Antifragility in Business: Thrive Amidst Disruption

Whether we consider an individual, a home, or a town, negative events can cause negative outcomes if the entity is fragile—that is, if they suffer as a result of variability and randomness. These are inbuilt features of the world that can cause turmoil and disorder. For antifragile entities, any event has the potential to cause a positive outcome. This is at the core of mathematician Nassim Nicholas Taleb’s concept of antifragility.

The opposite of fragility is usually thought of as resilience: A home that has a power backup is resilient to short-duration power outages. But resilience and antifragility aren’t the same thing; antifragility goes beyond resilience and robustness. It is the ability to thrive—and possibly become stronger—when disruptions occur. We can extend the analogy to a home that uses a grid-connected wind energy system. The home would be resilient to a grid power outage—but beyond that, if the outage were long enough, the homeowner would profit by being able to sell electricity to nearby homes.

In the business context, achieving antifragility means a company would need to protect its reliable revenue sources of revenue from drying up when disruptions happen—and invest in such a way that it might gain from a disruption. To avoid theory overload, let’s look at examples of success (and failure) that illustrate the principles of business antifragility.

Antifragility: Illustrative Examples

Polaroid

Polaroid is an example of a company that—in the context of its worldwide stature at one point—wasn’t resilient. The company created instant photography in 1972: Using their SX-70, one could take a photograph and see the printed photo soon emerge from the camera—which was sensational at the time. In the 1990s, Polaroid did make digital cameras but did not believe that there would be a radical shift to the digital format. So when digital photography made physical photos all but antique, especially for young people, Polaroid went bankrupt. The name “Polaroid” still exists: Polaroid X Magnum calls itself “The Next Imperfectionists,” selling a niche “instant camera engineered for the tactile craft of analogue photography.”

What really happened? Polaroid made digital cameras but failed to see that that’s where the future lay; they didn’t risk investing more in digital photography.

Quite the opposite example in the context of this market comes from…

Sony

When Sony entered the digital camera market, it had never made a traditional, film-based camera. The consumer electronics giant had made electronic—but not digital—cameras before the 1990s; they then recognised digital photography as the gold mine of an opportunity that it was.

Two factors accelerated Sony’s foray into the digital camera market: Their image sensor and other electronic component technologies, and their acquisition of Konica Minolta’s camera business in 2006. Soon, they were on relatively new technological ground—Digital SLR cameras (DSLRs)—that were dominated by two strong players but offered plenty of room for innovation.

Sony’s journey from 2006 onwards as a digital camera manufacturer comprises a strategic acquisition, cautious first steps into the DSLR market, innovation—in the face of overwhelming competition—towards product differentiation, and reaching the #2 spot in terms of market share by sales volume. It’s a story of a willingness to take calculated risks and invest in long-term innovation—and of recognising and capitalising on opportunities. But it’s only one example of the results of Sony’s organisational culture, which emphasises innovation and product diversification. Thinking of the Sony Walkman, Trinitron TV, PlayStation and so forth, it would seem that product diversification is at the core of the company’s strategy towards antifragility.

Polaroid, revisited

Recall that for antifragility, a company would have to safeguard its primary revenue source and also make speculative investments towards large potential gains. Polaroid, in fact, was poorly placed in this regard:

They had invested sufficiently in R&D to be able to make digital cameras, but they were unwilling to invest more…
because they believed their primary revenue source, instant film photography, was secure…
and also because they would reduce average revenue per customer by investing in digital photography: Their business model was similar to that of sellers of inkjet printers. The cost of an instant camera was low compared with the ongoing costs of film for instant photographs purchased from Polaroid.

If Polaroid’s “mistake” was to hold on to their faith in the popularity of the film, they also did the right thing by not endangering their primary revenue generator. Perhaps the company’s real mistake was to abandon the fruits of its digital photography research rather than making small inroads into the digital space while keeping its film business alive. Netflix, as we’ll see, successfully tried the entertainment equivalent of this.

