The Relevance of Organizational Resilience in Times of Crisis and Beyond

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Multinational companies have extensive and complex supply chains to operate as efficiently as possible. Within these production networks there is little room for error and preventive stress tests are rarely carried out. The COVID-19 pandemic has shown how fragile such structures can be and what consequences can arise if too little attention is paid to risk exposure (Sneader & Lund, 2020).

But how could companies have better prepared for an unexpected event like the COVID-19 pandemic? And how relevant is organizational agility and resilience in this context?

In addition to industrial groups, organizational resilience is also becoming a priority for banks. In particular, cooperation with third-party providers and potential cyber security threats pose new challenges for financial service providers (Watson, 2019). In science and practice, the term resilience is often used in connection with agility. Therefore, the two terms will be separated from each other in the following and their special features will be explained.

McManus et al (2007) define organizational resilience as the ability to adequately assess situations, to understand potentially critical vulnerabilities with all their dependencies, and to adapt to new situations both quickly and appropriately. Resilience can be described as the development of an inner robustness. It is about the ability to anticipate challenges using one’s own resources and to react to them appropriately (Welter-Enderlin & Hildenbrand, 2006). Not to be forgotten is the duality that resilience brings with it. It is not just a matter of finding a way out of a crisis, but also of reflexively questioning entrepreneurial action, recognizing opportunities and advancing out of the crisis into a new reality (Colse et al., 2020). In contrast, organizational agility describes the ability to respond proactively to unexpected changes by efficiently and effectively adapting or creating new internal resources, capabilities and strategies (Ganguly et al., 2009; Yang & Liu, 2012). Resilience is thus a broader term that includes agility as one of several parts.

The central importance of resilience

Economic cycles, interdependencies between companies, e.g. between suppliers and manufacturing companies, regulatory and environmental influences have direct and indirect effects on the activities of a company and increase the uncertainty of the corporate environment (Hirt, Laczkowski & Mysore, 2019). This uncertainty makes it difficult for companies to calculate future market conditions. (Wendler & Stahlke, 2014; Krystek & Zur, 2002)

A McKinsey study showed that not all companies are equally affected by crises, such as an economic downturn. For example, the financial crisis from 2007 onwards hit resilient companies less hard. Moreover, in the years following the crisis, these companies also generated above-average profits measured by the total return to shareholders. According to the study, resilient companies had three things in common: 1. the companies increased their operational flexibility by, for example, reducing the debt ratio in economically strong years before the crisis; 2. they reduced costs in anticipation of the economic downturn and thus reacted quickly to the first signs of the crisis; 3. companies that were in countercyclical sectors focused on growth, even if this was associated with initial costs (Hirt et al., 2019).

The main advantage of organizational resilience is that resilient companies are able to cope with the challenges of day-to-day business on the one hand and have the skills to overcome problems in times of crisis on the other. Resilient companies anticipate potential dangers or crises and prepare for them (McManus et al., 2007).

Having demonstrated the importance and advantages of organizational resilience, the question arises as to how companies can succeed in building organizational resilience.

Development of organizational resilience

Companies often focus on maximizing shareholder value, for example through dividends and stock appreciation. However, this is a short-term endeavor, while resilience takes a long-term, multidimensional perspective. Building resilience at the present time requires sacrificing a certain level of performance and efficiency for the benefit of sustainable and long-term performance in the future. (Reeves & Whitaker, 2020)

Reeves & Whitaker (2020) name six principles for building organizational resilience:

1. Redundancy

Redundancies can be used to create buffers for unexpected shocks by duplicating certain elements such as factories producing the same product.

2. Diversity

Diversity in responding to a new burden or threat can prevent the systems within an organization from failing completely. The establishment of such diversity can only succeed at the expense of the efficiency that can be achieved through standardization. Building diversity requires on the one hand individuals with different backgrounds and skills and on the other hand the establishment of a corporate culture that allows and promotes different ways of thinking and acting (Duchek et al. 2019).

3. Modularity

Modularity allows individual elements in a system to fail without endangering the overall structure. A modular organization is divided into individual parts with clearly visible interfaces. Modularity can be created, for example, by restructuring the company organization into smaller, customer-oriented units. During a crisis, the organization can quickly re-network the units.

