In 2015, the Edelman Trust Barometer—a tool that measures public trust in institutions, governments, and businesses—showed that trust among the informed public (this term is used in contrast to the general public and refers to a group of people whose confidence we need to earn) had decreased, indicating that leaders needed to change their approach.
Overall, it seems that leaders learned very little from the 2008 crisis, a year that was the result of the combination of the worst scenarios.
Scenarios such as excessive financial leverage, ill-considered mergers and acquisitions, diversification based on synergies that were uncertain, poor risk management, flawed corporate governance models, and problems related to horizontal and vertical integration of the banking network.
At the economic level, the impacts of these events were felt globally.
In Europe, the sovereign debt crisis led to a high level of household debt as well as trade deficits. On the other hand, unemployment increased to unprecedented levels, and strict austerity measures were imposed.
In the financial sector, many banks lost more than 90% of their equity value. Many of the banks that survived have still not been able to regain their previous standing.
Was the financial services crisis a rare event, or will we increasingly face such volatility in the future? How can institutions and companies prepare for such events? How can leaders change the way they make decisions?
This article is about resilience. Resilience is the ability of institutions and companies to adapt, endure, and rebuild in response to external shocks. It also addresses the role of leaders in creating resilient organizations and companies.
Overall, it seems that developing resilience—that is, succeeding and gaining strength despite catastrophic events—always becomes a priority for managers after a crisis occurs.
The root cause of this behavior is our inability to consider the long-term impacts of actions or decisions that maximize value for all stakeholders.
To support diligent managers in building resilient organizations, it is first necessary to discuss responsible leadership and how to achieve it. Responsible leaders uphold values and ethics regardless of cost or consequences, both professionally and personally. Additionally, they know how to build trust and ensure adherence to a defined value system.
In practical terms, responsible leaders conduct business activities with long-term sustainability and development in mind. In other words, they are committed to sound and foresighted management (as opposed to short-sighted or opportunistic approaches). These courageous leaders forego short-term profits in favor of sustainable long-term performance.
This article introduces a method called “Volar” for measuring performance, which integrates conventional metrics with theoretical insights.
At the beginning of the discussion, we demonstrate that the way to enhance organizational resilience depends on the following factors:
- Resilient organizations possess a high degree of authenticity. Their business approach is fully aligned with their traditions, advantages, reputation, and values.
- Resilient organizations are highly customer-oriented. They dedicate themselves to supporting their customers and meeting their needs, often sacrificing short-term profitability in favor of long-term customer relationships. Employees prioritize value creation for customers over shareholder returns and take pride in doing so.
- The business model of resilient organizations is simple, and they continuously protect their core advantages by integrating products and services with their unique resources and capabilities.
- Contrary to common beliefs, aggressive expansion in geographic or spatial diversity often increases organizational fragility, making it difficult to assess and control all local risks. These challenges grow with greater geographic diversification. Resilient organizations maintain a strong position in their home markets and prefer strong growth in limited markets over weak presence in multiple markets.
- Decision-makers in resilient organizations consider the long-term business vision, extending beyond their own tenure.
- Leaders in resilient organizations make strategic decisions and also manage the speed and quality of those decisions.
- Resilient organizations are guided by CEOs and small senior management teams. Members of such teams possess high-level expertise and strong operational experience, and they share a common agreement on organizational values.
In today’s business world, managers must make decisions across a wide range of areas. They need to understand: how to internationalize and which markets to enter; which businesses are worth investing in; whether to pursue a diversification strategy or a focus strategy; what image to convey to consumers; how to motivate employees; whether to simplify the organizational structure; whether to make decisions quickly or take a slower, more deliberate approach. Understanding these options and selecting the optimal choice leads to crisis avoidance and creates the foundation for building organizational resilience.
We need managers who consider the consequences of their actions and take responsibility for them. Responsible leadership, although simple in concept, requires fundamental changes and is not easily achieved. We often encounter managers who feel discouraged or disheartened and believe that making changes in their environment is difficult. Setting new standards and changing behaviors is challenging due to issues arising from excessive energy consumption, increasing pollutant waste, and population growth. Managers may wonder what they, as a small player, can do, or think that even if they change, the whole system will not change. While these thoughts are understandable, they generally lead to the emergence of an individual who begins to drive change (J. U. A. Bertick, 2017).
Since organizations are not naturally resilient, they must be made resilient. In this article, we ultimately show managers how to measure the resilience level of their organizations using comparative ranking.
Assessing the Ability to Withstand Shocks
Resilient organizations operate in a way that allows them to quickly return to their previous position after every economic setback or environmental disaster. Resilience is a call to action—a call for change—in a world grappling with crises and unforeseen events. But what does the term “resilience,” which has become widespread among economists, sociologists, ecologists, and psychologists, actually mean?
The term resilience comes from the Latin word resalio, which is the frequentative form of the verb salio, meaning “to bounce.” One of the meanings of “bounce” is to leap or spring up from an overturned boat. The term “bounce” was first used in physics and mechanics to measure the effective resistance of a material and its ability to return to its original shape after deformation, flattening, stretching, or any other change.
Resilience has commonly been applied in engineering sciences, especially metallurgy, to indicate a material’s ability to withstand applied forces and impacts. This concept is also used in fluid dynamics, describing a system’s capacity to return to equilibrium after being disturbed and the time it takes to reach that equilibrium.
A classic example used to illustrate resilience is a pebble dropped into a pond. The pebble creates concentric circles that continue until the water becomes still and the circles disappear. Another example is a metal alloy called Nitinol, which retains its shape so that even after deformation, it can return to its original form when exposed to heat (J. U. A. Bertick, 2017).
In computer science, resilience refers to a system’s ability to function correctly despite failures in one or more of its components. System resilience indicates the capacity to withstand breakdowns, errors, and interruptions.
In anthropology, the term refers to communities, ethnic groups, languages, and beliefs that are enduring and stable.
In chemistry and biology, resilience is interpreted as homeostasis. Homeostasis is the ability of a system or organism to return to its original state or continue performing its primary functions in a dynamic and changing environment, where numerous interacting forces must be maintained in a more or less unstable balance.
Definition of Resilience
This is a famous quote from Muhammad Ali: “Inside the boxing ring or outside it, there is no shame in falling; the mistake is in staying down.” The uncertainty of economic competition can be compared to the uncertainty inside the boxing ring (De Soul, 2009). Before a match, a boxer can study the moves his opponent has used in the past, but he cannot predict what will happen during the fight. Two fighters may adopt different approaches during the match.
Some boxers, like Jack Johnson, display high agility. Johnson, the first African American heavyweight champion (1908–1915), was highly energetic and resilient against his opponent’s blows and was always ready for fast, consecutive counterattacks.
In contrast, some boxers, like George Foreman, rely on physical strength and plan their tactics to withstand many punches and then attack when the opponent shows signs of fatigue. True champions, of course, plan to combine agility with the ability to absorb hits.
Like boxing champions, organizations also need systems that allow them to avoid shocks when possible and withstand unavoidable ones. Three factors of resilience can be inferred from the analogy between organizational resilience and boxing:
- Persistence in Performance: Just as a tree stands firm against a storm, organizations do not bend and have the capacity to endure shocks. Example: Audi
- Recovery Strength: Organizations experience stress from external shocks but know how to rise again. Example: Hyundai
- Innovation in Problem Solving: Organizations face stress and adapt by changing their target markets. Example: Nokia
Resilience Model
Commonly used models for studying resilience face two major problems. The first problem is that resilience is defined only indirectly through its drivers and is not directly defined as an external variable (i.e., a performance objective). The second problem is that many organizational characteristics, such as agility and shock absorption, can be related to the concept of resilience (De Soul, 2009). Strategies of “capture” and “domination” (Kermel, 2011) make it very difficult to measure resilience before an event occurs.
