Niren Sirohi, PhD, is vice president of analytics at the Korn Ferry Institute.
For decades now, it has been hard for any organization to resist: the drive to let efficiency rule all things in the firm. Create a more efficient supply chain. Concentrate manufacturing. Tightly integrate global systems. In short, establish the most waste-free operating model as possible.
Who could have guessed, before we ever heard of COVID-19, how damaging efficiency can be?
This single-minded drive toward optimal output with minimal waste works very well in a stable world with no surprises—but it elevates the risk of catastrophic failure when black swan events occur. For example, in pharma, 88% of the active pharmaceutical ingredients (or APIs) used in drugs for the US market were manufactured overseas in 2018, many in China. A crisis like COVID-19 in China puts the United States at risk for essential medicines. In the past decade, ironically, we have had several black swan events—export quotas on rare earth elements by China in 2010, the 2011 Japan earthquake and tsunami, the US-China trade war, and now the novel coronavirus outbreak.
As organizations look forward to a world beyond COVID-19 and prepare for the next crisis, they will be well served to design systems and structures that are resilient. These will allow them to spring back into shape after a shock. However, resiliency will require embracing the principles of redundancy, diversity, and modularity, which efficiency often seeks to destroy.
Redundancy is about having parallel sources in different locations for all aspects of an organization to function effectively. This could mean manufacturing capacity, suppliers, staff, and even leadership. Although on paper this seems less efficient than reducing resources to a leaner level, it actually leads to greater resilience in complex, interconnected organizations and improves cost-effectiveness.
Take Apple, for example. The high-tech firm shifted production between factory operators and set up parallel sources for many of its components, making Apple resilient to crisis. When an earthquake and tsunami hit Japan in March 2011—the same time the iPad 2 was introduced—Apple told analysts it didn’t expect the situation to materially affect the company. Even recently, Tim Cook, Apple’s CEO, suggested that the novel coronavirus outbreak in China, and its impact on the company’s supply chain, is a temporary situation.
Redundancy can also take the form of having a larger safety stock buffer or help with just-in-time manufacturing systems that don’t hold inventory and rely on receiving a steady flow of components produced as close as possible to the point of need. And building redundancy can involve regionalization and localization; for example, the Toyota factory in Georgetown, Kentucky, has more than 350 US-based suppliers, with more than 100 inside the same state.
We believe that diversity is key to resilient organizations. Research shows that the presence of diverse perspectives and mindsets encourages creativity. It also provides a larger pool of resources that can help when dealing with sudden crises and disruptions. This is consistent with the idea of necessary variety and its role in reducing errors; when organizations lack variety, they overlook key information, which may lead to incomplete diagnoses and short-sighted solutions.
Experts also agree that diverse work units can contribute to resilience by offering a broader knowledge base. In recent years, various authors have analyzed the factors that led to the International Monetary Fund’s failure to anticipate the 2007 financial crisis. And the main cause, the authors found, was the homogeneity at that time in IMF’s leadership team, mostly men with similar sociodemographic backgrounds and life experiences.
The final principle that enables resiliency is modularity of organizations. Modularization allows traditional organizations to be disaggregated into smaller, autonomous units—in other words, modules. Although modules are not generally interdependent, modular organizations are extremely flexible, which allows them to respond to crisis situations more effectively.
Just consider this: when one of Toyota’s key brake valve suppliers burned to the ground some years ago, supply was restored in just two days because the automaker was able to swap production between suppliers, even of very different components. Or think about flexible factories that can handle a broader mix of products with short notice: in the midst of a global pandemic, automakers are stepping up to manufacture ventilators, while alcohol producers are working to make hand sanitizers.
Efficiency is not fragility, nor is resilience wasteful. Organizations need to find a happy balance between the two, one that provides a competitive advantage in the long run while preventing an undue focus on short-term gains from efficiency. In a networked, digital world with complex financial arrangements and globalized supply chains, the risk environment has become more grave. When unexpected crises strike, organizations can lose billions in value very quickly. Those that are better designed will not only withstand shocks but find opportunity in adversity.