July 15, 2014
This past winter was a rough one for big swaths of the United States, with both unusual cold snaps and disruptive snowstorms. General Mills’ CEO recently blamed the winter for less-than-expected earnings, saying that “severe winter weather…disrupted plant operations and logistics…We lost 62 days of production…which hasn’t happened in decades. That would be the result of people not being able to get into work safely or not having inputs arrive.”
It wasn’t just one company, though; the whole economy was slowed by the extremes and volatility we faced.
The disruption to operations and supply chains is real and costly, and all signs point to increasing threats as weather gets more volatile, driven in large part by climate change. The science is getting clearer that we’ll see more extreme hurricanes, droughts, floods, and even snowstorms – more moisture in the atmosphere means bigger downfalls of all kinds.
A couple important recent reports confirm that these issues are not some theoretical model to debate, but reality today. The Risky Business report from former Treasury Secretaries and Mayor Mike Bloomberg is incredibly blunt about the hundreds of billions of coastal property and business assets at risk. A few weeks earlier, the quadrennial U.S. National Climate Assessment, a 840-page tome, did not bury the lede and declared in the first sentence, “Climate change, once considered an issue for a distant future, has moved firmly into the present.”
Of course, all weather isn’t necessarily tied directly to climate change – like with the recent tornadoes that swept through the American Midwest – but no matter what you believe the cause, extreme weather will play an increasing role in our lives and economies. Nobody can predict exactly what might go wrong, but we can say with near 100% confidence that something will.
So let’s consider what a company can do in a world that’s volatile, uncertain, complex, and ambiguous – that’s “VUCA” for short, a military term that’s been adopted by business. Here’s a review of the five core components of resilient systems, which I pulled together for my new book,The Big Pivot, based in part on two other important works: Nassim Taleb’s Antifragile: Things That Gain from Disorder and Resilience: Why Things Bounce Back, by Andrew Zolli and Ann Marie Healy.
1. Diversity. A company is clearly more at risk if it has just one major product, service, technology, key supplier, or other core element. In the 2011 Thailand floods, both hard drive makers and auto giants realized that having a sole key component made in one place made for a fragile system (Toyota took a $1.5 billion hit to earnings). While companies don’t often share the details of their supply chain strategy publicly, you can bet these companies have built more diverse options for sourcing key inputs.
2. Redundancy and buffers. Taleb uses the natural world as a model for this principle: “Layers of redundancy are the central risk management property of natural systems,” he writes, pointing out how many of our biological systems have doubles (like lungs) or backups. Our business systems need leeway for extremes as well. A few days ago, for example, the Obama Administration announced a plan to stockpile a million barrels of gasoline in the northeast specifically to avoid the shortages that plagued New England after Hurricane Sandy.
This is all smart strategy, but the challenge for business specifically is that companies don’t like keeping two of anything – that’s not lean or (seemingly) efficient. It’s a fine line for sure, but having multiple pathways to get key inputs, for example, might have saved General Mills – and the hard drive and car companies – lots of money. It might have actually generated increased revenue as well, if it meant operating while competitors couldn’t. As Taleb says, “redundancy seems like a waste if nothing unusual happens. Except that something unusual happens – usually.”
3. A love/hate relationship with risk. It’s a paradoxical idea, but one way to build resilience, or antifragility, is to keep the vast majority of the business as safe as possible, but then take big risks – ones that may pay off 10-fold or more – with a smaller part of the business.
Think of the famous idea from Clayton Christensen of trying to disrupt or cannibalize your own business before someone else does. Imagine setting up a skunk works to identify major risks to the business stemming from resource constraints or climate change – and then lean into those risks and come up with products and services that avoid them and challenge the core business (for example, a car company investing in car sharing programs which consumers use to save money, but also reduce material and energy use dramatically).
4. Fast feedback and failure. If you’re going to take some risks to, ironically, make us less risky, you need to drop what isn’t working quickly. To be more responsive, companies need better data on resource use and climate risks up and down the value chain. So invest in capturing information and building real-time systems.
5. Modular and distributed design. If some part of a system fails, it would be great if it didn’t bring down the rest of it. A tree branch hit a power line in Ohio in August 2003, causing cascading failures across a highly connected U.S. grid, and 50 million people in the northeast lost power (including me, my wife, and our 11 day-old child in Connecticut – we were not in a resilient mood).
These principles alone may not make for resilience in a hotter, scarcer, more open world, but they go a long way. And they point toward one key pathway for managing – and even thriving – in a VUCA world: renewables.
Companies (and homes) that generate their own onsite energy will be able to literally weather storms better than competitors. Not all the technologies we need to do this well are in place – like building-scale energy storage at a reasonable cost – but we’re getting there. And during the day, companies with their own solar panels can operate after the storm has passed, even if the grid is down.
Nobody can prepare for every possible outcome. Randomness, of course, is a prime element of our new business reality. But we can build systems that are better prepared than they are now. And, sure, it’s a challenge to value resilience: How much is your business damaged by a breakdown in your supply chain, or a threat to your ability to operate? How much will it cost all of us if we let the drivers of deep volatility, like climate change, go unchecked?
It’s not easy to say, but let’s avoid finding out.