An organization’s latent resilience consists of resources, strategies, and capacities that are very difficult to measure. Consequently, we propose a model that evaluates an organization’s ability to withstand shocks and achieve positive long-term outcomes (i.e., Sustained Superior Performance [SSP]) while considering which drivers make an organization resilient.
To determine whether an organization is resilient, two conditions must be assessed:
- The organization must be exposed to an external event or a complex crisis; and
- The organization must maintain performance above the pre-crisis average during the event and after it has ended.
We measure SSP using an index called Volar. We consider 705 organizations across seven different sectors that have been affected by external shocks in recent years over a relatively long period (ten years) and assign each organization a score ranging from 0 (lowest) to 10 (highest). The main industries include banking, automotive, pharmaceuticals, and energy, and the model analyzes the primary strategic choices implemented by these organizations.
A combination of quantitative and qualitative research methods is used to identify the drivers of resilience. Multiple interviews were conducted with our sample organizations, and the information obtained was integrated with secondary data from business documents, institutional websites, and newspaper articles (J. U. A. Bertick, 2017).
Our main focus in the interviews and analyses is on decision-making in situations faced by top management teams. These include questions such as whether it is better to concentrate on a few markets where the company has a stronger position rather than spreading itself across multiple markets with less impact, whether to focus on a limited number of products that make the company easily recognizable or to take the risk of diversification by increasing the product range, and whether to prioritize foundational values or strive to become a global company in terms of culture and organizational behavior. Other considerations include whether to prioritize shareholder interests or produce products demanded by customers, even if this temporarily reduces efficiency, whether to make decisions quickly or to gather and consider different opinions before concluding, and whether to rely on specialist managers in the top management team or managers with broader general knowledge.
Our response to each of the two options presented in these questions influences the level of organizational resistance. Unconventional decisions challenge the brand of the organization, and the present research identifies drivers that increase the likelihood of achieving positive and sustainable performance over time. These drivers, which must always be adapted to the organizational environment, can be combined according to the model shown in Figure 1.1. This model encompasses the claims listed in the introduction.
1. Resilient companies have higher authenticity. Their business approach is fully aligned with traditions, competencies, brand, and values.
2. Resilient companies are customer-centric. They dedicate themselves to supporting their customers and meeting their needs, often sacrificing short-term profitability for the trust that is built over the long term. Their employees are recognized for this approach and take pride in creating value for customers rather than focusing solely on shareholders.
3. Resilient companies generally have relatively simple business models and are committed to maintaining technical competencies. They achieve this by aligning products and services with. their resources and capabilities in proportion to their capacities.
4. Contrary to common beliefs, rapid geographic expansion often increases organizational fragility, as it makes it difficult to evaluate and control all risks. In fact, problems multiply with increased geographic diversification. Resilient organizations maintain a strong market position in their home countries and tend to develop a strong presence in a few additional markets rather than having a weak presence in many.
5. Decision-makers in resilient organizations adopt a long-term perspective, making choices whose results may not be realized during their tenure.
6 . Leaders in resilient organizations make strategic decisions. Moreover, they not only make high-quality decisions but also do so with speed and efficiency.
7. Resilient organizations are led by senior managers and small top management teams. Members of such teams possess specialized expertise and strong operational experience, and are. united by shared values. (G. U. Bertik, 2017)
Measuring Long-Term Sustainable Performance
What are the main limitations of commonly used performance indicators? In other words, is there a need for a new performance metric to assess success? Many performance indicators encourage managers to focus on the short term and take on higher-level risks.
As a result, we propose a new indicator called VOLAR, which combines existing performance metrics to identify Superior Sustainable Performance (SSP). Organizations that achieve SSP are the most resilient. VOLAR not only affects stock prices but also changes the way business units allocate resources and evaluate the attractiveness of industries or investments before they occur.
Limitations of Commonly Used Performance Indicators
One of the most likely ways to influence managerial decision-making is by changing the parameters used to select performance indicators and calculate incentives. Determining which performance measures should be used in a business is critical. Banks are able to measure various indicators and evaluate their impact on strategy. It can be said that all the banks listed in Table 2.1, except for UBS and Lloyds, have been rated as “best” in at least one performance metric. Bank of America ranks first in terms of revenue, but if we consider EBIT (Earnings Before Interest and Taxes), the leading bank according to this metric is Citigroup. UBS, which ranked second in return on equity in 2020, and Lloyds, which ranked third in the same metric between 2000 and 2010, come close to the top of the table in at least one parameter. The question raised by Table 2.1 is: Which performance category should be maximized?
The first step in increasing organizational resilience is to understand how to measure it. Without external shocks or disruptions, there is no benchmark for resilience. However, financial and economic crises, which disrupt the operational environment of organizations, are becoming increasingly persistent. Despite the above, resilience is not possible without a long-term perspective and consideration of the associated risks. Collecting information that can guide future business decisions is essential. Specifically, many performance indicators used by organizations are limited to short-term timeframes.
Measuring performance with appropriate variables serves as a methodological foundation for building organizational resilience. In Moneyball, the best-selling book by Michael Lewis, the focus is on how the Oakland Athletics, an American baseball team, selected the right metrics to enable managers to assemble a winning team at low cost. Before using this new method, the Athletics based their decisions on the opinions of scouts, who monitored player performance. These scouts evaluated players’ abilities in running, throwing, and batting. As a result, the team experienced repeated losses. The metrics used by the scouts were no longer effective, and the team found itself in a crisis. Despite losing its most talented player, the team could not afford an appropriate replacement.
Billy Beane, the team’s general manager, proposed recruiting new players based on diverse calculations developed with the help of a young economist, Peter Brand. Brand argued that average batting statistics were not important; instead, it was essential to evaluate players’ ability to reach first base. Players, coaches, fans, commentators, and the entire baseball world were skeptical and critical of this approach, especially during the early stages of continued losses. Eventually, the Oakland Athletics broke the record for consecutive wins with twenty straight victories and advanced to the brink of the season’s ultimate victory.
The book was published in the early 2000s, yet its main message has still not been fully understood by organizations. The majority of managers continue to rely on poorly selected statistics (M. Mbousin, 2012).
Many prominent factors highlighted in the article Performance Measurement: A Review of Literature and Temporal Evolution (Pita, 2012) help managers design an appropriate set of performance indicators. These indicators should be linked to business strategy and should measure outcomes rather than causes. They must be timely, multidimensional, and capable of identifying the effects of interdependent activities. Indirect parameters can be manipulated, and nearly all are based on a short-term perspective. Many managers focus on optimizing economic metrics such as return on equity (ROE), return on assets (ROA), or earnings before interest and taxes (EBIT). While these indicators reflect financial performance for the past year, they cannot account for the long-term effects of past decisions. To achieve sustainable performance, it is necessary to measure it directly.
After the 2008 crisis, many companies scaled back high-risk activities or those not directly related to their core business. In 2012, Kodak announced that it would cease production of digital cameras, pocket camcorders, and digital photo frames, instead focusing on the digital imaging market for corporate clients (Rochester Business Journal, 2017).
Measuring Superior Sustainable Performance: Volatility and Return on Equity (VOLAR) [19]
Based on these considerations, we propose a new resilience indicator called VOLAR, which serves as a complement to existing performance metrics by incorporating a long-term, risk-adjusted performance measure. VOLAR (Volatility and Return on Equity) applies an investment-oriented approach that considers both return on equity (as a profitability measure), calculated as the average shareholder return over ten years, and volatility of return on equity (as a risk measure).
