StratChat 1 October 2020: Antifragile business strategies
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StratChat is conducted under Chatham House Rules. Consequently, the summary below is presented without any attribution of who said what. As such, it is an agglomerate of views - not necessarily just those of the writer or indeed of any one individual.
This week, we talked about antifragile strategies.
COVID-19 has highlighted just how fragile our world has become. Everything is speeding up: the rate of innovation and change, and the movement of goods a people. Everything is more interconnected and efficient. So when something goes wrong, it spreads more quickly and with greater impact.
How do we develop and execute business strategies in this environment?
Some organisations are fragile. In the face of a crisis, they falter and fail. Others are more resilient - more robust. In the face of a crisis, they bend and adapt to survive. Is there a third kind of organisation which is what Nassim Nicholas Taleb describes as antifragile - that is organisations which are not just resilient but actually grow stronger through crises?
Does size matter?
Smaller organisations, startups in particular, seem more nimble. More able to adapt to change. This enables them to disrupt much larger incumbents and even whole industries.
Larger organisations, on the other hand, seem more intent on maintaining the status quo. They are more likely to be risk-averse because they have more to lose. They are worried about risking their established balance sheet or cannibalizing their existing profit lines. They may say they want innovation, but when push comes to shove, they remain more conservatives.
Startups don't have any existing profit lines to cannibalise. With less to lose they can afford to be more innovative.
Some larger organisations try to buy startups in order to reap the benefits of their more nimble and more disruptive nature. But in many, if not most instances, the larger organisation ends up destroying those very qualities in the smaller organisation. There may be two notable exceptions:
- There are some large financial institutions with cash reserves they need to invest. These may look at startups as a source of higher returns. It may work less well where the startups are Fintechs which they then try and integrate with the parent company.
- Some of the newer unicorn startups like Google and Amazon were themselves startups not that long ago. Many of the people who are still there will remember what it was like to be a disruptive startup. This culture trickles down from senior management. They are more tolerant of failure knowing that the success of 1 venture can compensate for the failure of another 9.
Do organisations follow a natural life-cycle? Do successful startups inevitably grow, become large incumbents, and then get disrupted and die? Or can they retain some of the entrepreneurial DNA, develop antifragile characteristics and survive in perpetuity? If so, how would they do it?
Can organisations train antifragility?
Our own muscles are an example of anti-fragility. If we repeatedly stress them - push them to their limits - then they become stronger. But the process is not without pain.
We've noted already that muscles grow stronger when they are regularly stressed.
Athletes put stress their muscles on a regular basis. They lift heavy weights, for example, that don't need to be lifted! But they do so so that their bodies will be strong for when they do need to lift a heavy weight.
Can organisations do the same thing? That is, can they engineer stresses when the environment is benign in order to maintain a state of preparedness for when the environment is malign or uncertain?
Would fractal organisations be antifragile?
At our last StratChat, we discussed that business strategies are fractal. That is, they can be broken down into sub strategies and each sub strategy has the same basic structure as the super strategy above it.
Organisation themselves, don't share that characteristic. Specialisation inevitably means that at some point, organisations break down into functional divisions and departments. These could be purchasing, operations, marketing and sales, as well as finance, HR, IT, etc. Each of these functional divisions does not follow the same pattern. That is they are not a microcosm of the organisation itself, with all of its same capabilities at a smaller scale.
Again, we can find parallels in nature. Most animals die if you cut their heads off. In that sense, they are fragile. But if you remove the leg of a starfish, not only with it grow a new leg, but the severed leg may in fact grow a new body! (Source) In that sense, starfish are antifragile. This is an idea developed in the book The Starfish and the Spider.
The reason, I suspect, is that the pattern for a starfish is repeated on a more fractal basis throughout its body. The pattern for a spider, however, is not. The pattern for a spider's brain, for example, exists in its head only. The body doesn't contain that pattern and so can't survive.
