Five fallacies obstruct a company’s ability to hedge against, absorb, and recover from the unavoidable shocks to its system. 

Most industries have seen an increase in the quantity and magnitude of external shocks, yet the focus on efficiency has rendered companies more vulnerable to shocks. In the midst of COVID-19, more leaders are willing to invest in their company’s resilience. 

According to the index, while excessive risk can result in large returns, more resilient organizations have roughly double the long-term survival rate. Adopting the best resilience strategy necessitates refuting five commonly held fallacies. 

Senior leaders will need to recognize the trade-offs and make decisions about their revenue portfolio and operations. With volatility expected to worsen, strengthening resilience can position a firm to prosper through future crises. 

It’s no surprise that business resilience is all the rage. While the COVID-19 pandemic is horrifying on a social and economic level, it is only the latest in a long line of upheavals that highlight the vulnerabilities or brittle features of unprepared businesses. Major shocks in recent years have included international trade disputes, a drop in oil prices, and a financial crisis, all of which have pulled the rug out from under exposed enterprises. An increasing number of government actions have begun to limit the possibilities of technology behemoths such as Ant Financial, Google, and Huawei. 

Companies are currently being buffeted by the coronavirus pandemic and the subsequent economic slump. The pandemic cut off vital supplies of medicine components from Asia, exposing pharmaceutical companies’ reliance on long-distance supply systems. For more than a decade, pharmaceutical corporations have sought to reduce costs by shifting a large portion of their manufacturing capacity to China and India. This had a direct impact on supply chain reliability in 2020, with production site closures and deteriorating transportation routes immobilizing supply chains and resulting in substantial medicine shortages in several nations while demand surged. 

Resilience is certainly becoming increasingly crucial for businesses across all industries. And the instability is set to worsen as globalization unravels, inequality increases, new technological threats emerge, and the repercussions of climate change become more frequent and severe. However, senior executives and boards of directors do not always understand the dynamics of resilience. We challenge corporate executives to think about the following: 

The majority of your concerns are overly short-term and minor. 

Improving resilience does not have to come at the expense of investors. 

Expanding government controls or restrictions, such as foregoing dividends or stock buybacks in exchange for bailouts, may further limit your options if you don’t get ahead of the task of becoming more robust. 

The destructive obsession with efficiency 

How did we end up in this situation? Recent stability has allowed for the largest growth in profits since the middle of the twentieth century. From 1990 to 2018, the profit pool of corporations in developed nations rose at a rate more than double that of the GDP. During this time, the relative regularity of the business environment allowed enterprises to pursue efficiency, which contributed to the remarkable profit increase. 

However, this emphasis on efficiency has come at the expense of increased structural instability. Firms increased leverage, with nonfinancial corporate debt-to-GDP ratios in the United States rising from around 30 percent in the 1980s to just shy of 50 percent today, and used debt to increase cash pay-outs to shareholders, which have risen from 78 percent of net income in 1999 to more than 100 percent today. At the same time, several companies unified their supply chains in order to acquire greater bargaining leverage, and they implemented just-in-time and redundancy-free processes in order to eliminate waste. 

While having a focused portfolio is important for long-term value generation, it has also produced hidden tension points that make some organizations vulnerable to unexpected changes in circumstances. Spirit AeroSystems, a top fuselage maker that was primarily reliant on a single customer, Boeing, ran into this issue when problems with the 737 Max aircraft prompted a major restructuring. Spirit has lately made moves to strengthen its resilience, including acquiring assets from Bombardier that will help it increase business with Airbus. 

In contrast, Samsung Electronics’ experience demonstrates the growing benefit of a more diversified revenue and profit portfolio. In 2016, the battery in Samsung’s new Note 7 product caught fire in certain situations, jeopardizing the company’s leadership in the smartphone market. The announcement prompted a $5 billion recall. However, the company was able to weather the storm because of the breathing room provided by offsetting growth in its semiconductor and display panel divisions. The structure of Samsung’s portfolio allowed them to devote the time and resources required to address the core causes of the battery failure and produce a new flagship product (the Galaxy S8) with a slew of novel features to reclaim customers. 

The emphasis on streamlining and efficiency has increasingly increased risk at the macro level. When we compared 1980–1999 to 2000–2018, we discovered that the volatility of the aggregate profit pool in developed economies increased by 60%. This volatility coincides with an increased chance of failure at the firm level. In the case of publicly traded US companies, the bankruptcy rate tripled between 1980 and 2018. Both aggregate volatility and firm failure rates would have been far higher if the government had not provided unprecedented levels of assistance. 

The experience of banks in the aftermath of the financial crisis, particularly in Europe, serves as a cautionary tale. Prior to the 2008 financial crisis, European banks not only had fast development, but also a rising return on equity that reached the mid-double digits. Returns have since fallen to the low single digits, substantially below the cost of capital. This is due in part to Europe’s general economic malaise and the lingering effects of bad loans, but it also reflects a huge step shift in the amount of regulatory capital these corporations are now required to keep as a condition of government bailouts. 

As evidence mounts that the conventional organizational risk-management playbook is no longer adequate, senior executives and boards are beginning to reconsider resilience. Even those that were able to survive the epidemic because of the extraordinary efforts of their staff and partners see the need for a more sustainable approach. 

But here’s the rub: Much of the conversation, like the rush to digitize everything a few years ago, fails to analyze what resilience means for each company and what it will take for a company to improve. In recent interviews with business leaders, we’ve discovered five persistent myths that confuse the debate. The first step toward resilience is dispelling these beliefs.