Specifically:
=
where nnn is the sample size and xˉ\bar{x}xˉ is the arithmetic mean of the sample. We chose Return on Equity (ROE) as the metric because it is less dependent on market expectations and perceptions. For instance, stock prices are influenced by investor expectations, whereas Total Shareholder Return (TSR) cannot be directly controlled by companies, as it depends on the interpretations of analysts and investors. However, the VOLAR logic can be applied using other performance metrics, such as cash flow or Return on Assets (ROA).
VOLAR is adapted from a model developed by Markowitz in 1959, considering ROE and the volatility of ROE over ten years, and is used as a representation of resilience or superior sustainable performance over time. To determine the resilience of each organization in a specific domain, long-term ROE and volatility are shown in the chart in Figure 2.1. The highest long-term ROE for a given volatility range is identified using a logarithmic regression. The resulting curve is called VOLAR 10, and organizations on this curve exhibit the highest resilience. Organizations furthest from this curve have the lowest resilience (VOLAR = 0).
ISO curves measure the VOLAR level and are plotted by reducing the curve slope to 4%. VOLAR regions are defined by adjusting long-term ROE by ±2% with the same standard deviation. The structure of the VOLAR metric allows us to code 705 companies in our dataset according to their VOLAR level (from 0 to 10) over the period 2002–2011. The data used are sourced from Reuters, and the industries considered include automotive, food and beverages, banking, pharmaceuticals, communications, energy, and household appliances.
VOLAR enables us to assign a score from 0 to 10 (0 being the lowest and 10 the highest) to organizations across different industries. For example, in the automotive sector, the leaders in our sample include Audi, Porsche, and Hyundai (Figure 2.1). In pharmaceuticals, Novo Nordisk is a pioneer. Among banks, Bank of Nova Scotia and Banco Santander rank at the top. This dataset allows us to map resilient organizations over the period 2001–2010 and compare them with those unable to respond effectively to external shocks and disruptions.
How VOLAR Changes Resource Allocation
The crisis revealed that companies need to develop more robust business models. However, it seems that resilience becomes a strategic priority only after an incident occurs. It appears that many companies have forgotten the impacts of the 2008 crisis and have returned to their old business practices that previously yielded positive results.
Yet, the question remains: above what point can we consider ourselves safe? The term “new normal” has recently gained popularity, acknowledging that stability is artificial, expectations will not be fully met, and disruptions can occur at any time. The crisis is not over; rather, we have learned how to live with it.
However, only a small number of companies are truly capable of facing this reality when the next illusion nears its end. After the 2004 tsunami, a series of successive earthquakes struck the island of Thái, generating multiple waves. While the first wave caused devastating destruction, the subsequent waves made the situation even more complicated and challenging.
VOLAR forces companies to conduct forward-looking, predictive assessments before a disruption occurs and guides them to make fewer misjudgments. For example, should one invest in an investment bank with higher returns or a retail bank with lower yields? While the investment bank may appear more attractive in the short term, it carries higher long-term risk. VOLAR considers both profitability and risk, demonstrating that investing in a retail bank is much safer, even though the returns are lower.
In this way, VOLAR adjusts resource allocation based on risk/return considerations, not only at the level of individual projects but also across entire business units, aligning investments with those that are positive and sustainable over time.
Most managers assess risk when distributing free cash flow among different business units, and it is unlikely that their focus is solely on high profits or yields. Nevertheless, a form-based approach is needed to show how long-term business risk/return performance can assist more cautious managers who seek a balanced portfolio of business units. At a minimum, calculating and providing VOLAR data enhances transparency in risk/return trade-offs and helps meet shareholder demands.
Authenticity
Choosing means living authentically, where a person acts in a role that reflects their true self. No one can make choices on behalf of another individual.
The current situation resembles an existentialist perspective: once again, we face a crisis and must make choices to overcome it and survive. Sociologist Gary Alan Fine writes: “Today, the desire for authenticity occupies a central place in contemporary culture. Whether in the search for identity, pleasurable experiences, or in purchasing goods, we seek authenticity.”
We observe that the word “authentic” appears frequently in advertising, store signs, and business meetings, especially in recent years of crisis. There seems to be a modern obsession with defining authenticity. This trend is also visible in media coverage of politicians’ private lives, as the public is eager to see what happens behind the scenes, beyond formal appearances.
This phenomenon extends to marketing, notably in slogans emphasizing authenticity. For example, Coca-Cola’s campaigns and Starbucks’ promotion of their “authentic lunch salad” reflect this trend. The British brand Marks & Spencer, specializing in clothing, cosmetics, and accessories, claims to sell authentic apparel, especially highlighting their line of casual menswear inspired by Cornwall on England’s southern coast. This menswear line even included boxer shorts marketed as transforming wearers into “authentic boxers.”
Authenticity is also applicable in the food and beverage industries. Cities are filled with advertisements for craft breweries as alternatives to industrial breweries. Trappist beers, produced by nuns in monasteries in Belgium and the Netherlands, exemplify this logic: authentic foods are organic and preservative-free.
Similarly, there is a growing market for “authentic” films and overly realistic TV performances, often shot by the participants themselves, depicting real life. For some, this trend is astonishing. Television host and actress Oprah Winfrey stated: “I never imagined that simply being your true self could make me so much money—if I had known, I would have done it sooner.”
Discovering Authenticity
According to Glenn Carroll [28], a Stanford University professor, there are two categories of authenticity. The first is “type authenticity”: the more something can be identified according to its class or type (such as a product, market, or customer segment), the more authentic it is. In this sense, a company is authentic if it focuses on a specific product, market segment, or category. The second is “moral authenticity”: the more someone is identifiable by pre-established values, the more authentic they are. Lance Secretan [29] states that “authenticity is the alignment of head, mouth, and heart—that is, what one thinks, says, and feels all operate in harmony. This builds trust, and followers love leaders they can trust.”
A business is authentic if it reflects clear values and traditions. These values may be set by the company’s founder, based on the country of origin, or evolve over time. Importantly, type in the first category and values in the second must be clearly defined and identifiable.
Authenticity is not an inherent property; it is always perceived by an audience. The audience—whether the general public or a specific group of stakeholders—judges and identifies the characteristics that make a company authentic. Authenticity always involves a relationship between two groups, leading to the evaluation of another entity. In other words, for a business to be considered authentic, a group of stakeholders must form a judgment about it. The company is evaluated by a set of social partners, such as customers, employees, and the media, who ultimately determine its authenticity. Stakeholder judgment increasingly matters, as the company’s long-term performance depends on it. Our observations indicate that the more a company demonstrates type and moral authenticity, the greater its organizational resilience over time. Here, we analyze these two categories in relation to organizational resilience (Rothenbuhler, 2007).
How authentic is your company?
Research shows that the higher the authenticity, the greater the resilience, which in turn leads to superior sustainable performance. To assess a company’s level of authenticity, we have designed a test. This tool allows managers to identify the current status and reveal appropriate future actions. Multiple factors can be evaluated on a scale from 1 to 5 (where 1 = strongly disagree and 5 = strongly agree) and are related to resilience actions that can be implemented by the company.
Customer Orientation
Today, companies refer to the customer perspective. As Sam Walton, founder of Walmart, says: “There is only one boss—the customer. The customer can fire anyone in the company, from the CEO on down, simply by deciding to spend their money elsewhere.” This statement clearly illustrates the importance of putting the customer at the center.
