How to shockproof your company

“Plans are worthless, but planning is everything,” as US President Eisenhower once said. The Supreme Allied Commander of the D-Day landings was making an important point. 

The discipline of trying to foresee difficulties and anticipate both opportunities and hazards is worthwhile and important. But we should guard against complacency or the delusion that we can somehow see or control the future. There will always be surprises.

In the latest London Business School webinar on leading through the coronavirus pandemic, Julian Birkinshaw, Professor of Strategy and Entrepreneurship, spoke powerfully on the need to recognise the possible limitations of corporate “agility”, and how resilience might be a better goal for the organisation to aim for.

Clearly, and inevitably, some businesses and organisations were better prepared for Covid-19 than others. It was hard if not impossible to consider all the possible scenarios. But this is symptomatic of how we struggle in the strategic planning process, Professor Birkinshaw says:

“We predict that everything will get just a bit better or a bit worse – it’s a pretty linear process”. And then we make a fan chart to allow for variation, which we call “sensitivity”. But we should be sceptical about these neat forecasts. 

In fact, he insists, the world is turbulent. Big shocks will come. We cannot predict when they will happen, but we could prepare for them. Donald Sull, Senior Lecturer at MIT (formerly a London Business School faculty member) refers to these moments as “golden opportunities” (the positive shocks) or “sudden death threats” (the negative ones).

Agility sounds good. It suggests the ability to move quickly. Agile businesses may be small, and fleet of foot, but may also lack heft, and have weak balance sheets. In this way agile can sound a bit more like fragile. Resilience is perhaps a more useful concept. Agility is arguably more about seeing opportunity on the upside, Professor Birkinshaw says, while resilience is about surviving bad times.

He draws the distinction with these two definitions:

• Agility is the ability to move quickly and easily.
• Resilience is the capacity of a system to absorb disturbance and still retain its basic function, structure and feedback systems.

A classic study by Shell executive Arie de Geus, The Living Company, suggested two hallmarks of resilient companies are their sensitivity to the world around them, and a tolerance of new ideas.

It is also worth reflecting on the concept of “anti-fragility” introduced by the writer Nassim Nicholas Taleb. A business or organisation that is “anti-fragile” actually grows stronger from the knocks it receives. Imagine a package being sent in the post labelled: “anti-fragile – please bash”. Taleb compares anti-fragility to the hydra of Greek mythology, who grew two new heads every time you succeeded in slicing one of its heads off. Or as Nietzsche put it: “What doesn’t kill me makes me stronger.”

The task, Professor Birkinshaw says, is to make a system more resilient to absorb shocks. Consider the banking crisis of 2008. Investment banks – the “broker dealers” such as Merrill Lynch or Lehman Brothers – pursued high risk trading strategies. They were not as heavily regulated as traditional commercial (lending) banks.

The investment banks made a lot of money in the good times. But as soon as the crisis hit they were in trouble. Their balance sheets were weak and they had no cash deposits. Even the mighty Goldman Sachs teetered and required support from Warren Buffett and the government to survive, and changed its status to become a deposit taker.

Agile broker dealers were great places to be in the good times, but lacked resilience when things were rough.

In business it is too soon to say how well people are doing for now, in the middle of the crisis. Resilience means surviving over the medium to long term.

Professor Birkinshaw points to three different types of resilience that leaders need to think about: operational resilience, strategic resilience and personal resilience.

Operational resilience ensures that core operations continue. Strategic resilience means the business is in a position to respond to the changing world we are in, staying relevant to customers today and tomorrow. Personal resilience means that every employee has the ability to keep going.

And there are four elements of resilience that can be considered as leaders try to build from here, four areas of activity where a shift may be required. These are:

• A shift from bureaucracy to emergence
• A shift from formalisation to personalisation
• A shift from efficiency to reliability
• A shift from profitability to meaning

 

From bureaucracy to emergence

Bureaucracy is unavoidable and necessary, but it comes with difficulties. It creates rigid, internally focused procedures. “Emergent” structures are more fluid. They enable resources to be reallocated more quickly.

In a rigid bureaucracy things get done in a top-down way through fixed procedures. This can create a fragile house of cards. People at the bottom of the hierarchy may have no sense of what the bigger picture is. So we need fluid, emergent structures to deal with situations as they arrive.

For example, during the Hurricane Katrina crisis in 2005 the US Federal Emergency Service (FEMA) was quite slow to respond. A resilient business – Walmart – was quicker.

