We witnessed one of the most tragic pandemics recently and have been made aware of the importance of developing resilience. Moreover, the only way to survive shocks in the environment is through resilience. Let’s take a deep dive and understand why is resilience important in business?
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Business resilience
Business resilience refers to the ability of businesses to overcome the shocks in the business environment and bounce back. Further, we can say that it is the ability to get back to normal operations swiftly and efficiently.
The major goals of business resilience building are:
1. Early identification of threat
2. Proactive threat confrontation strategy
3. Minimizing the financial damages
4. Recovery planning
What are the benefits of resilience in business?
Organizational attitude towards resilience has a direct impact on its sustainability. Although many business shocks are unpredictable, the response systems can still be proactively put in place. The firms have a choice to get overwhelmed by the shocks or be empowered to fight back. The resilient firms have the following advantages:
- It enhances chances of survival of the firm.
- Reduces the financial impacts
- Improves the morale of the workforce
- Poises the firms to grab new business opportunity
- It reduces the uncertainty and unpredictability.
Some Common business shocks
| Type of business shock | Example | Severity |
|---|---|---|
| Geo-political | War | Medium to high |
| Famine | Medium to high | |
| Pandemic | High | |
| Epidemics | Medium | |
| Ecological | Earthquakes | Medium to high |
| Floods | Low to Medium | |
| Other Environmental phenomena | Low to High | |
| Attacks | Physical attacks on infra | Low to medium |
| Cyber attacks | Low to High | |
| Targeted rival attacks | Low to High | |
| Financial | Credit risks | Low to medium |
| Forex risks | Low to medium | |
| Market risks | Low to medium |
How to plan for business shocks?
Business shocks are inevitable. However it is not impossible to overcome them. Being proactive is quite useful.
Step 1: identify the key business risks
Business risks can come in all shapes and sizes. We have highlighted some common risks in the table above. They may have different levels of severity save probability. Also, the severity would keep changing over time.
Nevertheless, the key here is to ensure that organization is poised to monitor the external environment for any signs. These signs may not be evident in an early stage. While, in some cases it may have sudden onset with no time to ‘detect’ it. For instance, for events like earthquakes, we may only have post facto responses.
Step 2: prioritize the risks based on their severity and probability
Resilience strategy can go haywire if we do not have a priority. Random allocation of resources dilutes the focus of the firm. This can prove to be detrimental as well. Therefore, once the business risks are identified, we need to sort them according to two factors: the severity and probability. The severity of events depicts their impact on the firm. On the other hand, their probability is the chance of them occurring in future.
The most important event should be one with high probability and high severity. We should also note that the chances of an event happening is taken based on past occurrences. However, for infrequent event, it is not possible to predict when it will happen. Infrequent events follow a poisson’s distribution. We can only predict the cumulative probability of their occurrence within certain time domain.
Here lambda (λ) is the Poisson’s parameter. It represents how infrequent is an event. As you can see from the graph that for λ = 1, the cumulative probability graph is steeper than for λ = 10. This means that there are higher chances of an event occurring for events with yellow color. There is almost a certainty (probability close to one) for k more than 3. On the other hand, the blue curve represents an infrequent event, the probability of an event is around one for k greater than 17. If we consider k is the time in months, then these curves simply represent how likely events marked in yellow and blue are about to occur in the future.
Step 3: Risk mitigation planning
The next step in working with resilience planning is develop a mitigation strategy. It is easier said than done. Firstly, we may not know what business shocks may happen in future. Almost none of the businesses predicted the extremely rare phenomena like Covid19. Although it was evidenced in epidemiology literature as early as 2013 that there may be an outbreak of new corona virus. Such warnings were never picked up in mainstream media as it was too far-fetched at the time.
However, we can develop a mitigation strategy for the type of shock, as seen in table 1 above. All geo-political shocks have direct impact on few known areas of operations:
- Reduced demand
- Supply chain disruption
- Increased cost of goods sold
Developing the culture for resilience
We cannot overemphasize the importance of developing a culture of resilience. Culture is the key to organizational attitude. One is the key concepts in resilience culture is how risk is perceived by the employees. Nevertheless, the employees must be encouraged to be open towards perceiving impending threats. Additionally, any early warning signs raised by employees must be considered by the managers seriously. This can ensure the early identification of potential threats. Time is a key factor in the resilience process.
Secondly, organizational communication channels should be friendly. This has two benefits. Firstly it reduces the information gap between teams. It has been seen during Covid19 that different teams from the same firm resounded with different sets of assumptions about the pandemic. Sometimes strategic business units started from scratch while their peers were already dealing with supply chain disruptions.
Thirdly, a key tenet of organizational learning is knowledge transfer. Although it’s not possible to pass on tacit experiences from dealing with business shocks, we can ensure the strategic response system is developed. We can codify some of the knowledge into ‘response manuals’. These manuals will be a boon for future events.