Customer orientation requires that the product quality be such that the customer loves it. Giovanni Rana, a fresh pasta producer, is a good example of this. He prioritizes his products over profit. His goal is to showcase the quality of his pasta, which is produced industrially but using traditional methods and in small volumes. The defining feature of his products is excellent quality that meets customer needs and desires while continuously enhancing creativity. According to Rana, the first rule is to love the work and the product you produce, without forgetting your origins. The second rule is authenticity and the desire to look customers in the eye with confidence, assuring them that what you sell is exactly as described. Therefore, the only thing that scares the Verona-based entrepreneur is a grandmother with a rolling pin.
Customer orientation leads to superior products and services that must endure. At Geox, a leading shoe manufacturer, many of its products are patented. In 1995, when Geox began industrial production, it secured patents for various shoes. Today, Geox has sixty registered patents in Italy, demonstrating its love for its products. Technically, loving your product means implementing a strategic business approach that uses customer needs as leverage to achieve objectives, and also understanding how to formulate marketing and advertising steps to offer and utilize products in alignment with customer priorities. Customer-centric companies always strive to measure how well they meet customer needs. To determine whether a customer-oriented strategy has been implemented, at least five related quantitative parameters can be used: number of new customers, number of lost customers (customer retention), number of products a customer uses (products per household), customer satisfaction, and number of customers who recommend the company to others.
From Total Shareholder Return to Customer Orientation
At least two models exist in modern capitalism. The first, which emerged in the 1930s, emphasized the importance of managers. The second model focuses primarily on the importance of shareholders. This second wave, which began in the late 1970s, continues to this day. For example, the main goals of investment banks are to make money and keep shareholders satisfied. Those working on Wall Street earn astronomical incomes.
Following the events of 2008, including the Wall Street crisis, a new paradigm emerged. Fundamental assumptions essentially changed. Shareholders were no longer at the center, and the pursuit of profit ended without generating long-term positive results.
Initially, company organizational structures were designed so that the customer was at the end of the production chain. Today, organizational structures place the customer at the core, known as the “outside-in” structure. Recently, many products have been designed with customer needs in mind.
This transition is not merely theoretical but practical, encompassing activities aimed at customer satisfaction. To enhance resilience, business processes, choices, and strategic decisions must be made with a customer-centric focus. For an airline, traditional operations start with ticket sales and end with baggage retrieval after the flight. Southwest Airlines, one of the few U.S. airlines capable of sustaining profitability during crises, operates differently: service begins when a customer realizes they need to travel and ends when they return home. Southwest claims to be in the “people transportation business.”
Research shows that more resilient companies are those capable of focusing on their customers and their needs, especially during crises. This was the case for Hyundai, which, after the 2008 crisis, introduced the “Hyundai Assurance” program in the U.S. market. This program allowed customers to return their cars up to a year after purchase if they became unemployed or were economically affected by the crisis (J. U. A. Bertik, 2017).
The question arises: are companies that prioritize customer orientation more successful at satisfying customers? In a 2013 survey by the German Institute for Quality and Finance, 74,275 people were asked two simple questions aimed at assessing customer satisfaction across 274 Italian companies in 49 sectors: “In the past 36 months, have you been a customer of one of the following companies/brands?” and “Have you received good service from this company?” These questions mainly reflect customers’ sensory experience rather than the objective reality of the company. Among the 274 surveyed companies, 91 won gold medals (over 75% of customers reported good service), 36 won silver (70–74.9%), and 38 won bronze (65–69.9%). Amazon ranked first with a 91% score, followed by Calzedonia and Booking.com. Unsurprisingly, the top-ranking companies in terms of customer priorities were those with a clear customer-centric approach.
In essence, concrete examples indicate that customer centricity refers to:
- Love for the product: customers have complex needs that naturally require stronger customization. They also expect to interact with products that are easy to use and understand.
- Excellent processes that make customer acquisition more efficient.
- Innovative choices aimed at anticipating, analyzing, and meeting the needs of a correctly targeted group of customers.
Love for the product
In 2012, Luca Cordero di Montezemolo, president of Ferrari until 2014, met with Apple CEO Tim Cook. Montezemolo had come to speak in front of thousands of Stanford University students at a conference. He highlighted his alignment with Steve Jobs by saying, “We make cars, they make computers. But Apple and Ferrari share the same level of passion and love for their products; a fanatical attention to both technology and design.” Similarly, on the Ferrero website, it is stated: “Since the beginning of our family business, we have built our success on strong values, pride in our products, and a passion for quality.” Ferrero’s Nutella, made from hillside hazelnuts, first dominated the Italian market before entering the international market. Each ingredient is selected according to high-quality standards.
When attention to detail is high and quality exceeds average, the likelihood of customers having a positive perception of the product increases, and it should capture their favor. In other words, love for the product offers an advantage by fulfilling customer needs. Customization and simplifying processes ensure that the product is quickly appreciated by customers, and skillfully addressing their needs can be beneficial. As mentioned above, this is the approach progressive companies in Italy have adopted, and its impactful results continued even during crises. (E. Sen Hart, 2007)
Customization
The ability to customize a product or allow consumers to choose a product according to their preferences (i.e., the ability to select and shape choices or simplify them) is inherently part of customer centricity. Sky Television understands this well. By creating new ways to enjoy content, Sky revolutionized television offerings. TV products such as movies, series, and documentaries are broadcast at different times, with each program repeated several times a day. This allows customers to watch their favorite programs whenever convenient. Customer centricity is further enhanced with the MySky HD device, which enables customers to record their favorite shows, keep them as long as they wish, and replay scenes at any time. The choice is with the customer.
B2B businesses often collaborate similarly. This applies to the company Finplast, which specializes in chemical compounds consisting of two or more elements, with a turnover of 86 million euros in 2012. The CEO and founder, Battista Farinotti, explains: “For many clients, including Prismatic and Nexans, we are a true partner. We co-develop products and collaborate closely. For example, we recently tested a product that can serve as a suitable replacement for specific applications, saving costs for customers in the cable industry.”
Facilitation
Customer focus often means providing a product that the customer can easily understand and use. This is especially true for technical companies whose products are specialized and difficult to familiarize with. In such cases, the best approach is the facilitation or simplification process.
For example, banks typically offer a wide range of products with complex names that can confuse customers. This strategy can have negative effects, making it difficult for customers to choose among the many options. As a result, both customers and sales marketers may become confused. Recently, banks have attempted to simplify the process of familiarizing customers with their products and to offer more understandable products. Bank “Banca Mediolanum” introduced a new service called “Send Money,” allowing customers to send money via a mobile app without needing the recipient’s IBAN. Only an email address or mobile number is required. If the recipient is a PayPal user, they receive the money immediately.
Facilitation means offering a limited number of products to customers so they can understand the distinctions between them.
Accessibility facilitates the connection between customers and the bank. Extrabanca, for example, is typically open long hours from 9:00 a.m. to 7:00 p.m., and sometimes even on Saturdays or Sundays to serve specific ethnic groups or special cases. Accessibility also means that all bank branches are in safe locations, but to avoid intimidating customers, these locations are not overly luxurious. Branches are usually located in areas with high percentages of foreign populations. The company’s slogan is: “We are always open.”
Excellent processes
High efficiency in internal processes ensures that information about current and prospective customers is collected and organized. It also guarantees rapid responses aimed at meeting the identified needs of customers.
