Degrees of anti-fragility

Last week I posted about the concept of anti-fragility (a la Nassim Nicholas Taleb) and business models. My former colleague Andy Harris raised the point that some of the anti-fragile ideals (redundancy and optionality) can produce waste. Let's explore.

I will start with a common risk pattern of optimisation: when a business optimises for something it is introducing risk elsewhere. If you have a show-stopper product, such as Nokia's 1110 phone (released in 2005 - 250m units sold), it means that the focus of the business is on scaling up and pushing things out the door. Innovation was the sacrificial victim of their success.

Thinking about this always leads me back to Taleb's book. I do think there is a sense of balance in Taleb's theory. Risk is always about balance.

A low-cost airline usually has a strategy of buying a large volume of one type of aircraft. There is certainly no diversity about that and with good reason. You have one supply book to order spare parts from. You have one plane to train your staff on. By going with a popular model, you are also making it easier for you to hire new staff that has experience with that craft. A large single order also gives you buying power with the manufacturer.

I know software companies that make similar choices around their choice of programming languages and stacks. On the other hand, Paul Graham and Robert Morris went for a language called Lisp when they founded ViaWeb. It was relatively obscure in commercial software development but it provided Graham and Morris with the ability to develop software at great speed. This was 1995, the web was new and there was a gold rush on. Speed mattered. This was entrepreneurial risk-taking.

Now - back to the airline - it is placing a very big bet on its choice of aircraft. I am thinking about unforeseen events, such as technical issues, regulatory changes, or supply chain disruptions. This, too, is entrepreneurial risk-taking. Your business now carries a bag of assumptions with it.

Diversity: I think this works in building your team. Double that if your customer base is diverse or you are looking to disrupt your industry - I am not sure that the people who built the industry are the right people to take it apart. The raw nerve here is if you promote diversity above, say, skills for the job. My personal view is that diversity rocks (it worked a treat for us at Dynamic Planner and still does) but a business is not a Disney film. First things first. And not Or.

Taleb of course is using diversity in the wider context - like bio-diversity - rather than the DEI context, but I think the above example holds.

Optionality is pretty interesting. The cautionary tale for lack of optionality would be Blockbuster Video. Also Kodak, Sears, Nokia, local bookstores, small hardware stores, family photo portrait studios, etc. No options when the change hit.

A solid practice for a firm is to have a few irons in the fire with new product lines at any given time. However, that firm needs to apply some balance to innovation experiments.?

You will try a few new ideas but follow 3 Horizons principles: a totally new idea should be focussing solely on whether there is customer appetite. You should not be looking to burn your brand on experiments nor to require this experiment to feed its financial data into the general ledger through your industrial ERP systems. You should not be asking the team running that experiment to provide a return on investment. Normally you will have the most promising project moved forward and the company will have a sensible policy of how many new product lines it can ingest in any given year.?

The same goes for your primary product lines. It is good to have a diversified product line: Microsoft has done a great job with this, for example. Some organic, some acquired.?

However, we see many technology firms that acquire firm after firm in place of innovation. Many of these companies find it hard to sell their disjointed portfolio of products to their customers. I have seen their salespeople grappling with how to differentiate between near-identical products so their customers can understand them. Customers can sense when the sales reps are confused.

There needs to be some unifying theme there. Dyson has done this (bringing modern design to everyday household products), as has Apple. This becomes a bit more complex the larger you get: Microsoft has several themes - productivity and collaboration, platforms, and enabling digital transformation. Even XBox picks up on these with platforms and collaboration in the gaming world. Satya Nadella has done a great job of unifying that picture.

The COVID epidemic provided many sad examples of redundancy - rather than pick on personal services businesses which were very unfortunate I would prefer here to look at companies that are built around just-in-time manufacturing. It is efficient but makes many assumptions around the reliability of the supply chain (Toyota, General Motors, Apple, PPE manufacturers).?

"Redundancy" as Taleb points out "is insurance against having to rely on accurate predictions and allows for more errors and sloppiness in forecasting." (Chapter 18).?

Coming back to Andy's point, I would argue that Taleb's response could be "redundancy is ambiguous because it seems like a waste if nothing unusual happens. Except that something unusual happens--usually."?(Chapter 5). This is a strong point.?You can never really tell exactly what will happen but you know that something will happen.?

Coming back to the Nokia example - and I will leave this here - "Robustness and redundancy are opposite concepts: robust systems are necessarily devoid of redundancy, and vice versa." (Chapter 5).

In conclusion, the concept of antifragility can be a valuable lens through which to view and analyse a company's business model. While many anti-fragile qualities can be seen as competing forces, a balance between the two is crucial for building resilience in the face of uncertainty.?

Ultimately, finding the right balance between these factors will depend on the unique circumstances of each company.?

One approach to achieving this balance is by engaging the wider executive group in assessing the organisation's business model for risk and opportunity. This is focus of the training programs we at AlphaCurve have been developing with some customers. Equipping the next generation of leaders with the skills to navigate these challenges will contribute to a more resilient and adaptive business environment.

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