Blockbuster vs Netflix

Implicit in the idea of business antifragility is the fact that disruptions and market shocks are sometimes positive.

The benefits of investing in multiple growth avenues and expanding product range include, for instance, reduced reliance on a single source of income. Consider how this ties in with antifragility, where half the story is about defending against disruptions and the other half is about being able to gain from them. In this context, investing in multiple avenues increases the range of opportunities to benefit from positive shocks—new technologies in a certain business area, or sudden increases in demand in a certain geographical region.

The story of Netflix presents itself here. Up until 2007, the company only offered a DVD rental service in which customers could order DVDs online, receive them at home, and return them postage-free. When Netflix launched their video streaming service, they anticipated that streaming video could become the proverbial next big thing. But they also considered the relatively slow Internet connection speeds of the time; they had no way of predicting if—or when—high-definition video could be streamed to provide DVD-like or better quality. They also couldn’t predict whether and when demand for streaming services would surge. Netflix’s DVD rentals, therefore, coexisted for many years with their streaming service.

The positive technological shock came in the form of Internet speeds increasing almost exponentially beginning in 2013. Netflix easily weathered the decline of DVD as a home entertainment medium, unlike Blockbuster—which was too slow to recognise the potential of online streaming.

Business antifragility demands a dual approach to risk: Putting in most resources into reliable revenue sources—and a small portion into high-risk, high-reward avenues.

Business Antifragility: The Core Principles

Taleb defined the barbell strategy—a necessary condition for antifragility—as a strategy that takes “both a defensive attitude and (an aggressive one), by protecting assets from (uncertainty) while allocating a small portion for high-risk strategies.” In a 2016 keynote speech, he said business success “is the result of risk appetite with small losses and big gains,” which can happen if organisations keep “tinkering”—innovating and experimenting with well-thought-out risk management policies in place—and never missing out on opportunities.

It’s easy to see how Sony and Netflix both demonstrated this defensive-and-also-aggressive approach. Sony took on the opportunity that digital photography presented even though there were dominant players in that market. They were able to do so because of their position in the world’s electronics markets, which they could always fall back upon. Netflix’s excursion into video streaming, the aggressive side of their strategy at the time, did not detract from their DVD rental service—which stayed on as the defensive side.

The idea of “tinkering” has been literally echoed by Amazon founder Jeff Bezos, who apparently said Amazon’s success was “a function of how many experiments (the company does) per year, per month, per week, per day.” The quote is apocryphal, but Bezos has often stressed the importance of continual experimenting—in his 2015 and 2016 annual letters to shareholders, for instance, where he mentioned two notable failed experiments: Amazon Auctions and Amazon zShops (more about this below).

It is important to see how these ideas dovetail with continual problem-solving. If many or all employees of an organisation have a mindset that tells them to actively look for—and try to solve—problems even when none are apparent, they are more likely to quickly come up with workarounds and solutions when one does come up. For such an organisation, external crises and upheavals come less as a surprise.

Perhaps the most stand-out characteristic of an antifragile company is that it sees disruptions as part of the business journey and so encourages continual learning and problem-solving.

Achieving Antifragility

The barbell strategy, as an approach to risk, is at the core of what it takes to become antifragile. Here’s an illustrative, non-exhaustive list of the attitudes, strategies, and procedures that complete the picture.

1. Be (a little) willing to fail.

Small investments in high-risk ventures are one half of the barbell philosophy, as we’ve mentioned. What happens when such ventures fail? An organisation can still gain if it has a culture of willingness to fail and to learn from the experience.

Some of us remember how Amazon started off as “Earth’s Biggest Bookstore” in 1995:

The company had 32 product categories by 1999. We need not mention how it has expanded over the years through acquisitions, the launch of its Kindle e-book reader, the creation of Amazon Web Services, and so forth.

