Bain & Company Dispels 5 Myths of Building Resiliency
For years now, companies have been fixated on improving efficiencies and driving out costs. Consolidated supply chains leveraged for better pricing, just-in-time inventories, and the elimination of redundancies to drive out waste have removed any protective cushioning, increasing the likelihood that even the smallest supply chain disruptions can have large impacts on their operations.
The global pandemic has exposed vulnerabilities and garnering the attention of executives who now see the value in investing in their business resilience.
“Analysis of the Bain Resilience Index shows that while high risk can generate high rewards, more-resilient companies have nearly double the survival rate over the long run,” Bain says.
But what does ‘business resilience’ really mean? Bain believes there is a lack of clear discussion on the dynamics of business resilience, what it means for every company, and how to improve it. They challenge business leaders to consider:
- Most of the things you’ve been worrying about are too short-term and modest.
- Improving resilience doesn’t have to come at the expense of shareholders.
- If you don’t get ahead of the challenge of becoming more resilient, expanding government regulations or restrictions―such as forgoing dividends or stock buybacks in return for bailouts―may further limit your options.
Business heads will need to recognise the trade-offs involved and make choices around their revenue portfolio and their operations Bain & Company says. They go on to explain that although executives have come to recognise the criticality of improving resilience, they believe there are five prevalent myths to be dispelled.
Bain & Company’s five myths that must be debunked:
Myth 1: Resilience eliminates volatility
Volatility must be distinguished from risk, and that it is unrealistic to believe resilience will help eliminate earnings and share price volatility. Bain describes volatility as “predictable fluctuations in every business over time,” whereas risk is “exposure to a lasting adverse change in trajectory.”F
Failure to define risk appetite is a rampant issue. Rather than attempting to improve on earnings certainties, management teams and boards should look to identify and mitigate their most prominent adversaries, whether it be bankruptcy, a hostile takeover or activist investors.
Myth 2: It’s all about the balance sheet
Increasing resilience is about more than examining leverage and liquidity. Risk may lay in five distinct areas: strategic, financial, operational, technological and organisational.
Adopting a realistic, holistic approach to resilience building that acknowledges all of the areas of exposure, and their impacts to your organisation allows business leaders to make better informed, smarter decisions on where best to invest resources.
A simplistic and transparent business model makes for a more resilient business. Complex and opaque supply chains can make risk assessment nearly impossible, leaving organisations exposed to operational risk due to unforeseen disruptions such as shortages of critical parts that lay beyond their visibility.
Myth 3: Past resilience guarantees future resilience
Building business resilience is about looking forward to what may happen in the future that could have significant deleterious effects on your business, not about looking back. Although Covid-19 may have you better prepared to withstand the same type of disruptions, executives must evaluate the likelihood of all areas of risk.
As we continue on the trend of digitisation and industry 4.0, cybersecurity should remain of the utmost concern. Although identifying all potential risk sources is an impossible task, executives must build the ability to evaluate the likelihood and impacts of risk scenarios, and mitigate their most significant threats.
Myth 4: Resilience should be handled by the risk function
“Too often, risk gets treated as an obligatory but unfortunate box-checking exercise, then relegated to a corner of the business. Accepting this more limited scope, risk functions may fall into the trap of becoming overly tactical and blinkered in their identification of risks.”
“This approach falls short in a world of greater turbulence. The combinatorial nature of many risks demands that companies identify and mitigate risks for the entire business… Moreover, many future risks will emerge from the ecosystem of partners outside the firm, and traditional risk-management functions are ill-suited for this challenge.”
Preferably, organisations should incorporate risk management into their existing channels and processes for critical decision-making at the C-suite and board levels. Leaders at all levels in the organisation should adopt a risk ownership mindset considering potential impacts on the company across the entire business and over the long term.
Myth 5: Resilience doesn’t require difficult trade-offs
Business leaders must openly discuss the need to balance both short and long term gains. “For their part, many investors are trying to balance the desire for responsible stewardship of capital over the long term with the need to avoid allocating funds to systematic underperformers.”
