Resilience

In the midst of the Covid-19 crisis, we have become painfully aware of the fragility of many companies. Hence the identified importance for businesses to build their resilience. To be honest, when we come to teaching business management little focus, if any at all, is placed on resilience and the focus is much more on financial performance management. As a result, very few companies are able to explicitly design for, measure and manage resilience.

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. After all, 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 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 maximize shareholder value. 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. It is a completely different mindset.
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. Of course, many companies already undertake some form of risk management — but mostly to understand and minimise 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.

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

(i) Build Redundancy buffers systems against unexpected shocks, albeit at the expense of short-term efficiency. It can be created by duplicating elementsor by having different elements that achieve the same end.
(ii) 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.
(iii) Modularity allows individual elements to fail without the whole system collapsing, albeit while forgoing the efficiency of a tightly integrated organisational design. Because 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.
(iv) 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.
(v) Prudence involves operating on the precautionary principle that if something could go wrong, 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, monitoring early warning signals and analysing system vulnerabilities.
(vi) Embeddedness is the alignment of a company’s goals and activities with those of broader systems. It is critical to long-term success because companies are embedded in supply chains, business ecosystems, economies, societies, and natural ecosystems. Articulating a purpose — the way in which a corporation aims to serve important societal needs — is a good way to ensure that the company does not find itself in opposition to society and inviting resistance, restriction, and sanction.

Companies can also 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.

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). 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.

So How does my Company become more Resilient?
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.

Seek advantage in adversity. Don’t merely endeavor to mitigate risk or damage or restore what was; rather, aim to create advantage in adversity by effectively adjusting to new realities.
Look forward. In the short run, a crisis many 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.

Take a collaborative, systems view. In stable times, business can be thought of as performance maximization 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.

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.

Prize diversity. Resilience depends on being able to generate alternative ways of reacting to situations, which in turn depends on the ability to see things with fresh eyes. Resilient businesses prize cognitive diversity and appreciate the value of variation and divergence.

Change as the default. Alibaba founder Jack Ma sees change, not stability, as the default. Resilience is less about occasional adjustments under extreme circumstances and more about building organisations and supporting systems predicated on constant change and experimentation. This is partly to avoid rigidity and partly because iterative incremental adjustment is far less risky than a massive one-shot adjustment.

In conclusion, all the disruption brought by COVID-19 would not have thought us a big lesson if we do not change our mindset completely. Building resilience represents not just an opportunity to mitigate risk but also an opportunity for competitive advantage. In today’s business world, transient high performance is commonplace; it is sustained performance by resilient companies that stands apart.

Silvan Mifsud
Silvan Mifsud

Silvan holds a degree in Banking & Finance from the University of Malta and an MBA from the University of Reading, specialising in Corporate Finance and Business Leadership. Silvan has been involved in various sectors of the economy holding various managerial and directorship roles. Silvan is presently working as a Director for Advisory Services at EMCS, whereby he advises various businesses on their strategy, operations, corporate governance, financial performance analysis and sourcing their financing needs.

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