“The Serenity Prayer:— Reinhold Niebuhr, 1933
God, grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference..”
Fragility is a measure of how much stress it takes to break or greatly damage something. There are many different kinds of stress, however. A system may be highly stress-resistant when it encounters some kinds of stress but easily broken by other kinds of stress. Fragile = easily broken.
A rock is generally not fragile. You can whack it hard many times without causing breakage or appreciable damage. Unless you hit it on a fracture plane. Then it may break apart with a very light tap.
Most businesses have invisible “fracture planes” that make them highly fragile under the right set of conditions and the right impact location.
In a business, understanding its latent fragility is extremely important for survival unless conditions are very stable long-term, meaning very little stress is encountered by most. Very stable conditions are nice so long as they last but history is full of highly stressful changes. Like today.
Risk is a part of the typical fragility picture since a business may be highly fragile but only if it encounters highly-unlikely stress conditions. Is such a business fragile in practice? How about COVID-fragile?
A business is not fragile like a glass vase
The term “fragile” seems not quite right to me when trying to characterize what happens to a business when one or more big bad things hit. Drop a vase and it falls, breaks, and then just lies there waiting for someone to sweep it up. This does not happen to a business.
Hit a business hard and it will respond – very quickly in most cases. Businesses are organisms made up of people and their machinery. Whack a business and it will react. Because the people, machinery, and environment of each business are different, their responses to a similar hit – like a sudden 50% sales decrease – may be very different.
Business fragility becomes critical when its available responses are not sufficient to overcome the results of impacts and the business becomes seriously damaged or fails completely. Fragility in this context seems more like resilience.
Resilience is a measure of a system or organism’s ability to recover in a timely manner from serious difficulties or stresses. It is a kind of toughness that overcomes, not succumbs to, adversity.
I’ll keep using the term “fragility” in its “resilience” context to avoid unnecessary confusion. Necessary confusion will remain, however.
Businesses are organisms, not objects
Businesses are alive (well, mostly). Whack a business and it will nearly always respond. If the whack is from an external source, then the responses are going to be mostly or entirely internal, not toward the external source. Very hard to whack a COVID back.
A fragile or non-resilient business by definition will be seriously damaged or may even fail despite its best efforts at making an effective response.
This definition means that a practical fragility measure must assess damage, including outright failure at the extreme, within the context of an active, organic business response.
Fragility is response-dependent
Suppose that you have two identical businesses and both get hit with a COVID-related 50% drop in sales over a single month.
One business responds by laying off 50% of its staff and cutting expenses by 25% in the hope that conditions will “soon” return to normal. Unfortunately, “soon” stretches out to two years and this business is forced to close permanently as it runs through all of its reserves.
The second business responds by laying off just 25% of its staff, cutting other expenses by 50% through store consolidations and sales, and increasing its online sales to 25% of the total. It assumes that the lockdowns are going to remain indefinitely in some form. This business not only survives well before its reserves are exhausted but manages to return to 75% of its former sales.
You will quickly see that the first business is highly fragile and the second business is minimally fragile under our extended resilience definition. The difference here: the different responses planned and executed by managers and other key people.
Fragility then is not entirely or even largely inherent in the business itself but is also resident in the management and people. Inherent or latent fragility can be modified and offset by the response, which is of course people-dependent.
This is why fragility is so important to every business
Latent fragility determines the nature and extent of potential damage but it is the unique responses available in each business that ultimately determine its post-impact fate.
This means that a multi-unit business, such as a chain of identical stores, will see some fail and some survive. The quality of store management and key people will be the main damage and survival determinant in many cases.
Because fragility exists only in this organic, response-dependent sense, it cannot be measured ahead of an event occurrence. There is simply no reliable way to predict what a management team will do when a major impact takes place.
Risk management attempts to do this but it can be way off the mark due to the unpredictability of management team and business responses.
Fragility is observable and measurable in practice only after the fact – after management teams have done their best to overcome the impact.
Finding out whether your business is fatally fragile by waiting for a major hit seems not to be a very good plan, even though it is the way of most businesses today. So, what’s the alternative?
Business simulation can identify and quantify fragility
Business simulations, properly designed, allow you to test a variety of possible responses to an impact or set of impacts. A good simulation design will allow you or your management team to make adjustments in responses as the effects on your business become known (i.e., are simulated). This step-wise capability is in fact critical to the usefulness of this approach.