Simply having passion for the product is not enough. For example, ASICS’ strategy is based on efficient production processes and investment in necessary technologies. The company’s research institute in Kobe, 200 miles west of Tokyo, spans 45,000 cubic feet of research facilities. Various testing rooms are part of this complex. Observing and analyzing physical movements forms the foundation of every ASICS product. Researchers in Kobe have access to high-speed cameras, advanced measurement equipment, and sophisticated computer software. Every creative idea at ASICS leads to the development of the best product, subsequently meeting customer needs. Integrating industrial processes across the production chain of apparel and sports shoes accelerates and streamlines these operations. Similarly, Gordon Ramsay, the Michelin-starred chef, has said: “Cooking is a passion, but you also have to be practical. I have established 21 restaurants worldwide, and I know that if things don’t happen in the kitchen, service won’t function properly, and customers will never return. The machine must not stop working.”
Another rapidly growing method for strengthening customer-company relationships today includes providing access to call centers with free calls, email support, and branches available 24/7. Each of these methods addresses different customer demands. For example, Barclays Bank, in 2001, started by developing a service-network model for its customers. The bank gradually extended branch hours to 8:00 PM and even opened some branches on Saturdays.
Barclays CEO Matt Bart stated: “…we are proud to provide our customers the opportunity to visit our branches beyond regular hours.”
Studies have identified multiple resilient companies that have applied creative solutions in appropriate contexts (often during operational phases). This leads us to the third aspect of customer-centricity: innovation.
Innovation
Innovation is an approach that anticipates needs or creates new ones. For example, Giovanni Rana, in addition to his passion for his product, continuously invested in innovation. In 1966, his pasta factory had good revenue but could not sell its products in surrounding areas because tortellini could only remain on the shelf for three days. Following the principle that carbonated water, due to containing carbon dioxide, has a longer shelf life than natural water, Giovanni Rana was curious whether the presence of carbon dioxide in the sealed tortellini package would increase its shelf life. His discovery became a reality, and fresh tortellini with this method lasted fifteen days instead of three. This product quickly found its market in central Italy. A few years later, the emergence of a new technology known as modified atmosphere packaging allowed Rana’s company to preserve its products for a longer time, extending the product’s sell-by period and enabling access to more distant markets.
For a company to be resilient, it must anticipate and interpret customer needs and even have the capability to create new needs. Apple, with the launch of the iPad and iPhone, fulfilled customer needs they didn’t even realize they had. This does not mean companies should ignore their customers’ needs; rather, they must accept that sometimes customers do not precisely know what they want. Resilient companies not only pursue innovation in products and services but also aim to develop production processes to achieve benefits in the form of lower costs and differentiated advantages. For example, HeidelbergCement always focused its innovative efforts on the premise that cost advantages could be achieved through changes in production processes (lower-left square in Figure 4.1). However, a wide group competition among thousands of innovative ideas emerged, demonstrating that it might be possible to overcome raw material traps in the cement business.
Raw materials are not available.
Customer centricity is essential not only for the rapid movement of consumer goods but also in industries that produce more standardized products, such as simple power cables, cement, or sugar. Any type of business, even those producing the most standardized products, can be differentiated based on customer needs.
Listing the key factors for a successful pivot is simple, but implementing them is very difficult:
- Cultural change: Do not allow anyone in your organization, especially sales staff, to view your product as a mere raw material.
- Market segmentation: Do not see your customers as a homogeneous group simply seeking low prices.
- Customer intimacy: Take the time to understand your customers’ businesses.
- Innovation and scale: Work on innovative ideas in every organizational process to meet customer needs.
- Measure success: By introducing a sophisticated performance measurement system, increase individuals’ motivation for improvement and progress.
How customer-centric is your company?
Our research shows that high customer-centricity increases resilience and, consequently, generates Superior Sustainable Performance (SSP). To assess the level of customer-centricity, we use a “quick test” (Table 4.1). Multiple factors can be evaluated on a scale from 1 to 5 (where 1 = strongly disagree and 5 = strongly agree) and are linked to resilience-related activities introduced in the company. You are free to modify the tool and create a short questionnaire with other options or indicators used to measure performance across different areas of the company.
Product Focus
Over the past three decades, research on the relationship between product variety and performance has been a hot topic in this field. The study of this relationship has been influenced by a resource-based view (RBV) perspective. RBV suggests that the type of diversification a company can achieve and its performance depend on the resources and advantages that the company possesses or can develop. Studies indicate that diversification directly linked to existing business units leads to superior performance compared to extensive diversification or strategic focus within a single business. The prevailing model, which was initially very flat, has transformed into a U-shaped model, suggesting that, on average, moderate product diversification positively impacts performance. However, no consistent insight into the relationship between the two variables has yet been established.
The Importance of the Local Market
The domestic market has a significant impact on achieving positive and sustainable performance over time. In stable and strong countries such as Germany, the United Kingdom, Switzerland, and the United States, many companies have high Vollar levels. However, for some companies facing fundamental problems due to crises, these markets serve as their home markets. Good performance is also found in markets with lower stability and development, such as Brazil and India. Returning to the example of Banco Santander, it may be surprising how, while operating in a market with numerous challenges, it managed to achieve good efficiency. Banco Santander operates in seven other markets outside of Spain, in addition to its home market in Spain. Its market share in each of these markets is at least 10 percent. These countries are considered “base home markets,” in other words, markets that replicate the local market model and attain power similar to the main market. This illustrates how institutions derive more than 55 percent of their profits from emerging but profitable markets like Brazil in 2012.
These examples show that companies with a more limited international presence are more resilient than companies with a more geographically dispersed international presence. From our perspective, generally, being among the top three players in ten product or geographic categories, in terms of market share, is better than being among the top ten players across thirty different categories.
Long-term approach and strategic decision-making
Resilient companies have the ability to identify threats in a timely manner and quickly decide how to respond, implementing these decisions in place of previous ones. In highly volatile markets, the ability to make strategic decisions is a key source of competitive advantage. However, many companies struggle. One of the main problems in decision-making is the lack of a long-term approach. Many management teams operate with a “today-to-tomorrow” mindset, focusing primarily on immediate results, without considering what may happen in the future. The fundamental issue with ignoring a long-term perspective is that acting consistently often requires going beyond one’s personal performance in their role or even within the company.
In family businesses, where short-term approaches are generally less common, there is no necessity to adopt the ideas of the previous individual. However, there is a natural tendency to retire the entrepreneur in order to leave the business in the best possible state. The transfer of responsibility between two generations is one of the critical moments in the life of a family business; only about 15 percent of family businesses survive to the third generation. Since the entrepreneur plays a central role, replacing them is difficult. Moreover, the strong emotional involvement often present in family relationships can lead to decisions that fail to balance business logic with family values. Nevertheless, entrepreneurs frequently ignore this problem, either trying to avoid it or coping with it to some extent. In a 2005 survey of 600 Italian companies, nearly 40 percent of leaders indicated that they would work as long as possible, and only 8 percent had set a retirement age for themselves.
On the other hand, in large companies, the duration of job responsibility changes is increasingly shortening, to the point where the reality of working changes every few years. Newly appointed CEOs often go through four phases:
- Phase 1: It takes a few months for newly appointed CEOs to study and assess the situation. During the first months, they acknowledge that the situation is worse than they thought and warn about declining profits (for CEOs promoted internally, this process happens faster, as observed at Shell in 2013).
- Phase 2: In the second year, CEOs begin implementing strategic actions and make it clear that more time is needed to achieve positive results.
- Phase 3: In the third year, CEOs focus on optimizing short-term profits, reduce investment in marketing and strategic R&D, and increase revenue by engaging in higher-risk projects.
- Phase 4: In the fourth year, CEOs leave the company.
Our research shows that being concerned with managerial outcomes—even if the intent is to justify profit declines and blame previous managers for the failure—increases the likelihood of a company being resilient. A long-term approach involves dedicating time and extra effort to strategic projects.
