· From risk management to paradigm change? ·
The past 2 years have been a global crash course in crisis management for businesses, individuals as well as public and private decision makers. From a slowly receding global health crisis, we are jumping into an area of global economic disruption exacerbated by large-scale armed conflicts we thought were long gone, at least in Europe.
Long-held, mainstream beliefs about the global peace-keeping power of a globalized, hyper-connected economy are challenged in ways we collectively thought were unimaginable.
From the economic activity viewpoint, the long, just-in-time supply chains have crashed against the reality of both a pandemic and country-on-country aggression, with the not too distant threat of a nuclear war escalation.
These are NOT the easiest topics we to write about in our monthly blog post.
Resilience as a risk management approach
Resilience comes from the latin ‘resilio’, literally translated as ‘rebound’. Depending on the context in which the term is used in, it can be described as variations of the “capacity to sustain and recover from crisis”
From an organization viewpoint, resilience can be defined as the ‘capacity of organizations to withstand changes, shocks in its environment and still function’.
Let’s focus on the economic or organization use of the resilience term, the business resilience, or the resilience of a business.
There are numerous publications, white papers, reports available advocating for business resilience from corporations, consulting firms and in business / economics studies. Interestingly, and without pretending to go on an academic literature review in this short blog, business resilience is very often framed as a risk management approach. A risk management approach in which the ultimate goals and objectives are to protect the shareholders from negative impacts on their capital and expected financial returns.
From an organization standpoint, business resilience is about protecting the business from external shocks. i.e, Supply and availability disruptions in the upstream supply chain of a mobile phone manufacturer could have far reaching repercussions for the whole organization and ultimately impacts the expected financial results.In our current linear economic models, supply chains have (ideally) no stock. Inventory costs can be expensive, and we do not want that, do we? So long supply chains are spread over multiple countries and continents and enabled by the ever increasing computing power of information technologies. No need for buffer stocks as clever algorithms can predict the precise amount of goods, materials, time, man / machine hours required as well as the costs to account for in order to bring a product to the global consumer where, when and how they want it.
At least that is the modern economic theory.
Remember 2011 and the massive floods in Thailand?
The flooding created a global electronic components crisis. The just-in-time, no-stock approach of these long supply chains with a handful of production sites in the same country producing a large share of electronic components resulted in the whole supply chain of personal laptops grinding to a halt in a matter of weeks. That was an early warning of how fragile a whole industry can be if the actors do not seriously account for and price in the lack of resilience in their own operations and in the wider value chains.
Fast forward to 2022, we are facing even more serious resilience issues.
The Covid crisis is receding but is still far from being over. Case in point with the surge in cases in China and the very likely ripple effects on pretty much all electronics goods, globally.
Climate-induced impacts on crop yields from the largest key crops producers were already impacting global food prices in 2021. 2022 looks set to compound this trend greatly with the impact of the conflict in eastern Europe on food exports towards Europe and more importantly towards food import dependent middle-east countries (remember the Arab spring events links to the reduction of wheat imports by Russia in 2011?..).
The artificially cheap fossil energy we rely on and take for granted in Europe for heating, manufacturing, will become much more pricey next winter by the look of things.
The rare earth materials we need for the green/sustainable energy revolution are increasingly controlled by a limited number of countries, most of these not too keen on an equal split of these precious metals.
The business resilience as a risk management approach has obvious limits if we take into account the scale of the challenges listed above.
What can an organization really do, when faced with global commodity and energy increase? Pass on the costs to the consumers?
From organization resilience to systemic resilience: the core proposition of a Circular and Regenerative economy
All doom and gloom isn’it? Well, not really.
Before the COVID-19 crisis and before the latest events taking place in Eastern Europe, the notion of resilience as a systemic approach was well theorized. The work of Sally Goerner on this topic is remarkable in articulating the purpose, intent, and end goal of a resilient economic and social model.
Here, the notion of resilience is not a risk management approach, it becomes the goal of the system, the balancing point at which the various elements of the system can thrive.
A picture speaks a thousand words, so here you have it:
Goerner, S. Regenerative Development: The Art and Science of Creating Durably Vibrant Human Networks, The Capital Institute, September 1, 2015
This graph introduces the ‘window of vitality’: the safe and just space for economies, cultures and human activities to thrive while remaining within the Earth’s ecosystemic boundaries.
All very theoretical you might say…
Not really, if we keep in mind this notion of window of vitality and use it as a guide, then economic activities have very different goals and objectives, and use resources very differently.
- Use materials and energy that are available locally = increase resilience, reduce supply risk and mitigate pricing volatility
- Extend the life cycles of existing products and materials through sharing, re-using, repairing, remanufacturing = increase resilience, shorten supply chains, develop local knowledge and build social bounds
- Create products and services that are accessible and benefit a wide array of stakeholders = increase resilience, spread value across society, reinforce social and cultural bounds.
Crisis can lead to fast and far reaching changes. The realization of our current social and economic models’ weaknesses and shortcomings is no justification for pessimism nor despair.
Yes, commodity and energy prices will increase, a lot.
Yes, this will have far reaching implications globally and in our day to day life,
The positive news is that there are more and more models, frameworks, tools to imagine, create and scale economic and social models that allow us to thrive, to be truly resilient as societies.
At Circulab, we believe that the Circular and Regenerative economy in its various iterations and evolutions can help all of us find our economic, social and environmental window of vitality.
Fabrice Sorin, Circulab Academy Manager