But consider that not all of Amazon’s diversification ventures succeeded. A significant turning point for the company came when it opened Amazon Marketplace, which allowed third-party sellers to use Amazon as a platform. Before Marketplace was Amazon Auctions—an online auction platform similar to (and directly competing with) eBay, still the world’s leading auction site—which turned out to be less than profitable and was eventually abandoned.

From Bezos’ 2015 annual letter to shareholders: “Failure and invention are inseparable twins… We (tried but) missed with Auctions… before we launched Marketplace.” In fact, Auctions contributed direct lessons towards the evolution of Marketplace.

An extreme example of taking an opportunity on the off-chance that it could succeed comes from Tiffany and Co., which started off as a stationery store. When taking orders for custom embossed envelopes for wedding invitations and such, Tiffany’s employees would ask customers whether they were also looking for items such as luxury watches and jewellery. This was the beginning of Tiffany’s journey to becoming one of the most well-known names in the worldwide luxury goods market.

2. Improve on an ongoing basis.

As we said earlier, employees at antifragile companies continually solve problems. Take customer complaints, for instance. At least two approaches are feasible:

1. Treat each complaint as an event. Resolve it to the customer’s satisfaction, perhaps going above and beyond.

2. Treat the existence of customer complaints as “a problem category.” Perform ongoing analyses on complaints combined with other customer data. This can:

help the company continually improve their offerings
help the company continually improve customer service and complaint handling
prevent minor issues from becoming major problems

Each complaint is data that might become an opportunity to improve!

In the context of ongoing improvement, consider the Toyota Production System (TPS)—a manufacturing philosophy that has been analysed and implemented in some form by an enormous number of companies worldwide. It embodies several principles including Kaizen, the idea of continuous improvement enabled by an emphasis on small positive changes.

So for every Toyota employee—ideally, at least—Kaizen means continually identifying the small, positive changes they can make to their work. Also, consider one way in which the TPS prevents minor issues from becoming major problems: It uses Andon, a mechanism by which a worker can visually signal an issue in the production line; production stops until the issue is resolved.

3. See problems as potential opportunities.

A corollary of continual problem solving as an antifragile strategy is to see problems as potential opportunities—which worked for Shopify, one of the most valuable e-commerce platforms worldwide, during the COVID-19 pandemic.

When the company expanded to reach clients worldwide, its staff were collectively required to work in office shifts that spanned 24 hours. Many were unhappy and some were leaving. Remote work had been tried successfully by other companies—but up until then, Shopify had not considered the possibility. The company took the circumstances as an opportunity to learn whether remote and hybrid work schedules would work for them.

The experiment was not entirely smooth, and issues persisted for years after Shopify first considered a hybrid workforce. But it paid off: No company had anticipated the pandemic, a disruption that brought into focus the value of an operational model that allowed for remote work. Shopify, having already taken measures towards such a model, was able to easily transition to “remote-first” operations; the company thrived during the pandemic, outdoing competitors. Mid-2020 on, Shopify has been fully remote-first—and trying to learn how remote workers and teams can collaborate better.

4. Develop absorptive capacity and adaptiveness.

“Absorptive capacity” refers to the willingness and ability of a company to learn; to absorb knowledge from outside sources. This also entails the organisation’s ability to identify what knowledge could be useful and to understand how to use it for business gain. These organisational abilities can help innovative capacity, which correlates with antifragility. It has been demonstrated that creating a “knowledge-friendly organizational culture” helps organisations develop absorptive capacity.

It would seem that the value of adaptiveness in commerce need not be mentioned here. After all, any business needs to adapt to changing customer behaviour, challenges such as the emergence of mobile shopping, and so forth. But consider that adaptiveness, absorptiveness (learning from the outside), learning from mistakes, ongoing innovation, and discovering opportunities are intertwined:

Adaptive companies allow themselves to take action based on what they learn from past mistakes.
With an adaptive mindset, one is more likely to experiment within the bounds of acceptable risk—and, therefore, to innovate.
Companies with high absorptive capacity are open to novel, possibly unexplored solutions to problems.