Organizing for the long term
Companies need to take time to think about the future. Unfortunately, envisioning the company’s state five to ten years ahead does not seem easy: “The future is like heaven, everyone praises it, but no one wants to go there now” (James Baldwin). Many formulas have been proposed for adopting a long-term approach, but nearly all require one key factor: being receptive to change. Some companies are capable of anticipating future events. For example, Scott Malkin, the son of a prominent American real estate figure who owns a significant number of real estate agencies in New York, revitalized his family business. After being hit by the first real estate crisis in the United States, he transformed his company from a traditional real estate agency into a store with continuous ultra-luxury and modern sales. One of the most famous outlet stores in Italy is Fidenza Village, located between Milan and Bologna. In 2012, Chic Outlet Village generated €1.7 billion in revenue, sourced from sales across nine stores. The core idea was internationalization and becoming like China. Consequently, progressive shopping centers emerged near Shanghai.
In some cases, the main challenge is having the motivation to swim against the current.
Sometimes, foresight means changing the target audience. An example is Huawei. The Chinese CEO of this giant, Richard Yu, announced that the company would no longer produce low-cost phones, even for telecom operators. Instead, he claimed that the company was ready to compete with Samsung and Apple, ensuring a medium-to-high quality standard for its products. The shared strategy among international Chinese and Korean companies is to enter a market with basic products that follow the leader and then subsequently position the company to capture the advanced segment. Achieving this requires foresight and possibly replacing the CEO with someone capable of implementing a multi-move strategy. Therefore, it seems that in Asian cultures, the long-term approach is more widespread.
For long-term management, companies must develop their adaptability skills (the ability to survive in the present by leveraging existing resources and advantages and being prepared for future success by exploring new options). Capabilities can be categorized in terms of time (i.e., entering phases of survival or exploitation after periods focused on development or utilization) or space (i.e., establishing dedicated units to ensure tasks are carried out toward progress), but providing both aspects allows the organization to maintain both a short-term approach and a long-term vision. One function manages operational processes, while the other oversees the transition process.
Another way for companies to facilitate long-term thinking and action is through incentives. An advanced incentive system linked to long-term strategic goals increases organizational resilience. Most internal and external activities of the organization can be interpreted in terms of its incentive system. The incentive system must align with the type of company (such as profitable companies, social companies, and those focused on goals). This alignment becomes even more crucial during a crisis. In the face of significant external shocks, companies cannot focus solely on short-term profit achievements; they must structure their strategies to achieve long-term objectives—and they must measure and motivate outcomes. Studies show that resilient companies have relatively complex incentive systems. These companies typically include:
- An incentive system is not only linked to financial performance but also leads to broader strategic objectives.
- A system composed of multiple components includes a fixed part and a variable or shared part that provides rewards if everything goes well.
For example, AstraZeneca awards its executives using a scorecard with detailed explanations. GSK grants bonuses to its R&D staff based on productivity levels. Novo Nordisk provides bonuses at a fixed rate of 40–60% up to 35–55%, which are given either in cash or as vouchers for goods and services.
Resilient companies have more attractive reward and performance systems that rely not only on quantitative metrics but also on qualitative components. They use bonus banks where variable portions of annual bonuses are deferred for three to five years.
Process tools for strategic decision-making
Resilient companies leverage standard strategic management processes to gain comprehensive insights for decision-making. Similar to the video game Super Mario, where players can scale multiple levels of difficulty, businesses operate in a world of higher volatility, forcing executives to enhance their analytical, decision-making, and execution skills. Skilled players can navigate Super Mario because they remember the stages and use their insights to adapt to new situations. Unfortunately, in business, insights often lead to poor decisions. Managers are prone to decision-making traps: favoring new information, seeking confirmation of personal beliefs, or overemphasizing initial data received.
As a result, a structured approach is needed to enhance organizational resilience. Historically, this structured approach focused not only on decision speed but also on timing. Increasingly, market volatility compels companies to react rapidly. Legendary hockey player Wayne Gretzky’s quote—“I skate to where the puck is going, not where it has been”—remains relevant, yet predicting the “game” is becoming harder. Consequently, decision-making speed has become a primary source of sustainable competitive advantage. Sociologist Zygmunt Bauman notes, “We have moved from a world where big fish eat small fish to a world where fast fish eat slow fish.”
Overly large management teams
Why was the rule of thumb—that teams should not exceed eight members—ignored? Today, companies have management teams consisting of ten or even more members. In fact, many CEOs have more than twenty direct reports. By 2012, Mitsubishi had twenty-nine members at the top decision-making level. Simply coordinating meetings with this number of people is a challenging task, let alone managing the discussion and completing the decision-making process.
The current approach generally defines efficient teams as consisting of five to eight members. Increasing the number of people often leads to confusion and disorder, a lack of clarity in roles, and reduced execution capacity. A larger team requires extra effort for coordination among members, and decision-making efficiency declines.
To address this complex scenario comprehensively, we present five methods that leading business leaders employ to manage meetings efficiently:
- “Act fast” (according to Sheryl Sandberg, COO of Facebook): According to recent data, ideally, a meeting should last no more than thirty minutes.
- “Feed the fire when the discussion is heated” (according to Jeff Bezos, CEO of Amazon): By ordering just two pizzas for meeting participants, Bezos found a way to limit the number of attendees to key individuals. This prevents analysis from becoming diluted.
- “See you Friday or forget it!” (according to Satya Nadella, CEO of Microsoft): Holding regular meetings for coordination and progress is useful. Weekly meetings can be effective, and the shorter and smaller the meeting, the better the outcomes. At the same time, avoiding unnecessary meetings saves time, and employees are encouraged not to attend meetings that are not needed.
- “No-Meeting Wednesdays” (Facebook slogan): Blue Jeans data shows that Tuesday is the most popular day for meetings. Wednesdays are often recognized as highly productive days without interruptions.
- “The Punk-Rock Model” (according to the CEO of vArmour Networks): The person running the meeting has the opportunity to set its course. Punk-Rock meeting management should be open to opinions that differ from the majority. The important point is that this is your performance.
The appropriate number of team members depends on the nature of the work, the extent of skill overlap, and the budget. However, in general, team sizes should be fewer than ten members. A smart choice is to form teams with the minimum number of people necessary to accomplish the task. (J. U. A. Bertick, 2017)
Management teams composed of a large number of members with general information domains
It is better for a management team to consist of specialists—those who have deep knowledge in a few areas—rather than generalists—those who have limited knowledge across many areas. Based on an analysis of top management teams in 160 companies over ten years, we concluded that resilient companies are led by managers with expertise in a specific field. If you disagree with our findings, consider the following scenarios: Suppose your team goes on vacation for the next three days, and you must hire a new team. Would you prefer to hire specialists or generalists? When a new CEO is appointed to a struggling company, should the supervisory committee select candidates based on the nature of the challenge in returning to profitability? Would you rather a colleague with thirty years of experience focus on improving weaknesses to advance their position or develop their strengths to enhance existing skills?
Having specialists on your team provides many advantages. If all team members have limited knowledge about everything, decision-making will be difficult. A team of generalists has members with additional knowledge, which may not necessarily focus on the business or industry in which the company operates. Having many generalists in a team may lead to competitiveness in all areas. However, when decisions need to be made quickly, you may find that your team has no real advantage in any area. The saying “jack of all trades, master of none” aptly describes this situation. Excessively broad skills often result in superficial knowledge. When decisions must be made rapidly but the necessary knowledge is lacking, inefficiency occurs. Therefore, executive team members should possess unique skills and expertise that accelerate the decision-making process.