Agreeing on the metrics to be used can be a sticking point. To help create fact-based discussion, Bain has constructed the Bain Resilience Index, “a 100-point scale that assesses a company’s resilience based on the statistical relationship between performance during a crisis and a wide range of readily observable metrics including scale, growth, margin, asset intensity, leverage, liquidity, and geographic and product concentration.”
Bain & Company goes on to explain that “once you get past these five myths, it’s clear that there’s no single solution or quick fix, no binary black-or-white choices, but rather a series of decisions in the grey areas of marginal risk. Developing the right level and type of resilience demands a combination of long-term vision, a deep understanding of company and industry economics, and a significant dose of creativity.”
offers a three-step approach to setting the wheels to resilience building in motion, as well as excellent examples of the successful business resilience strategies of Nissan and Southwest airlines. For more on that, click .
Biden establishes Supply Chain Disruptions Task Force
The US government is to establish a new body with the express purpose of addressing imbalances and other supply chain concerns highlighted in a review of the sector, ordered by President Joe Biden shortly after his inauguration.
The Supply Chain Disruptions Task Force will “focus on areas where a mismatch between supply and demand has been evident,” the White House said. The division will be headed up by the Secretaries of Commerce, Transportation, and Agriculture, and will focus on housing construction, transportation, agriculture and food, and semiconductors - a drastic shortage of which has hit some of the US economy’s biggest industries in consumer technology and vehicle manufacturing.
“The Task Force will bring the full capacity of the federal government to address near-term supply/demand mismatches. It will convene stakeholders to diagnose problems and surface solutions - large and small, public or private - that could help alleviate bottlenecks and supply constraints,” the White House said.
In late February, President Biden ordered a 100 day review of the supply chain across the key areas of medicine, raw materials and agriculture, the findings of which were released this week. While the COVID-19 health crisis had a deleterious effect on the nation’s supply chain, the published assessment of findings says the root cause runs much deeper. The review concludes that “decades of underinvestment”, alongside public policy choices that favour quarterly results and short-term solutions, have left the system “fragile”.
In response, the administration aims to address four key issues head on, strengthening its position in health and medicine, sustainable and alternative energy, critical mineral mining and processing, and computer chips.
Support domestic production of critical medicines
- A syndicate of public and private entities will jointly work towards manufacturing and onshoring of essential medical suppliers, beginning with a list of 50-100 “critical drugs” defined by the Food and Drug Administration.
- The consortium will be led by the Department of Health and Human Services, which will commit an initial $60m towards the development of a “novel platform technologies to increase domestic manufacturing capacity for API”.
- The aim is to increase domestic production and reduce the reliance upon global supply chains, particularly with regards to medications in short supply.
Secure an end-to-end domestic supply chain for advanced batteries
- The Department of Energy will publish a ‘National Blueprint for Lithium Batteries’, beginning a 10 year plan to "develop a domestic lithium battery supply chain that combats the climate crisis by creating good-paying clean energy jobs across America”.
- The effort will leverage billions in funding “to finance key strategic areas of development and fill deficits in the domestic supply chain capacity”.
Invest in sustainable domestic and international production and processing of critical minerals
- An interdepartmental group will be established by the Department of Interior to identify sites where critical minerals can be produced and processed within US borders. It will collaborate with businesses, states, tribal nations and stockholders to “expand sustainable, responsible critical minerals production and processing in the United States”.
- The group will also identify where regulations may need to be updated to ensure new mining and processing “meets strong standards”.
Partner with industry, allies, and partners to address semiconductor shortages
- The Department of Commerce will increase its partnership with industry to support further investment in R&D and production of semiconductor chips. The White House says its aim will be to “facilitate information flow between semiconductor producers and suppliers and end-users”, improving transparency and data sharing.
- Enhanced relationships with foreign allies, including Japan and South Korea will also be strengthened with the express proposed of increasing chip output, promoting further investment in the sector and “to promote fair semiconductor chip allocations”.