The rewards of absorptive capacity are probably over-illustrated by Procter & Gamble (P&G). In 2000, the world’s largest consumer goods company realised they were too large to stay along the traditional R&D path of innovation. They moved to a “connect and develop” approach where innovation would be driven… from the outside.

The approach also exemplifies adaptiveness: P&G realised that with changing markets and their ever-expanding product range, they would have to radically change their innovation methodology. Summarising the company’s words, “Connect + Develop actively identifies and collaborates with partners such as startups, research institutes, and patent-holders to identify key insights and technologies that create innovative solutions.”

In six years of launching the Connect + Develop program, R&D productivity at P&G increased 60 percent; between 2004 and 2006, P&G launched a hundred products whose development was partially driven by an external agency.

It must be stressed that Connect + Develop wasn’t just a great idea. It was possible because of P&G’s absorptive capacity; it was driven by their dynamic adaptiveness.

5. Dissect every failure.

Consider a significant business failure such as the loss of an important client. Most companies, of course, do learn from the experience: What they did wrong, and what they could have done better.

But moving towards antifragility would require a thorough, perhaps obsessive analysis of such a setback. Such “dissection” would be another instance of seeing a negative event as an opportunity. The question would change from “What went wrong in the case of Client X?” to “What have we been doing wrong such that we lost Client X?”

Taking this approach, the company might learn not just how to prevent similar situations from occurring; it might identify issues that affect several of the company’s operations and business relationships. This would be followed by rectification of those issues and, perhaps, rebuilding certain processes.

Recall the TPS, Kaizen, and Andon. In the current context, the TPS even allows for the dissection of micro-failures. Production is halted if an issue in the production line is signalled, as we mentioned. Further, in the TPS, such signalling happens not just in the case of an actual problem—it can even happen in the case of a sub-optimality a worker discovers, or perhaps an abnormality. Production resumes after everyone involved—staff and supervisors included—collaborate to come up with a fix, an alternative, or a larger-scale improvement for the issue.

Issues that occurred during production—and the actions taken—are discussed during project-review meetings called hansei-kai; in fact, a hansei-kai meeting is conducted at the end of each project whether or not there were any issues.

6. Go from customer-focused to customer-obsessed.

Brad Power, in a 2013 Harvard Business Review article, wrote about how UK retail giant Tesco in the mid-2000s made the cardinal mistake of deprioritising customer alignment and customer relationships for expansion, diversification, and operational excellence. By the late 2000s, it had ceased to be an exemplar of successful retail.

It needn’t be spelt out that business success relies heavily on prioritising the customer. But thinking about business and customers vis-à-vis innovation, ongoing improvement, adaptability, and absorptiveness, two clear customer-related strategies emerge:

1. Listen to your customers, engage with them through the appropriate channels, and actively try to procure customer feedback. This can help foster innovation towards continual improvement of your products and services. Importantly, customer feedback—combined with ongoing analyses of customer preferences—helps identify emerging trends so companies can more quickly modify their offerings and adapt to changing markets.

Amazon is an easy example here because of just how much they value customer reviews and ratings. After order receipt, customers are sent emails and messages that ask for feedback on their experience with the Amazon Marketplace seller. Sellers are indirectly rewarded or penalised based on customer reviews because the reviews are up for display on the product pages, which can influence purchase decisions. Customers are then sent communications that seek product ratings and reviews; customers who review a product are reminded of products they haven’t yet reviewed. Reviews help Amazon customers make purchase decisions, and they help sellers take action to improve their service. Even on the product recommendation communications Amazon sends out, customers see reminders about products “awaiting feedback.”