Its then CEO, Lee Scott, told staff:

“A lot of you [managers of the stores] are going to have to take decisions above your level. Make the best decision that you can with the best information that’s available to you at the time, and, above all, do the right thing.” In other words, he wanted the bottom of the organisation to take intelligent action.

In the current crisis you need that initial frontline response, a rapid response from those closest to the problem. But bureaucracy is inevitably still there. The central authority provides joined-up processes. You need a top-down central authority for mobilising a joined-up effort.

 

From formalisation to personalisation

This involves a move from formal authority to personal authority. Bosses may be good at telling people what to do, but an emphasis on formal procedures depersonalises work and leads people to lose sight of the big picture.

An emphasis on individual accountability means decisions are made by the person closest to the action. The individual owns the issue.

Again, leading up to the financial crisis individuals did things on their own with no sense of the system. People worked in siloed business, not seeing the implications for the whole. Making risk understood more personally – this process of personalisation – is ultimately at the heart of resilience.

Karl Weick and Katherine Sutcliffe from the University of Michigan have conducted research into what they call “high reliability organisations” (eg a power plant, or a super tanker), businesses where any mistake or error can kill people.

They found certain key characteristics of high reliability organisations:

• mindfulness – there is preoccupation with failure, resistance to simplification, sensitivity to operations, deference to expertise, and commitment to resilience
• people are good at highlighting catastrophe.
• people learn from mistakes and injuries. Is there a systemic problem?

 

From efficiency to reliability

Efficiency has been an apparently rational goal for business leaders for decades. It means taking out buffers and slack resources to keep costs low. Reliability means building in redundancy and slack so that the system can withstand failure.

For 50 years thinking about manufacturing and supply was inspired by the worldview from Toyota: reducing waste and inventory, working in “lean” and “six sigma” processes. These are good practices in a world of reliable supply of products and services. But when bad things happen all the assumptions about predictability are undermined. Remember the Icelandic volcano eruption in 2010. In Europe for five days no flights were possible. Some supply chains broke down.

We have been reliant on the international transfer of components and products for many years. But we need to think about the worst that can happen. This might involve developing more local supply. In the wake of this crisis, companies may be more thoughtful about where things come from, with less reliance on single source products sent around the world.

What does reliability look like in practice? The internet looks like quite a good example of this. It has been reliable through our working lives until now, a network of computers round the world, resilient to any failure in a single computer.

But you also need reliability at the level of a company or group. And where Fuji, the Japanese film company, survived the arrival of digital, Kodak did not. One of the reasons Fuji survived was that it had kept its chemical businesses, and proved to be more resilient. Kodak had sold their chemical business in 1995.

 

From a focus on profitability to a focus on meaning

We can broadly describe two contrasting views on the purpose of business, both of which are true based on two different interpretations of human nature. One view holds that people are motivated by extrinsic drivers, primarily financial rewards. An alternative view would argue that people are motivated by intrinsic drivers, such as concern for others, for society, and for the planet.

Companies, too, can set out contrasting purposes for themselves. Exxon Mobil says on its website: “We must continuously achieve superior financial and operating results while simultaneously adhering to high ethical standards.” Whereas the India Tata group says their purpose is “To improve the quality of life for the communities we serve”.

Both of these approaches are legitimate. But there has been a perceptible shift away from simply making money to doing good for quite a while, borne out by the Business Roundtable in the US and the prevailing sentiment at the World Economic Forum in Davos in January 2020.

There is also a need to develop personal resilience. But while pure optimism can set you up for a fall, optimism laced with realism can help build resilience.

In Jim Collins’ book “Good to Great” the author describes what he calls “The Stockdale Paradox”, based on the experiences and insights of Admiral Jim Stockdale, who was a prisoner of war in Vietnam.

Stockdale said: “You must never confuse the faith that you will prevail in the end – which you can never afford to lose – with the discipline to confront the most brutal facts of your current reality, whatever they may be.”

Finding meaning in what you do can also help support resilience. Viktor Frankl’s “Man’s search for meaning”, written after he had survived life in a concentration camp during the second world war, urges readers to recognise the freedoms humans enjoy.

“Everything can be taken from a man,” he wrote, “but one thing: the last of the human freedoms – to choose one’s attitude in any given set of circumstances, to choose one’s own way.”

Businesses could invest in building resilience, both structurally and at an individual level. They could embed personal and decentralised responsibility, while investing in reliability – duplicate and local sourcing.

They could develop a more pragmatic and realistic view of the future, and invest in individual resilience across the whole organisation.