Whilst organisations may want their leaders to behave more entrepreneurial, the structure restricts them from doing so. They are not given the choices that could make them antifragile. For example, the operations department must use the marketing department. It cannot go to an outside marketing department if it thought this would produce better results. Conversely, the marketing department can only market the products delivered by the operations department. It can't sell its capabilities to other organisations.
There are obvious advantages to this specialisation and tight coupling of the subdivisions within an organisation. But there are also disadvantages. The organisation is only as strong as it weakest link. It doesn't matter if the operations department produces the best product in the market if the market department fails to convey that to the market. These many single points of failure can make organisations more fragile.
Are specialisation and focus the answer?
One way for an organisation to respond to this challenge is to become very specialised within its industry. The is to focus on being the best at providing a subset of the products or services required to the extent that everyone else in that industry then uses that organisation.
Then, it does not matter which other providers thrive or falter within that industry. Whoever thrives will still remain reliant on that specialised provider for the solution they provide.
We have seen this happen, for example in the telecommunications industry in at least one country. One provider focused exclusively on providing and maintaining telecommunications masts. That provider was one of the only organisations in the industry to survive the massive disruption which affected all the others.
We've seen also in past recessions how some large and diversified organisations have been forced to shed some of their non-core businesses and become more focused again.
This is in stark contrast to other organisations, like Amazon, who try to dominate entire ecosystems!
What makes organisations adaptable?
As an observation, it seems that local independent businesses, like restaurants, adapted more readily to COVID-19/lockdown than the larger chains did. They pivoted to selling takeaways, or ingredients etc. more quickly in order to stay afloat. Whilst the large chains were more likely to shut their doors and furlough their staff.
(It will be interesting to see if these small independents will emerge stronger after the crisis, or if the larger chains will bounce back and find the small independents tired and weakened from their efforts.)
Is this a function of their size and autonomy? Or is there a question of agency?
Small businesses (including startups) are run by entrepreneurs who are willing to take risks. With lots of skin in the game, they have the incentive and the power to do what it takes to survive. Does this make them antifragile?
In contrast, employees have opted for the relatively greater stability of a regular paycheck in return for a proscribed job. (Albeit that stability comes under increasing pressure especially in times of crisis.)
(Franchisees probably fall between these two ends of the spectrum.)
Progressive management thinkers argue for greater employee involvement and engagement. This, of course, has many benefits. But not all employees want the responsibilities and personal costs that this brings. Not all employees want to invest in building the understanding required to contribute too far beyond the confines of their proscribed roles or to bear the risk that those decisions might bring.
A recent online debate asked why more businesses are not run as worker co-operatives. The answers suggested that this was because most workers did not want that responsibility. In many worker co-operatives, decision-making authority then concentrates in a small number of individuals. But without proper governance over those individuals, problems soon arise. A similar question might then be to ask why more employees of listed companies don't buy shares in their employers and exercise their right to vote at the AGM?
Some organisations give their employees greater latitude to take risks. For, example Google famously allowed employees to spend 20% of their week on any project they chose. There are many other examples of similar approaches. These organisations accept that most ideas won't work out knowing that the few that do will more than make up for them. But not all employees want that pressure to innovate, and not all industries can tolerate the risk it brings. (We noted that a nuclear power plant might not want too many employees running too many experiments on the job!)
So what did we learn about antifragility?
Firstly, you probably need a way of keeping the pressure on in organisations so that they don't become complacent when conditions are benign to the point where they aren't strong enough to respond when a crisis strikes. Secondly, there is a complex balance of size, autonomy, agency, diversification versus focus, and culture including the extent to which the organisations makes its members feel 'safe'. There is a diversity about organisations. There is no one-size-fits-all. The sweet-spot depends on the nature of the organisation and its industry. And it probably changes over time.
Next week, Thursday 8 October at 14h00 BST we will pick up again with a conversation about efficiency and business strategy. Does efficiency contribute to organisational fragility, and do organisations need slack in order to be able to be strategic? How do organisations find the balance between drivers like efficiency, productivity, profitability and growth? Find out more and then signup for free.