A Guide to Building a More Resilient Business
Mainstream business education and managerial practice is largely focused on managing performance. But as the Covid-19 pandemic has revealed the painful fragility of many of our systems, leaders are focusing on resilience — a concept rarely taught in today’s business schools. What is resilience? How do you manage and measure it? And how can you build a more resilient enterprise?
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In the midst of the Covid-19 crisis, we have become painfully aware of the fragility of supply chains, health care, and other critical systems. Many leaders have announced the intention to build back their businesses more resiliently, but not many know how to do so. Few business schools teach resilience, and today’s managerial toolkit is dominated by financial performance management. As a result, very few companies are able to explicitly design for, measure, and manage resilience.
We can usefully define resilience as a company’s capacity to absorb stress, recover critical functionality, and thrive in altered circumstances.
Resilience is especially important today because the business environment is becoming more dynamic and unpredictable. This is a result of several enduring forces stressing and stretching business systems — from accelerated technological evolution to a greater interconnectedness of the global economy to broader issues such as rising inequality, species depletion, and climate change.
There is no better example of system stress than the coronavirus crisis. Humans impinging on the natural environment have enhanced the risk of cross-species infections. Dense urban populations facilitated the rapid initial outbreak of the disease. International travel facilitated its global spread. Extended global supply chains have broken down. Economic activity has been massively disrupted, and inequalities and social tensions have been exacerbated.
And Covid-19 is not a one-off. SARS, MERS, and Ebola forewarned an inevitable global pandemic, and there is every reason to expect that we will see others in the future. Furthermore, the same circumstances are also conducive to the spread of a cyber-virus and to economic instability that could result from climate change or social tensions.
Traditional management approaches have several important limitations that make measuring and achieving resilience difficult:
Managing for resilience therefore requires more than just grafting new ideas or tools onto today’s approaches. It requires a fundamentally different mental model of business — one that embraces complexity, uncertainty, interdependence, systems thinking, and a multi-timescale perspective.
Of course, many companies already undertake some form of risk management — but mostly to understand and minimize exposure to specific, known risks. Resilience must deal also with unidentified risks, and it must consider the adaptations and transformations a company must make to absorb environmental stress and even turn it to advantage.
Companies can structure their organizations and decision processes for resilience by embracing six principles of long-lasting systems:
Beyond these structural options, a company can deploy migration strategies, such as shifting its business portfolio mix across products, channels, geographies, or business models to maximize opportunities and minimize adversity. The principal lever for this is capital allocation. Most companies tend to spread resources relatively equally across different businesses and units, but extreme circumstances usually need more-decisive reallocation, which requires both the business intelligence and the mental agility to see new risks and opportunities before they become apparent to competitors. A key concept here is sufficiency: Many companies will be seeing and piloting new models under changing conditions, but only those that allocate sufficient capital with sufficient speed will succeed in shifting the center of gravity of their business.
Then there are strategies of environmental shaping. To a latecomer in an established market, the business environment is a given. But a pioneer in an emerging opportunity can shape the environment. By imagining possible new realities, especially in dynamic environments, and then realizing them through shaping and persuasion, companies can reduce their exposure to unfavorable shocks. Migration and shaping go beyond risk mitigation by creating and exploiting new opportunities to flourish.
Finally, companies can increase their resilience through collaboration with other players. Business ecosystems, such as digital platforms, can increase their collective resilience through access to new capabilities, through increased flexibility, and by reducing the fixed cost of entry into businesses where assets can now be shared. Shared platforms essentially create “real” insurance against the unexpected through investment in shared execution, adaptation, and innovation mechanisms.
When confronted with unanticipated stress, a company that employs resilience principles has multiple advantages that play out sequentially:
First is an anticipation benefit, representing the ability to recognize threats faster. Though this may not be immediately manifested in performance, it can be detected via other signals, such as when a company articulates its resilience plans (something most companies were slow to do in the case of Covid-19). It can also drive advantages in subsequent phases.
Next is an impact benefit, representing the ability to better resist or withstand the initial shock. This can be achieved through better preparation or a more-agile response.
Then there is a recovery speed benefit, representing the ability to rebound from the shock more quickly by identifying the adjustments needed to return to the prior operating level and implementing them swiftly and effectively.
Finally, there is an eventual outcomes benefit, representing increased fitness for the new post-shock environment.
Cumulatively, the four gaps produce a significant difference in value. As we observed in China during the initial Covid-19 shock, most sectors and companies came down rapidly and synchronously, but during the recovery phase there was a marked divergence in company performance.
Crises are opportunities for change. With Covid-19, companies have a unique opportunity and necessity to revisit their business models to build greater systemic resilience, starting with the following six actions.
With the mainstream of business education and managerial practice focused on managing performance, resilience represents not just an opportunity to mitigate risk but also an opportunity for competitive advantage for enterprises who choose to focus on it. Andy Warhol famously said that in the future, everyone will be famous for 15 minutes. In today’s business world, transient high performance is commonplace; it is sustained performance by resilient companies that stands apart.
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Martin Reeves is the chairman of the BCG Henderson Institute in San Francisco and a coauthor of The Imagination Machine (Harvard Business Review Press, forthcoming).
Kevin Whitaker is the head of strategic analytics at BCG Henderson Institute. He can be reached at whitaker.kevin@bcg.com.
A Guide to Building a More Resilient Business
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