McKinsey: Resilience for sustainable, inclusive growth

Burgos, August 10, 2022.-  Mckinsey Consulting has prepared a great report on the variables that entrepreneurs must manage today. Due to her great interest, I highlight here a short excerpt and recommend reading the entire analysis. 

According to Mckinsey, Resilience pertains to public- and private-sector organizations, as well as to whole economies and societies. The resilient stance for organizations must be forward-looking, anticipating disruption rather than simply reacting, but continuously learning and amending based on experience.

Disruptions are focal points that reveal where capabilities are strong and where investment is needed. The experience of past crises and disruptions teaches essential lessons on how to proceed. These lessons will contribute to the architecture of the common resilience framework across the public and private sectors.

1.1 Managing disruptions defines sustainable growth more than managing continuity

Crises damage institutions and communities, but the process of rebuilding can create stronger foundations for future growth. The financial crisis and recession of the late-2000s, for example, led to actions by banks and regulatory changes that made the banking system stronger. The system has remained robust through subsequent economic disruptions. Likewise, changes introduced during the COVID-19 pandemic can provide new impetus for accelerated growth: the shift toward digitalization, new hybrid working models, the rethinking of supply chains, and the acceleration of public investments toward climate change. These are the kinds of structural shifts that crises often force on otherwise recalcitrant institutions. Resilience is thus more than protective measures; it is also the ability to reinvent and innovate in response to disruptions.

1.2 Crises evolve across categories and do not have single-point solutions

Significant crises are not single-issue events confined to rigid categories. They break through predefined areas of expertise and responsibilities, gaining momentum as they grow in scope and across regions. The COVID-19 pandemic spread worldwide as a public-health crisis but quickly evolved into an economic, social and, in places, organizational crisis.

The issues that trigger crises, and the public- and private-sector responses to these primary issues, have initial effects and produce secondary and tertiary effects. These can give rise to a new primary issue. To navigate these rapid interactions, organizations need to respond with sets of correlated solutions that can be adjusted as conditions evolve.

1.3 Networks hide interdependencies, accelerating crises (although they can also enable faster recovery)

The extent of networks within the global economy, societies, and industries is only partly visible. In a disruption, hidden interdependencies can emerge, unexpectedly accelerating the impact. Supply chain disruptions affect production, availability, and prices more quickly. The war in Ukraine threatens food security in low-income countries in the Middle East and North Africa. New and hidden interconnectivity makes systems more vulnerable. On the other hand, networks that provide more flexibility and reduce interdependencies permit a wider range of solutions to emerge and be shared quickly. Understanding networks and connections better in today’s environment is a key aspect of resilience.

1.4 Lack of preparation and inadequate responses can magnify the damage of crises

A poor response can easily magnify the damage directly caused by a crisis. An effective response, on the other hand, can significantly limit the damage. Decisions are crucial, and past crises have certainly produced their share of bad ones. Even highly successful organizations make decisions that, in hindsight, were all wrong. However, few probe more deeply about why bad decisions are made. It may seem obvious, but the reason is usually that the decision was not well thought out. Under pressure, leaders tend to favor action that can be implemented quickly, eschewing a slower, more thoughtful course. Decisions made under pressure and at speed can entail unintended consequences. The resilience framework will necessarily provide space for thoughtful decision making. Organizations will need to create the means for deciding when to move quickly and when to slow down, and test decisions in a given crisis with people outside of the core network.

1.5 Crises disproportionately affect the most vulnerable

Crises and disruptions cut deeper in poorer countries, among more marginalized and vulnerable population segments and particularly in fragile and conflict-affected states. Inequality in terms of income, wealth, social mobility, health, access to services, and learning opportunities leads to an unequal baseline for resilience. In developed economies, the recovery from the pandemic relies on ample government stimulus spending. Low-income countries rely on development assistance and emergency loans from international financial institutions, increasing the risk of sovereign debt vulnerabilities. The stimulus measures in richer countries magnify demand, putting further pressure on pandemic-disrupted supply chains. This dynamic has resulted in higher commodity prices and consumer inflation, which, in turn, have hit lower-income countries hardest. Other global developments, positive as they are for richer countries, could cause hardship in poorer countries, including the accelerated shift to the digital economy and pressures to reduce carbon emissions.

Growth is sustainable insofar as it supports the health and repair of the natural environment; it is inclusive when it meaningfully improves the livelihood of wider population segments.

According to their nature, many crises transmit globally the effects of heavier burdens, which are borne immediately by developing nations. Resource scarcity or refugee crises created by wars or climate change make the emphasis on inclusive growth of crucial importance. Exposed populations must not be left behind on a shared planet. The disruptions should be seized upon as opportunities to ramp up collective efforts to improve habitats, food and water security, public health, and social and technical infrastructure where these are most needed.

The rise in fragility and decrease in resilience among some populations or in some country contexts pose additional risks of spillover effects, including deeper supply chain disruptions, increases in extreme poverty, and the potential for conflict. A resilience muscle must ultimately serve the broader goal of sustainable, inclusive growth. Growth is sustainable insofar as it supports the health and repair of the natural environment; it is inclusive when it meaningfully improves the livelihood of wider population segments. At a company level, questions of equality and fairness are directly linked to an organization’s purpose and values discussions.

1.6 Crisis preparedness goes beyond financial reserves and buffers

Optimal crisis preparedness includes defensive measures such as buffers and financial reserves but equally important are active response capabilities. These allow organizations to quickly adapt, grow into the new conditions and move fast on new opportunities. Crises have accelerated the growth of the digital economy, with more organizational and societal buy-in for remote meetings, cloud computing, and digital banking. In the automotive industry, vehicle electrification is expanding as governments set emissions targets, offer subsidies, and install charging infrastructure.

In the public and governmental spheres, many national healthcare systems and pandemic-response programs are overstressed. Success in applying existing emergency plans has varied from country to country and within states and departments. The difficulties underscore the importance of combining defensive buffers (stockpiles of supplies and financial resources) with flexibility and less centralized approaches. Certainly, geopolitical crises can have serious implications for supply chains and energy supplies. Buffers will provide only partial, temporary solutions. Response capabilities and adaptability therefore matter as much as preparedness. In crises, half the impact arises from the crisis itself, while the other half, good or bad, is determined by the response.

Strategies across sectors must be coordinated to ensure that disruptions do not diminish growth. 

Resilience is a broadly used term covering many aspects of organizational health and operations within governments and public foundations as well as corporations and financial institutions. The World Economic Forum Resilience Consortium endorses the strategic view of resilience and emphasizes the long-term ability of organizations and economies to create the capabilities needed to deal with disruptions, withstand the shocks, and continuously adapt as disruptions and crises arise over time. It is the strategic prerequisite for long-term, sustainable, and inclusive growth.

Resilience failures cost. World Economic Forum research suggests that the impact of resilience (or lack of it) on annual GDP growth is 1 percent to 5 percent globally. In the COVID-19 pandemic, for example, workforce attrition may have shaved 3.6 percent off growth in some countries. In addition, low vaccination rates in developing countries have reduced growth by 1 percent. Beyond the pandemic, income, gender, and racial inequalities are likely to reduce growth by between 0.6 percent and 1.0 percent, while extreme weather events are taking 0.4 percent of growth. On the other hand, success in reskilling and upskilling the labor force in the digitizing economy could increase growth by 4.5 percent annually to 2030. Proportionate short- and long-term economic improvements can be captured through successful responses to the major risks and impact drivers in each of the resilience themes. Given the interconnectedness of the themes, the enhancements are not discrete and cumulative, and their magnitude will vary across economies, industries, and populations.

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