Executives dream of insulating their companies from all risks, both natural and manmade, making their company’s revenues impervious to the vicissitudes of a capricious world. This is also the implicit goal of most business strategies, achieved through the use of resource control through vertical integration, supplier dominance through buying power, persuasive political influence through lobbying and campaign finance, and of course, good ol’ market monopolies, among other things. The idea is that by gaining control of your destiny, you foster complete commercial independence.
This dream is popular, but it is, of course, a fallacy. The surprising secret is that dependence, not independence, is the way to protect the organization against risks.
The concept of resilience offers a window into the fallacy. Like the term “sustainability,” resilience has become a standard at global confabs and — as with sustainability — it is a term that means different things to different people. Experts often talk in terms of personal “psychological resilience,” referring to the ability of individuals to bounce back after being hit with disappointments, shocks, or traumatic events. This is an important perspective, and corporate wellbeing specialists have begun developing resilience practices for workers.
But a less-understood perspective is “business resilience,” that is, how to ensure your company can continue creating value in the face of disasters, both natural and manmade.
A good place to learn about business resilience is Indonesia, and a good guide is Karin Reiter, Group Corporate Responsibility Manager at Zurich Insurance Group. I met Karin at the Aspen Institute’s First Mover Summit, and she offered a compelling example.
“Indonesia is often referred to as supermarket for natural disasters,” explains Reiter, “particularly for flooding.” As an insurer, Zurich had exposure to many companies in Indonesia. One customer in particular experienced a severe flooding event and was heavily damaged. In order to reduce future losses, Zurich risk engineers were called in to recommend how to make the factory more resilient to future shocks. Protective improvements such as moving stocks off of the ground floor and building berms to divert floodwaters were made, which would substantially insulate the factory during the next flooding event.
Not surprisingly, Indonesia experienced another flood not too much later. This time, however, the factory was protected thanks to the improvements. “So you would expect that the next day the company would be up and running again at full speed,” says Reiter.
It wasn’t. Instead it stayed shuttered, just like after the last storm.
But if the company had successfully insulated their facility from a natural disaster risk — an executive’s dream — why were they unable to operate? The reason lies in the secret of business resilience. Resilience is not a condition of any single factory. It is a systems condition. It is a community condition. It is a condition of interdependence, not independence.
As Reiter explains, “The challenge was that roads were destroyed and employees couldn’t go to work. And they needed to look after saving their own lives, saving their families’ lives. They were really trying to save all their assets within their community.” An insulated fortress factory in the middle of a devastated community turned out to be worthless. The resilience of the company’s operations was dependent on the resilience of the community in which they operated.
“Look deep into nature,” said Albert Einstein, “and then you will understand everything better.” The secret of resilience can be found in nature. Individual species do not exist in isolation but are part of interdependent ecological webs. Food webs, trophic pyramids, symbiotic mutualisms — all of these relationships are vital to the health and resilience of biological communities. It is the dynamic flow and exchange — as when trees transpire the oxygen needed by animals and the animals respire the carbon dioxide needed by the trees — that makes the biosphere both possible and resilient. The same is true for business.
And, as in nature, the business relationship requires mutuality. Just as the factory was dependent on the resilience of the community, so was the community dependent on the factory. As Reiter explains, a factory closure “has a huge impact on the communities, because if the employees can’t work, they are no longer able to generate income. If they don’t have an income, they can’t invest in their communities, they can’t pay taxes, they don’t have any savings for their children to be sent to school. If flooding happens frequently, then there’s a cycle of poverty that just continues.” And, of course, as the cycle persists, the disruptions for factories and their supply chains persist.
Most business leaders would prefer to isolate themselves from worrying about these dependencies. But gone are the days of Ford when a company could vertically integrate and control everything from iron mines to Model-T dealerships. The alternative is to recognize that independence is a chimera and embrace our interdependencies.
Source: MIT Sloan Management Review
About the Author
Gregory Unruh is the Arison Group Endowed Professor at George Mason University in Fairfax, Virginia, and the MIT Sloan Management Review’s guest editor for the Sustainability Big Ideas Initiative. He can be reached at firstname.lastname@example.org.
MIT Sloan Management Review leads the discourse among academic researchers, business executives and other influential thought leaders about advances in management practice, particularly those shaped by technology, that are transforming how people lead and innovate. MIT SMR disseminates new management research and innovative ideas so that thoughtful executives can capitalize on the opportunities generated by rapid organizational, technological and societal change.