Business simulations are often used for training purposes but here we simply want to see what we might be able to do to respond effectively to some possible set of bad happenings. If our responses are successful, then we survive, and possibly even thrive, as they say. We are then not fragile but resilient.
Through simulation, you can see where your business is most vulnerable and where your most effective responses may lie. This view in effect is a fragility metric if you have a simulation design that ranks outcomes.
To measure fragility, the simulation must be specific to your business
Commercial simulation products tend to be generic but with some customizability. Finland-based Cesim, for example, has about a dozen products but none fully tailorable to a specific user business so far as I can see. Custom simulations are not cheap, however:
Dave Zielinski in his SHRM blog describes two learning simulations in game formats, developed by Sun Microsystems, that were designed to teach new hires about the company structure, strategy and history. Together these cost $100,000 to develop.
Most business simulations are designed for training and e-learning. From a relatively dated report on development costs per hour of simulation training:
“Although the delivery costs are variable costs and are low, the development costs, which are fixed costs, are high. Traditional e-learning requires an average of 220 hours of development work for each hour of content (Brandon-Hall, 2002). In contrast, simulations delivered via e-learning require 750 to 1,300 hours of work for each hour of simulation (Brandon-Hall, 2002). Some simulations require even more labor. The Strategic Management Group claims to invest from 1,200 to 1,500 hours for each hour of simulation (Aldrich, 2001)”.
Keep in mind that these figures are simulations for corporate training purposes, not for fragility assessments. Fragility simulations should be much simpler.
Another source of both custom simulations and development platforms is San Francisco-based Forio. Their Epicenter product, a simulation development and online delivery platform, may offer a good place to start.
Addressing fragility weaknesses in practice
Suppose that you are able to measure the fragility of your business in some way. What should you do with the results?
Here is where management judgement and insights come into crucial play. Many of your simulation scenarios may be driven by highly unlikely events, virtually all of which may never occur. Just like COVID.
How much are you willing to spend to mitigate or eliminate an apparent fragility weakness?
I have addressed just this question in earlier posts (here, here, here) but not in the context of fragility. These posts looked at the problem of becoming generally more resilient so that whatever may come along can be handled without serious damage. Some examples:
- Reduce concentrations of sales across customer segments and geographies
- Reduce concentrations of sales across product categories and customers
- Diversify your business to elimination concentrations in countries
- Supercharge your innovation process to keep new products flowing
You can probably come up with dozens more that are specific to your business. The key here is that your goal should be to become more resistant to impacts from any kind of situation or event. The source event or events can be largely irrelevant in this sense.
Focus analyses on impacts and their greatest damage points
For example, suppose that a major offshore supplier of your most vital production materials suddenly fails, due to whatever. This means that you have to buy time using inventories on hand while you scramble for replacement sources. The fragility here is obvious: overly-concentrated sourcing of critical materials.
Another example, admittedly pretty far-fetched: The government, because of reasons, orders all non-essential businesses to shut down until further notice. You are mostly in the “non-essential-business” business so your revenues suddenly drop close to zero. For how long? Who knows? Seeing the fragility here is a bit trickier. It is that our business is not sufficiently diversified geographically or in products to escape such local regulation-driven causes.
Both examples could result in a huge sales hit along with the now largely-unsupported burden of high fixed ongoing costs. If this were to happen, would your business be toast? How long could you hold on? How quickly could you develop alternative revenue sources and decrease some of the heavy fixed-cost burden?
Of course, stuff like this doesn’t happen. Can’t happen. But annoying enough, just did happen in our current times of COVID. Won’t ever happen again of course.
It doesn’t matter in our fragility assessment what exactly the stuff is that happens. All we need to know is that very nasty stuff of an unknown nature might happen. The challenge is to identify and quantify your points of greatest vulnerability – where your fragility is highest.
It is so important today for virtually any business to have an impact/fragility analysis that tells you where you are most fragile – most subject to breakage or great damage. Then you can begin to create and execute plans to reduce or even eliminate major points of fragility. Not a great idea to find out your degree of fragility in real time – as so many did in these times of COVID.
Risk management as defined by Wikipedia:
“Risk management is the identification, evaluation, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities.”
“Risks can come from various sources including uncertainty in international markets, threats from project failures (at any phase in design, development, production, or sustaining of life-cycles), legal liabilities, credit risk, accidents, natural causes and disasters, deliberate attack from an adversary, or events of uncertain or unpredictable root-cause. There are two types of events i.e. negative events can be classified as risks while positive events are classified as opportunities. Risk management standards have been developed by various institutions, including the Project Management Institute, the National Institute of Standards and Technology, actuarial societies, and ISO standards. Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety.”
