COVID-19 Building a more resilient business

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.

Why resilience is important
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. 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.

The challenge of measuring and managing resilience
Traditional management approaches have several important limitations that make measuring and achieving resilience difficult:

•    Companies have been designed predominantly to maximise shareholder value from dividends and stock appreciation. Very few companies even attempt to measure resilience beyond merely disclosing specific material risks.

•    Companies and shareholders often focus on maximising short-term returns. In contrast, resilience requires a multi-timescale perspective: forgoing a certain amount of efficiency or performance today for the sake of more sustained performance in the future.

•    Companies have been mainly focused on creating and executing stable plans, which work well when causal relationships are clear, predictable and unchanging. Resilience deals with what is unknown, changeable, unpredictable and improbable — and has significant consequences.

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.

Building resilient enterprises  
Companies can structure their organisations and decision processes for resilience by embracing six principles of long-lasting systems:

•    Redundancy buffers systems against unexpected shocks, albeit at the expense of short-term efficiency. It can be created by duplicating elements (such as by having multiple factories that produce the same product) or by having different elements that achieve the same end (functional redundancy).

•    Diversity of responses to a new stress helps ensure that systems do not fail catastrophically, albeit at the expense of the efficiencies obtainable through standardisation. In business, this requires not only employing people from different backgrounds and with different cognitive profiles but also creating an environment that fosters multiple ways of thinking and doing things.

•    Modularity allows individual elements to fail without the whole system collapsing, albeit while forgoing the efficiency of a tightly integrated organisational design. Due to the fact that a modular organisation can be divided into smaller chunks with well-defined interfaces, it is also more understandable and can be rewired more rapidly during a crisis.

•    Adaptability is the ability to evolve through trial and error. It requires a certain level of variance or diversity obtained through natural or planned experimentation in combination with an iterative selection mechanism to scale up the ideas that work best. Processes and structures in adaptive organisations are designed for flexibility and learning rather than stability and minimal variance.

•    Prudence involves operating on the precautionary principle that if something could plausibly happen, it eventually will. This calls for developing contingency plans and stress tests for plausible risks with significant consequences — which can be envisioned and prepared for through scenario planning, war games, monitoring early warning signals, analysing system vulnerabilities and other techniques.

Most companies tend to spread resources relatively equally across different businesses and units, but extreme circumstances usually need more decisive re-allocation, which requires both the business intelligence and the mental agility to see new risks and opportunities before they become apparent to competitors.

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.

The benefits of resilience
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 recognise 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.

How to become a more resilient company

Crises are opportunities for change. With COVID-19, companies have a unique opportunity and necessity to revisit their business models to build a greater systemic resilience, starting with the following six actions.

1.    Seek advantage in adversity. Don’t merely endeavour to mitigate risk or damage or restore what was; rather, aim to create advantage in adversity by effectively adjusting to new realities.

2.    Look forward. In the short run, a crisis may appear tactical and operational, but on longer timescales, new needs and the incapacitation of competitors create opportunities. Crises can also be the best pretext for accelerating long-term transformational change. One of the key roles for leaders is, therefore, to shift an organisation’s time horizons outward.

3.    Take a collaborative, systems view. In stable times, business can be thought of as performance maximisation with a given business model in a given context. Resilience, by contrast, concerns how the relationships between a business’s components or between a business and its context change under stress. It requires systems thinking and systemic solutions, which in turn depend on collaboration among employees, customers and other stakeholders.

4.    Measure beyond performance. The health of a business is not captured only by measures of value extracted, which tend to be backward-looking. Measuring flexibility, adaptation and other components of resilience is critical to building a sustainable business. This can be done quite simply by looking at either benefits or capabilities.

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. - hrb.org