? If he did so, how would the world respond? Would China remain his quiet partner, or condemn his brutality?
• How bad does it have to get for Russian elites turn against Putin? Would thousands more Russian casualties decisively change perceptions? An what of the Russian people, whose sons and husbands are dying by the thousands?
• Would mounting losses cause the Russian army to turn against Putin and his generals?
• If Putin were deposed, would Russia descend into chaos, or would a successor emerge to unite the country? Would such a successor sue for peace, or double down and further escalate the war?
• Conversely, if the course of the war turns and starts going well for Russia, would the Europeans and Americans continue to pump billions of dollars of weapons and economic aid into a struggling government in Kyiv?

These are among the questions that all the world’s political and military leaders are constantly discussing, questions that compose a vast mountain of uncertainty of enormous consequence, for the outcome of the war will certainly shape structure the next era, our geopolitical future, and attitudes and actions globally for decades to come.

But can we gain any insights into what may happen? Indeed we can, by applying the technique of scenario planning, a powerful method of thought experimentation. Well-crafted scenarios help us to think productively about issues of high importance and high uncertainty, as we learned in 2020 when we used a series of scenarios to examine the future course of the Covid pandemic.

Although there are a great many uncertainties and contingencies which make it difficult to sort out which scenarios could be most meaningful regarding Ukraine, we finally pinpointed two critical uncertainties: the use of nuclear weapons, and Putin’s longevity in power.

The first, shown as the horizontal axis of the 2 x 2 matrix below, considers the use of nuclear weapons by Russia. Putin has used this threat to force NATO and the EU to avoid direct contact with Russian forces, which limits its participation in the war to the use of Ukraine as its proxy.

However, if the war continues to go badly for the Russians then Putin will probably be wondering if these devastating weapons would turn the war in his favor.


If the Russians were to use even one, then the entire structure of the war, and indeed the geopolitics of the region and globally would be decisively impacted. This would force the West to make a very difficult decision: accede to the threat of more nuclear attacks and back down (lower left), or escalate a Western response to stop Russia while risking even more nuclear attacks, and finally at high cost ending the war. Putin would necessarily be deposed (upper left).

If the weapons used were small scale, so-called tactical nuclear missiles, then their impact on the battlefield could be significant, but the psychological impact globally would be massive, as the much larger threat of strategic nuclear weapons use would be that much closer to a possibility.

And hence a very difficult choice would confront the Western governments – to back down or not.

The other axis of the matrix addresses the longevity of Putin’s reign. Most likely the war ends if Putin is removed or he steps down, but he is most likely to prolong the war indefinitely if he remains in power, for there is no way out for him now.

Krzysztof Szczerski, Poland’s Ambassador to the United Nations, has commented that Western governments must not allow the Russian President to save face and remain in power, as the long term threat of Russian imperialism would destroy the international order.

“According to the Russian leader, Russia does not wage the war against Ukraine, but rather tries to undermine the current model of international relationships based on Western dominance and values. Although the Russian-Ukrainian war is confined to one region in terms of a military conflict, it is a world war because of its repercussions for the global economy and politics,” Szczerski said. (Euromaiden Press, Jan 2, 2023.)

The end of an era indeed.
 

Shift 2:
The Energy Transition

Russia’s invasion of Ukraine has forced world leaders to recognize that global fossil fuel supplies and suppliers are much less reliable than they had previously hoped, which has in turn has caused them to reconsider their national energy security and their national energy strategies. As we noted above, Russia’s weaponization of oil is significantly accelerating the shift from fossil fuels to solar and wind energy. The technical term for this is the “energy transition,” a shift that marks the end of the two centuries of the fossil fuel era. (We wrote extensively about this in our 2021 book “Net Zero City.”)

The economic and strategic significance of this shift is hard to overstate, for as we well know, the modern, industrialized economy exists only because fossil fuels have made huge amounts of energy cheap, reliable, and universally accessible. In fact, the modern world and the global economy simply would not exist but for the abundance and usefulness of coal and oil.

But now that Russia’s invasion has exposed the dangerous national security side effects of fossil-fuel powered globalization and brought energy and food insecurity to much of the world, coupled not trivially with worsening climate change due to fossil fuel use, the impetus for transition has received a mighty boost.