2. Loyalty programs don’t just help retain customers, and loyal customers don’t just spend more. They are also more likely to purchase new products and services and contribute much-needed early feedback, which means loyal customers provide a testing ground for innovation. Further, loyal customers are more likely to engage with the brand during a transition or pivot—a change in business direction so its products better meet market needs—so the company has the flexibility to adapt its offerings based on customer needs.

Probably the example of customers driving innovation is LEGO, the construction-toy manufacturer. LEGO took customer feedback to a new dimension with its LEGO Ideas initiative, which crowdsourced ideas for product innovation. Customers would send the company plans for a LEGO set—ideas for a set of toy bricks that are assembled to build, say, a model aeroplane or house—with all members of the LEGO Ideas community able to view other members’ plans, suggest improvements, vote for them, and so forth. People who created the LEGO sets that went into production were rewarded, and LEGO had a large number of new sets in their catalogue that would not have been possible based on the ideas of their staff alone.

7. Stress-test your supply chain.

Business resilience would demand supply-chain diversification: Working with multiple suppliers and distributors to avoid reliance on a single partner.

We mentioned earlier that a core principle of antifragility in commerce is to look for problems when there don’t seem to be any. In the context of your supply chain, regular scenario planning by stress-testing your supply chain can be useful. Such testing involves mathematical modelling of your supply chain under simulated disruption scenarios—scenarios that are plausible even if improbable—to identify supply-chain vulnerabilities. Equally important, supply-chain stress testing could uncover potential areas for improvement.

8. Attempt a nonlinear organisational communication structure.

Recall our emphasis—in the context of organisational antifragility—on ongoing improvement and innovation, creativity, and continual problem-solving. Traditional, linear corporate structures or organisational communication structures can fail to incentivise or even stifle non-traditional activities of this nature.

Employees tasked with coming up with creative solutions to problems that don’t exist will benefit from a nonlinear communication structure because:

the relative autonomy they perceive can make them more personally invested in the organisation’s success—and therefore more engaged in informal innovation, experimentation, and problem-solving activities.
they may become more likely to draw on their personal expertise, unrelated to their organisational roles, in the course of such activities.
procedural constraints would not stifle them from voicing novel, potentially unworkable but potentially worthy ideas.

9. List potential disruptions and disruptors.

The term “disruptive changes” can refer to disruptions such as technological failures, supply-chain disturbances, and economic upheavals (recall the COVID-19 pandemic). It can also refer to the emergence of disruptors such as aggressive competitors, disruptive technologies such as augmented reality, and new-paradigm services such as video streaming (recall Netflix vs Blockbuster).

Disruptive changes are of special importance in the context of antifragility because they can dictate, over short timeframes, which companies get—and which companies lose—a competitive advantage.

Mike Ross, founder of consulting firm Juniper, advises drawing up a list of disruptors and disruptions that could potentially affect your e-business. The urgency of your business actions towards addressing these potential changes should be proportional to how likely they are to happen and how much of an impact, positive or negative, they are likely to have if they do happen.

In Conclusion

Taleb did not formulate his ideas about antifragility specifically with business or e-commerce in mind. His book Antifragile: Things That Gain from Disorder looks at the concept at work in fields ranging from politics to biology, from economics to the human body. Perfect antifragility as in some of his examples—“our bones become stronger when subjected to stress”—is unachievable in business, but one of Taleb’s core ideas—that chaos is part of the business process and can only be addressed by ongoing innovation and problem-solving—is invaluable.

The fragile wants tranquility, the antifragile grows from disorder, and the robust doesn’t care too much.
Nassim Nicholas Taleb

Reference Links

Table of Contents

Commerce

The Rise of Headless Commerce: Modernising B2B and B2C eCommerce Experiences

Digital Experiences

Mobile App Development Trends: What’s Shaping the Future of App Creation?

Custom Software

Advancing Home Care for Aging Loved Ones

Continuous Deployment with Automation with HIPAA on Medstack

Beyond Business Resilience: Exploring Antifragility