“Strategies to manage threats (uncertainties with negative consequences) typically include avoiding the threat, reducing the negative effect or probability of the threat, transferring all or part of the threat to another party, and even retaining some or all of the potential or actual consequences of a particular threat. The opposite of these strategies can be used to respond to opportunities (uncertain future states with benefits).”
“Certain risk management standards have been criticized for having no measurable improvement on risk, whereas the confidence in estimates and decisions seems to increase.”
Nassim Nicholas Taleb in 2012 wrote about business fragility in a very new way: “Antifragile: Things That Gain from Disorder”.
“The simple fact is that there is no such thing as an invariant antifragile system – that is, tranquility and invariability inevitably lead any complex system (like the world economy) to become fragile, getting more rigid and increasingly vulnerable to unforeseen events the longer the system remains unstressed by changes.”
Harvard Business Review in 2013 weighed in on Taleb’s concepts in “Make Your Organization Antifragile”:
“Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.”
Ravi Mehta in medium.com wrote: “How To Build Antifragile Companies”
“Nassim Nicholas Taleb is a polymath — the Internet age’s equivalent of a Renaissance man. He is a physician, an author, a mathematician, a scholar, and a wealthy hedge fund manager. Nassim was born into a well-known family in Lebanon during a period of peace and prosperity. But that did not last. In the mid-1960s, the country’s financial system began to collapse, and the country eventually descended into civil war.”
“At a young age, Nassim learned that worlds collapse. He’s made a fortune betting on the inevitability of the impossible — beginning with the 1987 stock market crash on ‘Black Monday.’”
“Nassim distinguishes three concepts: fragility, resilience, and antifragility. Each defines a different way in which a system reacts to stress. “
“Fragile companies are like glass. Under the right amount of the right kind of stress, they break. “
“Resilient companies are like rubber. They deform when subjected to stress, but bounce back once the stress is removed.”
“Antifragile companies are like muscle. Bodybuilders know that muscle tears under the right kind of stress, but it builds back up — stronger than before.”
Wikipedia on Antifragility:
“Taleb stresses the differences between antifragile and robust/resilient. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.”
“An adaptive system is one that changes its behavior based on information available at time of utilization (as opposed to having the behavior defined during system design). This characteristic is sometimes referred to as cognitive. While adaptive systems allow for robustness under a variety of scenarios (often unknown during system design), they are not necessarily antifragile. In other words, the difference between antifragile and adaptive is the difference between a system that is robust under volatile environments/conditions, and one that is robust in a previously unknown environment. [emphasis mine]”
The German Development Institute and the UN wrote an extensive guide in 2009 on measuring fragility of nations and states “Users’ Guide on Measuring Fragility”:
“The Oxford English Dictionary defines ‘fragile’ as ‘easily broken or damaged’ or ‘delicate and vulnerable’. Thus, when encountering the term fragility, the first question that arises is: fragility of what? In the realm of development policy, two different entities are referred to as fragile: states and their institutions on the one hand, and societies as a whole on the other.
When fragility refers to the state, fragility is in fact a property of the political system. A ‘fragile state’ is incapable of fulfilling its responsibility as a provider of basic services and public goods, which in turn undermines its legitimacy. This has consequences for society as a whole, threatening livelihoods, increasing economic downturn and other crises which affect human security and the likelihood of armed conflict. In this sense, such phenomena constitute consequences of fragility.
When fragility refers to society as a whole, violent conflict and other human-made crises constitute fragility itself. In this sense, fragility is a property of society and thus, being defined much more broadly, includes any kind of political, social or economic instability. This understanding of fragility is termed a ‘fragile social situation’. In this discussion it is crucial to remember that fragility is not tackled in binary terms (“all or nothing”) but rather as a continuum, that is, a quality that can be present to a greater or lesser degree (i.e. from high resilience to extreme failure). In this regard, nationally led state-building processes of moving towards resilience are the core of the current international agenda, which emphasizes that the state-society relations are the centre of gravity of a resilient state. Furthermore, as we will see, fragility is composed of several dimensions, some of which may be more critical than others. In this sense, fragility is not an exclusive property of developing countries but can also be found in many forms and degrees in developed countries. The recognition of this gradation allows for the creation of indices of fragility, assigning comparable scores to several countries.”