But unlike the development of the fossil fuel industries, which emerged gradually through a market-driven process that occurred over two centuries, the energy transition we are now undertaking to bring forth non-fossil energy markets is heavily influenced by social intent, government regulations, multi-nation agreements, and an acknowledged need for speed. This transition is thus being driven not by market forces as it is by scientific insight, social will, and political policy.

As with all such structural transitions there is much at stake, and some will win while others will lose. Innovation is prolific throughout the energy sector, new industries are emerging as old industries are being displaced. Innovators are striving for opportunities across the entire spectrum of energy production, distribution, storage, and consumption through the electrification of global transport, the quest for energy efficiency in buildings, and a continuing debate about nuclear energy, all now occurring amid a backdrop highlighted by intense geopolitical tension accentuated by the Russian invasion.

The threat level is heightened not only for the oil- and gas-dependent industries and for fossil-fuel-producing nations, but also for entire island nations that are threatened with extinction as their territory disappears under rising seas. At the same time, the number of climate refugees is steadily increasing, and shows no signs of abating.

Thus we observe another profound structural change that is occurring globally: it is a new era for energy, also.

 

Shift 3:
The Perfect Digital Storm

One of the main drivers of the energy transition is the technologies of solar and wind generation. Our colleague Moses Ma has coined the pointed and prescient term “the perfect digital storm” to describe the increasingly important role that advanced technologies are now playing, and will continue to play in every market and indeed across all facets of the economy.

This strengthening storm is enabled by the convergence of many powerful technological capabilities, including AI, machine learning, robots, drones, computer modeling, and increasingly powerful chip technologies, all of which are being applied to our everyday lives, and at the same time, to the macro-level processes shaping the future structures of society. And of course as we noted above, they are having enormous impact on the conduct of the war in Ukraine today, on military budgets for innovation, and they will continue to impact on all future conflicts everywhere in the world, whether hot or cold.

Indeed, events in Ukraine have given still more impetus to the technology-driven arms race that will characterize the decades ahead, as nations seek innovations to protect themselves while also projecting power outwardly toward their adversaries. Military budgets for the coming decades will thus increase, which will inevitably cause reductions in spending on social services, education, and care for the weak and the increasing numbers of elderly. What Putin has achieved, then, is an end to an era of peace.

These discussions about how much to spend on military hardware and software will be accompanied by ongoing conversations about the role of many technologies in the new era. Social media, which didn’t even exist a few decades ago, is now having profound global influence, and is the subject of intense debate at the highest levels of government:

• Should social media be regulated, or self-regulated, and if so, is self-regulation even possible?
• Is Tik-Tok an instrument of international intrigue and intelligence-gathering, or just a crude form of teenage addiction?
• How skillful are Russian social media manipulators in shaping public opinion in the US, France, and elsewhere throughout the world, and in creating doubts about the reliability of democratic systems and institutions? And what should be done about them?
• What is the role of government with regards to disinformation, fake news, misinformation, are free speech?

Stanford professor Amy Zegart points out that the very public role that social media now play throughout society gives to private sector business leaders “responsibilities that they don’t want, while government leaders want capabilities they don’t have.” She goes on to note that the technology-enabled “landscape of innovation” has changed and expanded, and this is causing widespread disruption throughout governments and among nations. (Amy Zegart. “Open Secrets: Ukraine and the Next Intelligence Revolution.” Foreign Affairs, Jan-Feb 2023.)

Indeed, the perfect digital storm is a turbulent one, and so while the war in Ukraine will one day end, and we hope very soon, and the energy transition will steadily progress society toward “net zero” carbon emissions, there will be no final answers to questions about the future of technology, for technology will continue to evolve and to bring about still more social, economic, and cultural change.

So, it is with sadness that we have to admit that this discussion is hardly a joyful way to begin the new year, but after the new year’s fireworks have faded out and we wake up the next morning, we face a challenging strategic terrain for which we must be prepared. Thus, we hope you have found these thoughts useful and perhaps provocative; and as always we would love to hear your feedback.
 

 

 

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