“How do you innovate? First, try to get in trouble. I mean serious, but not terminal trouble.”
— Nassim Nicholas Taleb, “Antifragile: Things That Gain From Disorder”
This week in chaos: India and Pakistan brace for war. Accelerated ocean warming is killing up to 35% of our fish. The United Kingdom hurtles toward Brexit without a plan. Tariffs on $267 billion worth of goods hang in the balance as United States-China trade talks loom.
It would be natural in volatile times like these just to wait it out. Some problems solve themselves. Just last week, U.K. Prime Minister Theresa May signaled openness to a three-month extension of the Brexit deadline, perhaps a prelude to total Brexit retreat. Likewise, single-handed shuttle diplomacy by Apple CEO Tim Cook may yet pull us back from the U.S.-China trade-war brink. Delay has its merits.
On the other hand, we as operations leaders are paid to act. Citing its own view on Brexit risk, Honda in February announced it would shutter its 30-year-old, 3,500-worker Swindon, England, manufacturing operations. This was a complete strategy reversal from just 30 days prior, when the company had publicly expressed its commitment to keep U.K. production in place.
In the face of extreme uncertainty, which path should we choose? The standard 2-by-2 risk decision tool we learned to love in the early 2000s offers little real help.
As economies, supply chains and information networks become more interdependent, the consequence of any one small action — or inaction — becomes inherently more difficult to predict. In a matter of minutes, a local supply bet becomes a global catastrophe of black-swan scale.
Categorization by itself is academic. We need to find a way to better understand real expected costs of failure and create real options to mitigate.
The Beginnings of a Better Business Case
Experience suggests corporate controllers are rarely comfortable with opportunity costs because loss avoidance or societal impact never shows up on a standard income statement. Yet data on the full cost of otherwise unpriced externalities is beginning to emerge.
This past August asset management firm Schroders studied 11,000 companies and concluded that insufficient action against climate change alone would shave 0.5% to 20% off company valuations, depending on sector and geography.
Add in the expected direct cost of our other aforementioned structural supply chain disruptions, and we have the beginnings of a stronger business case. Honda’s bold exit may well have been genius. Opportunity overwhelms.
Yet the question about which China (or Brexit, or India, or carbon offset) path is “right” is itself the wrong question. It suggests our only options are binary: Stay or go.
Now for Real Options
The cost of 11th hour actions on decisions as structurally fundamental as our China source base or U.K. manufacturing locations may be prohibitive. To make legitimately wise supply network decisions, we need to ask better questions. For example, are there ways to innovate our way out of the trade-offs? And if so, how?
In the face of these more focused questions, my sense is that options theory points the way to frameworks we can actually use. For example, one global apparel operations leader 18 months ago persuaded her product design and development peers to experiment with dual sourcing of at-risk materials — designing in source-base optionality at the finished goods and materials level before locking in product designs. By pushing for modularity and targeted source redundancy, she bought her company a low-cost hedge against whichever U.S.-China political outcome materializes this April. The pressure comes off the quest for a perfect forecast, and the company is differentially protected.
But far more important than technical achievement is the space to experiment no matter the result. Known breakthrough artists like Unilever and 3M make a conscious point to cultivate real room for “getting into trouble” as Nassim Nicholas Taleb says, because of the enormity of the upside. Gartner’s own October 2018 study of innovation cultures suggests leaders are three times more likely to encourage risk with high payback — twice the average. Risk management and innovation in that sense are two sides of the same coin. Per Taleb himself, “trial and error is freedom.”
I couldn’t agree more. I don’t think we’re paralyzed by black swans, but they do seem to be chasing us hard. Interested in your thoughts.