Brilliance in Resilience: Turbulent Times

Brilliance in Resilience: Turbulent Times

Article Organizational Excellence & Transformation

In the most turbulent of times, European companies face a myriad of challenges and crises, especially in specific industries. The world has never appeared more fraught with uncertainty, risk and crises. How can businesses overcome uncertainty, adapt, evolve and thrive in these turbulent times? What is the optimal model of organizational resilience to adopt? These questions will be answered in the Brilliance in Resilience blogseries.

Not only have European businesses faced the strains of a global pandemic with unprecedented lockdowns, but they also now contend with a war in Europe, and are managing a host of crises from energy and inflation to the cost of living. There are even greater risks on the horizon: macro shocks that could up-end businesses, including the potential for China to invade Taiwan, an escalation of the war in Ukraine, and another financial crisis. All of this comes in the context of global digital disruption, rapid technological change, economic interdependence and a counterforce of emerging economic nationalism.
The world changed in 2020, but it was already so volatile that researchers devised models such as VUCA (volatility, uncertainty, complexity and ambiguity) and TUNA (turbulent, uncertain, novel, and ambiguous). The 2008 financial crisis caused chaos in financial markets, and after this event, CEOs described their operating environment as unlike anything they had seen before. Strategic frameworks based on an analysis of a market are rendered obsolete in the VUCA world when the paradigm changes. New business models emerge to meet needs created by megatrends such as urbanisation, digitisation, demographics changes and innovation. People are changing their attitudes, and consumer sentiment is becoming unpredictable.
Combining forces lead companies to consider how to survive challenges and how to seize opportunities, for there are winners and losers in every crisis. The world is moving faster than ever before, and paradigms are changing more quickly, so what should your company do to outperform the competition?
A growing range of sectors are struggling with volatility, turbulence and complex changes. Twenty-first-century industries such as healthcare, retail, automotive and the financial services sector have been transformed by technological and societal changes. Supply chains are strained by technological developments, pressurising costs and prices. Regulation is increasing, and consumers want greater transparency. In this blog series, we pay particular attention to the utility, financial, Life Sciences, and retail industries.

The Life and Death of Companies

Geoffrey West demonstrates in his book “Scale” that companies live and die like organisms. Of the 28,853 companies that traded on the US stock market in 1950, 22,469, or 78 per cent, were defunct by 2009. Of these, 45 per cent were acquired or had merged with other companies, while 9 per cent were liquidated or went bankrupt, 3 per cent had been privatised, 0.5 per cent had undergone a leveraged buyout and 0.5 per cent reversed acquisitions. The remainder disappeared for other reasons. He suggests a universal dynamic of business life cycles:

In other words, the general dynamics and overall life of companies are effectively independent of the business sector they operate in. This strongly suggests there is a universal dynamic at play.

West explains that the reason companies die is that in their youth, new ideas and enthusiasm flourish, but as old age kicks in, they narrow product space and become more specialised. Market forces encourage tried-and-tested products over new products, which are more risky but better longterm. They become more unidimensional, without diversity, which makes them less resilient so that configuring and reinventing becomes increasingly more expensive. So when a large enough unanticipated shock comes along, they are at risk of a buyout, takeover or bankruptcy, and die. Human beings and companies are finely balanced between metabolism and maintenance costs. In human beings, this is known as homeostasis: the gradual build-up of unrepaired damage makes us less resilient and increasingly vulnerable to fluctuations and perturbations as we age. A case of flu or pneumonia, which we can fight off in our youth, can kill us in old age. West explains: Just as organisms must die in order that new may blossom, so it is that all companies must disappear or morph into new, innovative variations to flourish. This also means Google and Tesla, which now seem invincible, will themselves eventually fade and disappear. Research has shown that lifespans of companies are shortening. Deloitte Center for the Edge found that over the last 55 years, the average company tenure on the S&P 500 has declined from 61 years to only 18 years.

Lessons from Resilient Companies

There are lessons to be learned from resilient companies. We used them and our own research and analysis to develop an original resilience model. What do companies that consistently outperform the market have in common? How did a company like Amazon reinvent itself from a book seller to the biggest ecommerce merchant in the world and the cloud computing leaderit has become? Research by the Center for Effective Organizations (CEO) has found that a few large companies in every industry consistently outperform their peers over extended periods. These companies have the capability to anticipate and respond to events, solve problems and implement change better. And they maintain this performance edge despite significant business change in their competitive environments. Harvard Business Review researchers studied corporate performance of 4,700 companies across recessions. Based on their financial performance, four groups of companies were identified: prevention-focused companies, which had cut back further than their competitors, promotion-focused companies, which had increased expenditure relative to rivals; pragmatic companies, which had adopted a prevention focus by reducing COGS or employees more than their peers had; and progressive companies, which had reduced COGS but hadn’t cut employees more than their peers and had also allocated more resources, relative to their competitors:

Companies that master the delicate balance between cutting costs to survive today and investing to grow tomorrow do well after a recession. Within this group, a subset that deploys a specific combination of defensive and offensive moves has the highest probability—37 percent—of breaking away from the pack.

This adaptive model of defensive and offensive strategies is at the heart of our Model for Organizational Resilience which we will eloborate on in these blog series.

The blog series are based on the ‘Brilliance in Resilience’ report by Critical Future for Eraneos from 2022. With the current challenges organizations are facing, the report findings, the model for organizational resilience and trends could not be more relevant.

Koen Boomsma

Senior Manager – Organizational Excellence & Transformation

+31 20 305 3700