Over the last few years, business leaders have been reminded repeatedly of the interconnectedness and unpredictability of businesses, economies, and societies. Humanitarian disasters, from the pandemic to the war in Ukraine, have created shockwaves affecting geopolitics, economics, trade, energy, and financial markets. Business reputations, markets, supply chains, and employees have been impacted in unpredicted ways.
It’s not surprising then that resilience — the ability to thrive under change — has risen to the top of many leaders’ agenda. As we saw with Covid-19, more resilient businesses had better outcomes, and some even emerged as new winners.
Yet, history tells us that companies often lose interest in resilience as crises fade. Few companies have systematically codified lessons learned and baked resilience into their organizations.
This is because too many organizations hold a narrow view of resilience as mainly ensuring short-term, operational continuity during crises. True resilience is more expansive: It’s a company’s capacity to absorb stress, recover critical functionality, and thrive in new circumstances. Resilience is not merely an operational consideration — it’s a potential strategic advantage that enables companies to capitalize on opportunities when competitors are least prepared.
In order to build truly resilient organizations, leaders first must understand five myths that may be holding them back.
Myth #1: Resilience is mainly a supply chain issue.
Reality: Resilience is essential in all key organizational functions.
Disrupted supply chains and shipment delays are conspicuous and immediate, but a sole focus on acute crisis management skews the narrative. When resilience is baked into all key functions — from finance, to IT, to customer service — companies can restore functionality and performance much more rapidly and effectively.
Myth #2: Resilience is synonymous with risk mitigation.
Reality: Resilience is as much about enabling of upside as protecting against downside risks.
Resilience reduces the immediate impact of crises by enabling companies to anticipate, prepare for, and cushion against shocks. However, resilience also enables companies to respond to crisis in opportunistic ways, thrive in new circumstances, and shape the competitive environment to their advantage.
Myth #3: Resilience is mainly an operational consideration.
Reality: Resilience is strategic.
Many leaders today undervalue resilience, believing it to be only valuable in a limited and non-recurring set of circumstances. Resilience provides value not only during but also long after a crisis has receded. It can create competitive advantage in several ways, such as:
- Differentiating service through greater reliability
- Capitalizing on transient opportunities, such as favorable talent and acquisition markets
- Gaining market share with new offerings fitting new circumstances
Myth #4: Resilience is a cost to the business.
Reality: Resilience is a driver of value.
Resilience provides substantial future benefit if invested preemptively. Building the required operational redundancy, modularity, diversity, and adaptive capability requires embracing a tradeoff against near-term efficiency. Challenges in measuring the long-term value of resilience with traditional metrics lead many leaders to make myopic decisions that effectively over-value short-run efficiency.
However, analysis of the impact of resilience over a 25-year period shows that it delivers differentiated long-term performance value. Although crises occurred in only 11% of quarters, relative total shareholder return (TSR) during those times accounted for 30% of a company’s long-run relative TSR. In other words, performance during crisis periods has almost three times the impact of performance during stable periods.
Myth #5: Crises are too infrequent and unique to warrant investment in resilience.
Reality: Companies need resilience to navigate an increasingly volatile world.
Resilience can enable companies to prepare for and respond better to future shocks, whether those be pandemics, geopolitical conflicts, effects of climate change, cybersecurity threats, industry-specific disruptions, or other unpredicted challenges.
In our increasingly volatile world, exogenous crises may become more frequent, but damage and disadvantage is not inevitable. Leaders must prepare to effectively lead their organization through both stable and unstable periods alike.
Building a Resilient Organization
In order to build systematic resilience into their organizations, leaders must take seven critical actions.
1. Adopt an expanded view of resilience.
Consider resilience both a strategic opportunity and an operational imperative. Build resilience into each business function by assessing the impact of lost or reduced functionality and adopting a tailored approach to address it.
2. Recognize and address the tradeoff between long-term resilience and short-term efficiency.
Under-investing in efficiency can cause a crippling lack of competitiveness, while under-investing in resilience can cause corporate failure or long-term competitive disadvantage. Leaders cannot justify and calibrate resilience efforts until they address this challenge head on.
3. Shift your mindset.
View crises as inevitable disruptions to be prepared for, managed, and leveraged for competitive opportunity, rather than infrequent one-off events to be defended against ad hoc. Such a shift will help the organization to make proactive and future-oriented decisions during crisis that allow it to thrive in and shape the post-crisis landscape.
4. Measure resilience.
Introduce business metrics that measure flexibility and responsiveness (such as recovery rates relative to competitors, share of upswing captured, portfolio fluidity, and speed of mobilization) to shift the focus beyond short-term performance optimization and reorient to long-term growth potential.
5. Operationalize resilience.
Build resilience across multiple timescales by applying six key principles:
- Anticipate future shocks using a prudence principle.
- Prudence: While the future may not be precisely forecastable, downside scenarios can be plausibly envisioned. Develop early warning systems to spot shifts and utilize contingency planning and war gaming to prepare intellectually and behaviorally for these possible futures.
- Absorb impact by building redundancy, diversity, and modularity.
- Redundancy: Maintain the right amount of absorptive capacity in the form of extra buffers (cash, inventory) or extra functionality (suppliers, manufacturing facilities). Duplication of elements may be inefficient in the short run but can provide a hedge against the unexpected.
- Diversity: Invest in heterogeneity of key business elements (products, business models, ways of thinking) to make it possible to react to unexpected change and avoid correlated responses across a system, which can lead to total system failure.
- Modularity: Loosely linked, separated modules (subsidiaries, plants, teams) can act like circuit breakers to help prevent the collapse of a system when one element is stressed.
- Adapt to and reimagine new emerging environments.
- Embeddedness: Align your company’s goals and activities with those of broader economic or social systems of which you’re a part. This will strengthen relationships with employees, customers, governments, and partners that can be relied on during crisis. It will also protect the company against “slow crises” — gradual drifts in attitudes and values, which can neutralize or damage a business model.
- Adaptiveness: Exogenous change is often unplannable and requires an adaptive approach comprising of experimentation, selection, and amplification of successful outcomes. Plan dynamically and reallocate capital as circumstances change.
- Imagination: Beyond adaptation, seek to be the driver rather than the victim of change by proactively reimagining businesses and shaping business environments.
6. Model leadership behaviors.
Systematically adopting resilience requires a cultural shift. The over-fixation on short-run efficiency, engrained through business education, workplace culture, backward-looking metrics, and misaligned incentives, can be hard to overcome. Leaders must reinforce the change by being a vocal champion for resilience and institutionalizing the learnings from recent crises.
7. Contribute to improving the resilience of the societal systems on which your businesses depends.
As the Covid-19 pandemic made all too clear, leaders and their organizations do not operate in a vacuum. They both influence and are influenced by the societies in which they are embedded. Businesses can’t succeed as society fails. Resilience is a property of integrated systems, not parts of systems like individual companies or business units. Business therefore needs to play a role in larger issues beyond traditional corporate boundaries. Leaders should look to reduce the volatility and fragility of the systems and societies on which they depend, reinforcing the social fabric through efforts like reducing polarization, optimizing for both societal and business value, and reimagining business models for sustainability.
The Covid-19 pandemic was not the first test of businesses resilience and the Ukraine crisis will not be the last. Businesses must act now to institutionalize resilience before the lessons of these crises fade, leaving them unprepared for the next ones.