GEORGE E. DANNER, President, Business Laboratory LLC
My email inbox is stuffed with articles about coping with COVID-19, advising me how to get my business restarted in the most profitable way. The pattern I have noticed is that the word "resilience" gets thrown around like confetti without any useful definition. It is an important word, as it conveys a genuine, powerful concept for companies to embrace, but it becomes meaningless when we fail to match a clear definition to it. I'd like to try to fix that.
In a perfect world, resilience has no footing. In the real world, where plenty goes wrong every single day, resilience shows itself in the form of "grace under constraints." In other words, can we remain economically impervious to a variety of constraints thrown our way? Can we continue to perform normally when the abnormal forces us to operate differently?
The curves in Figure 1 show two hypothetical firms and their financial performance along an axis of increasing degrees of constraint. We refer to firms that are not resilient as "brittle" -- the least amount of strain causes them to produce substantially poorer performance relative to their normal baseline. On the other hand, firms that are resilient support near-normal performance even as constraints are increasingly applied. Any given firm falls somewhere between these two extremes.
"Is my company resilient?" This is the question to ask yourself -- and one that can be assessed with some level of analytical rigor. Watch for boards, activist shareholders and industry groups to insist on detailed resilience plans for both public and private firms. Now is your chance to get out ahead of that looming mandate.
In past articles, I have introduced the idea of a "digital twin" -- a digital counterpart to a real system, asset or collection of assets. One could certainly expand this idea to encompass an entire firm, mimicking the economic behavior of the company under a wide variety of conditions. With a digital twin of the firm, companies can run simulation models of scenarios where constraints are increasingly applied. Figure 2 shows how a series of simulations can help guide companies to create a curve that represents the firm's overall resilience.
Modeling a firm under brutal market disruptions is a necessity. By creating models, we begin to systematize our thinking about this abstract representation of the firm so we can understand its behavior under a wide variety of circumstances. It allows us to play different roles, and each model shows us a different light, leading to better insight. Resilience is not a natural competency we simply pick up by staying in business over time. It has to be engineered into our operations.
Agility and resilience are two sides of the same coin. Building resilience enables business agility. These two characteristics will shape the winners and losers in our post-COVID-19 economy, trumping old economic traits like market share, asset base and even cost efficiency. In the great rebuilding to come, completely new strengths will be required.
For more information, visit www.georgedanner.com.
