The Antifragile Strategy

Jan09

One of the business magazines that I subscribe to recently posted its top five list of the best business books of 2013.  One of the books was Antifragile by Nassim Nicholas Taleb, who is also the author of one of the most thought-provoking books of recent years, The Black Swan.

In the Black Swan, Taleb made a convincing case that “Black Swans” i.e., large, improbable and highly consequential events are both unpredictable and, in many walks of life, deterministic of key outcomes.  This was an unsettling notion for many CEOs (and some strategy practitioners), as it suggested that classical economic-driven planning efforts are at best misleading and, in some scenarios, are useless.

Antifragile is a logical follow-on to The Black Swan and suggests that we must learn how to be less vulnerable to randomness and volatility and become “antifragile,” that is, poised to take advantage of stress, errors and changes.  This is tricky to do, because if we do too much to eliminate volatility (such as take frequent steps to eliminate small forest fires), we can make things more fragile (in the forest fire example make the “black swan” large forest fire disastrous).

So, the key question is, how can a company develop a strategy that allows it to be antifragile?  We suggest several areas to focus on which include, but are not limited to:

  • Invest in process-based competencies that allow you to quickly and flexibly respond to changes in your core markets, and don’t be afraid to outsource activities that are truly noncore;
  • Establish the right filters to stay in front of competitor and customer data, and be prepared to act on the data; and,
  • Understand and scrutinize the data thoroughly.

This last point on data is a critical one, particularly in this age of “big data.” What may seem like an acceptable conclusion based on a first glance at data may, upon doing some deeper, second-order thinking, not be such a good idea.  Taleb gives a flippant, but interesting, example of this in Antifragile, in which he asks if you would be comfortable if I told you we were going to leave your Grandma in a room at an average temperature is 70 degrees for the next two hours while you go out.  Many folks would say “yes” to this, but if you dug deeper and learned that I would set the temperature in Grandma’s room at zero degrees for the first hour and 140 degrees for the second hour, you may think differently (and not have a Grandma when you get back).

None of these suggestions are easy to do, as they require folks to think differently and, perhaps, in opposition to a company’s well-established cultural norms.  A little bit (or a lot of) discomfort in the strategy development process that allows a company to be more antifragile, however, could pay great dividends down the road.

 

 

Getting Acquisitions Right – Beware of NOT Letting the Facts Get in the Way

Jul23

Well-known British author and intellectual Aldous Huxley once made an observation that we at Avalon have to sometimes (gently) remind our clients of in some form, namely:

“Facts do not cease to exist because they are ignored.”

Although we’re pretty confident that Huxley did not make this observation while ruminating on a CEO’s track record with acquisitions, we know from our collective, deep experience in the acquisition domain that he could have easily done so.  Acquiring a business can be a complex, messy endeavor that involves transfers of people, personalities, processes, technologies, customer relationships, know-how and more, and it rarely, if ever, goes exactly as expected.  A strong story line on the surface (e.g., “immediately accretive,” “strong market fit” etc.) can mask underlying issues that may have been identified and addressed prior to the acquisition.

At Avalon we have found that an up-front, objective assessment of key performance and synergy (e.g., “softer”) characteristics across potential acquisition targets can make a critical difference in maximizing success (For a more complete process description, follow this link http://www.avalonassociates.com/our-approach/acquisitions/).  One client of ours successfully employed this process to acquire a company that helped it meet its primary goal i.e., industry diversification to reduce the impact of cyclicality in its core industry.  What defined this particular acquisition’s success, however, were the added capabilities that our client gained from the acquired company that enabled it to expand its core industry product lines and gain market share when the inevitable down-cycle came.

Our client’s success was driven by their objective assessment of the softer characteristics of its ideal acquisition targets, particularly engineering depth, product development capabilities, and management style.  Specific, well-defined and measureable metrics were developed, rated and weighted for each of these characteristics along with the more traditional financial performance metrics.  This fact-base proved invaluable in finding the right acquisition target and, just as importantly, eliminated some targets that our client thought were the best fit but fell short in important areas once all the facts were considered.

Hockey, Antennas and Adhesives

Jun17

Given that our Boston-based partners at Avalon are avid sports fans, we are fortunate in that we are experiencing an unusually high level of professional sports success in our city right now, with a possible 8th championship in 12 years across four major sports within reach.  As I write this, the Boston Bruins Hockey Club is playing in the Stanley Cup finals for the second time in three seasons and is on a roll.

One of the interesting stories on the Bruins is that of 41-year old Jaromir Jagr.  Jagr won a Stanley Cup with the Pittsburgh Penguins twenty one years ago.  In a profession where the average career is about three years, this is remarkable.  Over this time frame, the National Hockey League (NHL) has evolved on many different dimensions, including:

  • Number of Competitors – In 1991-92 the NHL had just added their 22nd team, in contrast to the 30 teams in the league today;
  • Technology – New technologies, such as hockey sticks made from fiberglass, composites or titanium instead of wood, have been introduced into the game;
  • Rules and Regulations – Many rule changes have been introduced, such as two-line passes to create more breakaway opportunities, but none as impactful from a business standpoint as the introduction of a spending limit for teams in the form of a salary cap; and,
  • Key Activities – offenses and defenses have evolved over the last twenty years in the NHL, and players are generally faster, better conditioned and more highly skilled due to better youth systems and education in/application of best practices in nutrition, skills development and conditioning.

Jagr is still playing in part because he has evolved along with the changes in the market and, in particular, has embraced the Bruins’ defense-first style of play that has proven successful in the current NHL market environment.  Moreover, in an industry where egos run rampant, Jagr has accepted a pay package that is commensurate with his contributions and fits within the mandated salary cap structure; he has not let his Hall of Fame credentials and past glory days skew the reality of what type of player he now is.

In the more mundane, but no less exciting, industries that Avalon typically works in such as antennas, adhesives, and controls, an attention to the details of how your competition and markets are evolving is just as critical to success.  The best companies will regularly evaluate their surrounding environment, assess the implications of any changes, and be prepared to act appropriately and rationally ahead of their competition as needed.  Unlike the NHL, however, sometimes these environmental changes, such as the introduction of a disruptive technology, entirely change the game that you are playing.

Understanding and effectively applying the Art of Strategy can be the difference between enduring, successful growth and the negative consequences of showing up for the proverbial basketball game with a hockey stick.

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