4. Adaptability

Adaptability is the ability to evolve through trial and error. This is achieved through natural or planned experimentation and a selection mechanism that filters out the best ideas. Within the organization, processes and structures should be designed for flexibility and learning. For example, companies with a global orientation should not design their supply chains rigidly, but in such a way that they can be adapted as flexibly as possible.

5. Caution

This includes acting on the principle of prudence and developing contingency plans and stress tests for potential risks with drastic consequences.

6. Embedding

Embedding is the alignment of a company’s goals and activities with broader systems. It is crucial for long-term success, as companies are embedded in supply chains, economies and ecosystems. Furthermore, the resilience of a company can be increased through collaboration with other actors. Ecosystems can increase resilience through flexibility, access to new capabilities, reduction of fixed costs and sharing of corporate assets.

An important and not negligible role in establishing resilience in companies is played by managers. Before an organization can act resiliently, it faces the challenge of adequately assessing internal and external conditions and identifying and deploying available resources and potential. Particularly in the face of uncertainties in the corporate environment, exemplary leadership behavior that motivates, supports and challenges employees is essential (Hoffmann, 2016).

Banks in particular are increasingly focusing on cyber-resilience, since digitalization means that more and more organizational processes and information structures are based on digital communication systems, making it increasingly important to defend against cyber attacks. It is particularly important for banks that work with highly sensitive and personal information to maintain the security of this data and to ensure customer confidence. Banks that have built up resilience in the past have the ability to minimize the effects of a cyber attack by means of appropriate cyber security and, for example, to resolve service delays or customer dissatisfaction within a short time. (Bagheri & Ridley, 2017)

In conclusion, it can be said that resilient companies are better able to cope with crises and emerge from them more solidly. However, the establishment of a resilient organization requires a long-term perspective, firstly because building resilience takes time, and secondly because a resilient organization tries to prepare for future risks before they occur. Cyber-resilience in particular is becoming increasingly relevant across industries. Finally, the Covid-19 pandemic offers a good opportunity to reflexively rethink one’s own business model and build up systemic resilience.

Sources

Bagheri, S. & Ridley, G. (2017). Organisational Cyber Resilience: research opportunities. https://eprints.utas.edu.au/25820/

Close, K., Grebe, M., Andersen, P., Khurana, V., Franke, M. & Kalthof, R. (2020). The Digital Path to Business Resilience. https://www.bcg.com/publications/2020/digital-path-to-business-resilience

Duchek, S., Raetze, S. & Scheuch, I. (2020). The role of diversity in organizational resilience: a theoretical framework.

Ganguly, A., Nilchiani, R., & Farr, J. V. (2009). Evaluating Agility in Corporate Enterprises. International Journal of Production Economics, 118(2), 410–423. https://doi.org/10.1016/j.ijpe.2008.12.009

Hirt, M., Laczkowski, K. & Mysore, M. (2019). Bubbles pop, downturns stop. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/bubbles-pop-downturns-stop

Hoffmann, G. (2016). Organisationale Resilienz. Grundlagen und Handlungsempfehlungen für Entscheidungsträger und Führungskräfte. Wiesbaden: Springer.

Krystek, U. & Zur, E. (2002). Internationalisierung. Globalisierung – eine Herausforderung für die Unternehmensführung. Springer Verlag.

McManus, S., Seville, E., Brunsdon, D. & Vargo, J. (2007). Resilience Management. A Framework for Assessing and Improving the Resilience of Organisations. Resilient Organisations Research Report.

Sneader, K. & Lund, S. (2020). COVID-19 and climate change expose dangers of unstable supply chains. https://www.mckinsey.com/business-functions/operations/our-insights/covid-19-and-climate-change-expose-dangers-of-unstable-supply-chains

Reeves, M. & Whitaker, K. (2020). A Guide to Building a More Resilient Business. https://hbr.org/2020/07/a-guide-to-building-a-more-resilient-business.

Watson, M. (2019). Why banks must view operational resilience as a strategic imperative. https://www.ey.com/en_gl/banking-capital-markets/why-banks-must-view-operational-resilience-as-a-strategic-imperative

Yang, C., & Liu, H. M. (2012). Boosting Firm Performance via Enterprise Agility and Network Structure. Management Decision, 50(6), 1022–1044. https://doi.org/10.1108/00251741211238319

Katharina Schache
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