Complex structures prevent org resilience

Complex structures prevent org resilience

Successful companies increasingly ask employees to apply their own judgment and drive their organisation’s success actively

Half the respondents in a recent McKinsey survey of over say their organisation is unprepared to react to future shocks. The survey covers more than 2,500 business leaders around the world. Only half say their organisations are well prepared to anticipate and react to external shocks, and two-thirds see their organisations as overly complex and inefficient. Early this year, the World Economic Forum conducted a Global Risks Perception Survey (GRPS) in which respondents chose “Energy supply crisis”; “Cost-of-living crisis”; “Rising inflation”; “Food supply crisis” and “Cyberattacks on critical infrastructure” as among the top risks for 2023 with the greatest potential impact on a global scale.

Climate change a key risk

Failure to mitigate climate change and Failure of climate-change adaptation top the rankings as the most severe risks on a global scale, followed by natural disasters and extreme weather events and “Biodiversity loss and ecosystem collapse”, were cited by respondents as future risks. CEOs together with their leadership teams around the world have been operating in a highly volatile and uncertain environment, first having to cope with the COVID-19 pandemic and then with the ensuing economic slowdown, soaring inflation, and geopolitical disruption. In such an unsettled period, it’s no surprise that efforts to strengthen short-term resilience have dominated the agenda at many companies. Less obviously – but no less importantly–business leaders are having to address a range of organisational shifts that have significant implications for structures, processes, and people.

Shifts that impact organisations

These shifts are both challenging and harbingers of opportunity, depending on how organisations address them. Some shifts, most notably how to strike the right balance between in-person and remote work, took place at the height of the pandemic and have lingered. Others, such as an ongoing mismatch in the labour market and a decline in employees’ mental health, have been accelerated by the COVID-19 crisis. Still others, such as effective leadership development and capability building, are perennial organisational issues that have proved more vexing–and more important to get right–in the current environment. All of these shifts have long-term consequences, and all require clearheaded thinking and decisive action that can’t be postponed.

US-China rift a major global risk

Global investment banking company BlackRock which is more focussed on immediate risks finds the strategic competition between the U.S. and China is driving global fragmentation as both aim to boost self-reliance, reduce vulnerabilities and decouple their tech sectors, as a major risk factor facing economies and organisations. It sees U.S. semiconductor export restrictions against China speeding up targeted decoupling. Japan and the Netherlands are rolling out similar measures. The U.S. is weighing additional controls on key technologies including quantum and AI, and will likely implement a mechanism to review outbound investment in Chinese technologies. The U.S. has enacted the CHIPS and Science Act to bolster its competitiveness in critical technologies and is enabling significant domestic investment. Beijing reinforced the importance of technological self-sufficiency during the recent Two Sessions meetings.

Need for resilience

Dealing with serial crises and being able to bounce forward out of them–and quickly–are more important than ever. This is putting organisation resilience to test. The competitive advantage that resilience provides was evident during the 2007–09 global financial crisis. Per McKinsey research, resilient companies in that time generated about 20 percent more total shareholder return (TSR) than their peers did–an advantage that accelerated to about 50 percent in the turnaround years of 2009–11 and 120 percent during the stable period of 2011–2017.

And that resilience premium was visible again during the height of the COVID-19 pandemic. McKinsey research shows that resilient companies generated 10 percent more in TSR than less resilient peers did during the economic downturn between the fourth quarter of 2019 and the second quarter of 2020. In the ensuing economic recovery, from the second quarter of 2020 to the third quarter of 2021, the differential grew to as much as 50 percent.

Barriers to resilience

Investing in creating a resilient organisation seems to be a no-brainer and yet companies were found to be falling behind in this critical mission. The McKinsey survey found several reasons behind this.The chief among these was the way organisations were structured; The way that organisations are set up is a key determinant of their ability to act quickly and effectively when a crisis strikes, or a market turns. The survey listed limited funds availability; unclear priorities and direction; isolated initiatives; limited organisational buy-in; dramatic differences between hierarchy levels and functions are some of the other reasons preventing organisations from building resilience.

McKinsey research shows that, compared with peers in slow-moving companies, leaders in fast-moving organisations report 2.1 times higher operational resilience, 2.5 times higher financial performance, 3.0 times higher growth, and 4.8 times higher innovation.

Reorg for resilience

Successful companies increasingly ask employees to apply their own judgment and drive their organisation’s success actively. To move faster, companies might consider removing managerial layers (such as by redrawing organisational charts). Dynamically staffing certain individuals and teams for high-priority projects could also improve speed, as could conducting more frequent performance reviews (for instance, quarterly instead of annually). An organisation is only as resilient as its people. That’s why it’s so critical for business leaders to encourage adaptability among employees and equip them with tools that allow them to work as quickly as situations dictate.

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