Resilient Organization
In this article, companies from various industries were examined to see how they reacted to crises and external shocks. The outcome of this analysis is a model that helps companies develop a more resilient strategy, organization, and culture. It was shown that companies can and should measure their resilience and must invest their time and resources to enhance resilience to an optimal level. Companies are not naturally resilient; they must become resilient. Consider children in their first year of life. Many rarely get sick because anxious parents protect them from the surrounding environment. However, when they enter kindergarten, they frequently fall ill. This happens because they have not yet developed the strong immunity they need. A resilient company does not just exist; it progresses toward becoming resilient.
It was argued that resilience is the ability to withstand crises and achieve superior sustainable performance (SSP). Our proposed resilience model has seven main drivers that make a company more resilient.
Step 1: Consider resilience by shaping foresight in the industry.
At the outset of any strategic process, a sense of urgency must be centered around core issues. Before investing time in measuring and managing resilience, we need to align managers’ concerns regarding resilience. For example, they may ask: If we are evaluated based on performance reports, why should we increase our resilience? Short-term profit reduction associated with investing in resilience might be the only concern managers have. Such issues need to be directed to reach a consensus on the importance of increasing shock-absorbing capacity. Shareholders do not necessarily favor companies with high resilience. For instance, in the companies studied, investors are always focused on growth and high short-term profitability. They are the first to notice the consequences of market changes and allocate their capital accordingly. Investors’ resilience stems from diversified activities and effective asset allocation. This raises several key questions: Why do we want sustainable companies? What costs are imposed on the company if it is fragile?
It has been concluded that resilient companies tend to achieve relatively high and stable profits over time, which in the long run leads to higher returns for shareholders. Consequently, every manager should genuinely want greater resilience. Moreover, we believe that fragile companies generally borrow at higher interest rates, attract fewer talented individuals, and are not among the best in strategic partnerships with suppliers and customers. We do not suggest that companies avoid high-risk projects. On the contrary, entrepreneurs—in the truest sense—make decisions under uncertainty and achieve profit because they take risks. However, we infer that companies operating with higher risk should deliver higher returns to their owners. Resilient companies can achieve higher returns than their peers under similar risk conditions.
Nevertheless, we also acknowledge that the larger and more successful a company is, the harder it is to motivate its management team to think about resilience. In 1990, Joseph Tainter wrote a book titled The Collapse of Complex Societies, describing the origins, rise, and fall of societies, including the Roman Empire, the Maya, and the Phoenicians. All these cultures followed a common trajectory: they reached a certain level of sophistication, grew larger, prospered, became more complex, and, even at the peak of their advancement, collapsed within a relatively short period. These societies advanced primarily because they had abundant resources, which stemmed from favorable geography, well-structured internal organization, and luck. Managing this abundance made the situation more complicated (agricultural techniques developed, new machines were built). This complexity became so entrenched that performing small tasks became impossible, as the entire organized system had to be equipped.
Scenario techniques can help stimulate the management teams of large organizations. Reliability testing in the financial services industry helps managers understand whether their company can endure challenging conditions. The same approach should be applied to companies in other industries. Scenarios are coherent and logical interpretations of hypothetical futures, reflecting different perspectives on past, present, and future developments, which can serve as a basis for action. The purpose of scenario development is to combine analytical knowledge with creative thinking in an effort to explore a wide range of possible future developments. Scenario techniques expand the thinking process and allow for the anticipation of a broader spectrum of potential futures, aiming to challenge prevailing mindsets and quickly identify warning signals.
The concept of “foresight,” as described by Hamel and Prahalad, refers to efforts that go beyond merely creating scenarios. From their perspective, “competition for industry foresight is necessarily competition for ‘intellectual leadership,’ enabling a company to anticipate the future. In this way, a company can gain control and oversight over the evolution of its industry.” Industry evolution is defined by three main factors: (1) the type of customer benefits in the future, (2) the competitive advantages required to deliver those benefits, and (3) engagement with customers. Foresight has been developed through an eclectic approach, a liberal application of analogy and comparison, inherent dissent, a tendency to guide customers, and the ability to understand human needs genuinely. Product foresight is an innocent, childlike curiosity about what could and should be, resembling speculation and conjecture. Overall, the pursuit of foresight involves cultivating a sense for what does not yet exist, without a fully grounded basis.
Hamel and Prahalad use the term “foresight” slightly differently from its use in other literature. In the foresight field, foresight refers to human capacity and skill, which has expanded in many ways and prevents errors, functioning as a mental-psychological process. A common example of foresight is opening an umbrella before leaving the house, anticipating possible rain. Richard Slaughter distinguishes between forecasting, pre-knowledge, and foresight. Forecasting expresses the future state of affairs with certainty and is limited to systems that are fully measurable or understandable. Forecasts are derived from careful analysis of the past and expressed in “if…then” statements, then generalized to the future. Foresight is distinct from pre-knowledge:
Foresight is a deliberate effort to expand awareness and interpret emerging changes. The principle of foresight applies the uncertainties inherent in life’s indeterminacy in a usable way. Foresight is grounded in common sense, as being cautious of risks and mitigating them is a valuable trait. However, implementing this principle is easier at the individual level than at the social level.
As Hamel and Prahalad note, foresight has not always been a tool for predicting the future. Rather, it primarily expresses human capability to anticipate the future to protect individuals against potential harm. Nonetheless, sometimes there is no way to predict large-scale shocks. These events become “black swans,” a term derived from the Latin poet Juvenal. In ancient Rome, this term was used in philosophical discussions to indicate practically unknowable truths. The term originated from the assumption that “all swans are white,” a claim considered true until the discovery of black swans in Australia. Predicting the future of a complex system with free factors is impossible. If an organization has a complex adaptive system—a system capable of creating changeable and diverse structures whose behavior is not deterministic or predictable—then foresight changes its nature. Foresight must be reduced to recognizing patterns in a self-organizing flow, a spontaneous activity within an emergent system. Stacey states, “Free systems cannot be foresighted and thus cannot be controlled. Consequently, developing foresight may be impossible. Instead of searching for foresight, following McDermott’s suggestion to cope with life’s challenges without foresight may be more meaningful.”
We do not fully accept Stacey’s theories and believe that some events can be predicted with a reasonable degree of accuracy. However, there will always be inherently unpredictable events. The cover headline of the October 2015 issue of Harvard Business Review read: “New Rules of Competition: Be Paranoid, Disrupt, Scout Talent.” Companies must invest time to understand the future and prepare for unexpected events, extracting insights rationally from real thinking. They must also be able to hold two contradictory ideas in mind without losing the ability to act on them. Finally, their engagement with conventional knowledge involves a degree of skepticism, refusing to accept it entirely. Creating foresight is the first step in building organizational resilience.
Step Two: Identify your level of resilience and select your target.
As the next step, we need to determine the current resilience level of the company. Industry scenarios and foresight serve as a foundation for assessing problem-solving initiatives and allow companies to shape a risk/return profile for strategic options. In other words, if you have developed industry foresight, you can be confident that your company’s preparedness to withstand external shocks or industry changes is adequate.
As a complement to developing foresight, management teams can be engaged to invest in resilience programs by measuring the company’s past resilience. “Volar” was introduced as a measure of resilience and a new performance indicator. While a resilience index has been provided as a complement to existing performance measures, we do not dismiss traditional auditing or common performance metrics. Clearly, auditing and financial and quantitative performance measures—such as revenue, cash flow, or debt—remain important. Financial performance helps decision-makers identify company strategies and activities from a monetary perspective. However, traditional performance measures may not be suitable for assessing long-term (e.g., ten-year) resilience. Annual or quarterly financial parameters, although optimized and validated, are not appropriate for measuring a company’s decade-long resilience.
