Organizations need to be anti-fragile

Many large, successful organizations are more fragile than they seem. They break under stress. Remember the travails of Kodak, Digital Equipment Corp., and Washington Mutual? In their heyday, they were dominant players in their sectors. All disappeared. Why do relatively few companies prove resilient and withstand stress? And why are even fewer “anti-fragile” — that is, they get stronger when stressed?

In his book Antifragile, Nassim Nicholas Taleb describes how some systems, such as biological ones, gain from disorder. Anti-fragile systems love randomness and uncertainty; going beyond resilience or robustness, they get stronger with stress and volatility. Start-ups tend to be anti-fragile; large, successful organizations tend to be fragile. If lucky, a start-up grows and develops a success formula. With maturity, however, it can become rigid and fragile. Most successful organizations do not like volatility, randomness, uncertainty, disorder, errors, stressors, and chaos. Yet we are in a world where disruption and randomness are increasing. Organizations that gain from randomness will dominate, and organizations that are hurt by it will go away.

In a recent post, I described how Tesco, the $100 billion U.K. retailer, spent the last three decades improving its supply chain processes, and designing and launching a series of services, including smaller local convenience stores and online shopping. It’s a great success story, but there’s a catch. In recent years, Tesco stumbled in launching new stores in the U.S. and in its home market in the U.K. One commenter on my post put it bluntly: “Tesco’s recent woes in the U.K., having sacrificed customer intimacy for increased operational excellence gains through widespread cost cutting, are well documented. They were a best practice example in 2007. Not anymore.”

In response, Dan Jones, chairman of the Lean Academy who worked with Tesco, commented that the retailer’s success is rooted in failure. “In the UK, Tesco lost the plot several times in recent years as they grew to double the market share of competitors like Sainsbury’s and Asda/WalMart. Each time they regained momentum by going back to listening to what customers were telling them in store and in shopper panels, as well as analyzing data on changes in their shopping behavior…. The lasting legacy of its learning from Toyota was building the capabilities to act quickly once they realized they had a problem. It looks like they are doing so again right now.”

Is Tesco fragile, resilient, or anti-fragile? Our competitive environments are complex systems, full of interdependencies that are hard to detect and responses to disruptions that are nonlinear. These complex systems tend to develop runaway chain reactions that decrease or even eliminate predictability, occasionally causing outsized events (Taleb calls them “black swans”), such as the financial crash of 2008. Organizations worry about fine-tuning their operations to handle the typical situations. The danger is that their management approaches cannot sense or respond to shocks. Organizational managers and leaders should be worrying about fragility in the face of such shocks.

Recall that Toyota’s reputation took a major hit in 2009 and 2010 with the largest car recall in history followed by a massive tsunami that wreaked untold damage on its international supply chains. After both crises, close observers of Toyota such as my friend John Shook (CEO of the Lean Enterprise Institute) were confident that Toyota would recover because of its extraordinary ability to solve problems.

Here is the working principle: Crises and major disruptions are not an abrupt departure from what anti-fragile organizations do continuously — solve problems. Rather than being controlled through rigid command structures, employees at all levels are trained every day to be quick problem-solvers. A disruption or crisis that might be crippling for some organizations is a challenge they already know how to handle. Toyota’s fiscal 2013 profits were more than four times its earnings in 2010, and three times 2012′s. The company has recovered and reclaimed its place as the world’s most successful car maker.

Will Tesco follow Toyota and prove it is anti-fragile too? As Taleb points out, managers should not be learning from today’s fashionable role models. They should be learning from companies like Ford, GE, IBM, and McDonald’s that have successfully responded to challenges and crises over time. The dismissal of yesterday’s shining star in favor of today’s (which all too often turns out to be tomorrow’s flame-out) is very revealing of shallow business school analysis (focused on short-term context and results) and ephemeral journalism (focused on the latest headlines).

Tesco took care to develop and maintain mechanisms for listening to customers and a brilliant problem management system that quickly identified needed supply chain and other improvements. And Tesco management was willing to experiment with home shopping, new types of convenience stores, and the Fresh and Easy stores in the U.S. (a run at Trader Joe’s, which ultimately did not work out). Tesco now has a new CEO, but these mechanisms are still in place — if he chooses to use them. Over the next few years, we will see just how fragile (or not) Tesco is.

This first appeared in the Harvard Business Review and has been lightly edited.