Company efficiency is crucial. High efficiency attracts top talent and motivates them; it provides access to resources for growth and development; it gives a competitive advantage; it serves as a gateway to key suppliers and buyers; and it generates liquidity for investment in international expansion, R&D, and innovation. Conversely, low efficiency can trigger destructive ripple effects. Integrating Volar into efficiency indicators that guide investment decisions and clarify performance draws management’s attention more acutely to long-term risk and return. It also enables managers to justify investments that enhance resilience, such as higher-value cash reserves, focus on core products and geographic concentration, and acquiring talent to rapidly convert resources into attractive opportunities.
Calculating Volar is straightforward, provided you are not seeking statistically robust results and are willing to accept your actual resilience level. First, find the Return on Equity (ROE) of your peer companies over the past six to ten years, then calculate the average (return) and standard deviation (risk), and plot the results on a chart. You may want to adjust for companies whose data fall outside the range due to consistently improving performance, which leads to a higher standard deviation.
Next, identify the points with the highest ROE to determine the risk ranges and connect these ranges with a curve. This curved line represents Volar 10—the sample industry pattern. All peer companies along this line demonstrate the highest resilience over the measured period, though they have different risk/return profiles. By moving along the curve downward, Volar values from zero to ten can be extracted.
Step Three: Identify and Evaluate the Drivers of Resilience
You now have a list of comparable companies in your industry with their resilience scores calculated. The next step is to understand why some companies score higher while others score lower. We conducted these calculations for over 700 companies across seven different industries and developed the resilience model previously discussed. This model identifies seven key drivers of resilience. When evaluating your industry more closely, you may find that other drivers are more important, allowing you to adapt the model accordingly. We do not claim that this model is complete, flawless, or universally applicable to all industries.
For example, we believe that focused international expansion increases a company’s resilience. However, defining “focused” precisely is challenging. What is the correct level of international expansion? As discussed in Chapter Six, our research does not provide a definitive answer to how international expansion affects profitability. For retail banks, food producers, or legal firms, international expansion offers fewer benefits than for aircraft engine or flat-panel display manufacturers. Nevertheless, there are several safe generalizations about international expansion: (1) most industries have a minimal scale that companies must achieve to compete; (2) this minimal scale has increased in recent years; (3) many companies overestimate the scale and scope of their internationalization and product diversification; (4) companies should invest in a strong primary market (home market) or region and remain strong there; (5) companies should develop a cautious methodology for choosing connected geographic areas for expansion.
Our research shows a relationship between international expansion and resilience, though results may vary in your industry. We recommend organizing a resilience workshop to discuss the best- and worst-performing companies by Volar in your industry and then develop strategies for improving your own resilience. Suggested questions for evaluating each resilience driver provide a good starting point. Integrate our quick tests with the metrics you already use in your company. How do you measure customer centricity? Do you use the Net Promoter Score (NPS), asking customers, “How likely are you to recommend us to a friend?” Include survey results in your resilience scorecard.
In previous chapters, we provided self-assessment tools for each resilience driver, assigning a score to each. Once driver evaluations are complete, the scores should be combined to calculate the company’s overall resilience score. In other words, by recording the scores calculated at the end of Chapters 4 through 9 and averaging them, you can determine your company’s total resilience score.
Step Four: Implement a Resilience Program
Once you understand what strengthens your company and what weakens it, you can begin to enhance your resilience. The results of the assessment identify the necessary actions that must be taken. Unfortunately, many companies start implementing essential changes too late. Consider the decisions in your company that have led to divestitures. How successful is your company at quickly shifting focus from one area to another and reallocating financial resources to new domains? Do you have a structured process for downsizing or selling troubled business units? Resilient companies divest underperforming units before they are forced to do so.
Such change is always accompanied by strong emotions, particularly because there is often no obvious need for such powerful indicators. Change occurs either when the pressure to implement it increases or when obstacles to change are removed. Increasing pressure for change often leads to greater resistance, potentially resulting in a zero-sum scenario. Therefore, obstacles to change must be carefully identified and eliminated. In 1963, Kurt Lewin proposed a three-step process for organizational change: unfreezing – change – refreezing.
The principle is simple to understand but difficult to implement. In the first step (unfreezing), urgency must be established regarding the key areas for change. Change involves pain—the pain associated with not changing must be increased. One way to capture the full attention of the organization is to deliberately create a crisis, especially since in large companies, the prevailing sense of security is often strong. The common mindset may be: “Headquarters should generate a bit more profit because things aren’t going well right now.” The opposite mindset is harder to overcome: “Everything is going well. Why should we change?” Using shock tactics to jolt the organization can help prepare employees for change. Repeatedly resorting to such tactics or frightening already anxious and insecure staff is not recommended.
Crises can be generated through actual company financial data, direct feedback from dissatisfied customers, or warnings about increasing competitive pressures. Alternatively, a five-minute time-lapse video showing the geographic rise and fall of the Roman Empire—how a great empire gained power in four minutes and collapsed within seconds—can also be highly effective. Managers may also use examples of the rise and fall of companies such as AEG or the Encyclopaedia Britannica to illustrate how industry changes affected these businesses.
Conclusion
To validate the initial step of change, the industry must move away from its current state and all symbols of past successes. Chauffeured cars, lavishly equipped executive offices, or grand halls for senior managers all signal to employees that everything is fine. Simply releasing new organizational charts to implement fundamental changes in the industry or to execute ambitious strategic initiatives will not suffice. Change processes will be inefficient or ineffective. Consider a large barren tree in winter, full of numerous crows nesting on it. An angry farmer tries to scare the crows away by shooting at the tree, forcing the birds to fly. They circle the tree and return after a few minutes. Most settle on different branches, and a few die and fall to the ground. Does anything fundamentally change? For the change process not to proceed in this way, programs to alter company processes, management structure, and valuation systems are essential.
If a resilience program is implemented at the beginning of a new phase of strategic industry development, it will be very helpful. Why do people decide to quit smoking on January 1st, for example, and not on August 14th? They need a point in time to say that one phase has ended and a new phase can begin. A fundamental transformation in workplace conditions or relocation to new offices can have a similar effect as a fresh start. Only when a large portion of the organization is prepared for change can transformations be pursued purposefully. Although we have argued that we live in a world of high volatility and continuous change, we believe that deep and fundamental changes cannot be implemented repeatedly. Individuals and organizations need routine activities to remain effective. Therefore, we require step three (establishing a new structure) to ensure the development of routine activities essential for managing daily tasks.
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[1] Edelman Trust Barometer
[2] Informed Public
[3] VOLARE
[4] Top Management Teams (TMTs)
[5] Sustained Superior Performance
[6] Lloyds
[7] GitiGroup
[8] Moneyball
[9] Michael Lewis
[10] Oakland Athletics
[11] scouts
[12] Billy Beane
[13] Peter Brand
[14] It is an action performed by a batter as a member of the offensive team against the defenders, meaning hitting the ball pitched by the pitcher. By doing this, the batter contributes to the offensive effort and competes with the opposing team to score points for themselves and their teammates.
[15] ROE
[16] ROA
[17] EBIT
[18] Kodak
[19] Volatility And ROE (VOLARE)
[20] Novo Nordisk
[21] Nova Scotia
[22] Banco Santander
[23] Thai
[24] Gary Alan Fine
[25] Cornwall
[26] Trappist
[27] Oprah Winfrey
[28] Glenn Carroll
[29] Lan
[30] Geox
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