Companies Wanting to Survive Must Make Four Moves
When toddlers start being in pre-maternal care, they get frequently sick. This happens because they do not have strong immunity defenses, which must be built. The same applies to businesses. You are not born resilient, you grow into resilience.
Resilience means the ability to withstand crises and build sustainable futures. The Italian economic predicament is complex, but generalized defeatism is not going to solve anything. There are entrepreneurs that make it, entrepreneurs that quit, and others that persevere against the odds.
Resilient companies are made of resilient entrepreneurs and managers who have the courage to invest in Italy. For example, Lars Petersson, chief executive of Ikea Italia, has decided to implant the manufacturing of drawers, faucets, toys etc. to the Peninsula, by sourcing from local firms. Also some Italian firms are investing and expanding. Domenico Restuccia, founder of Techedge, a group specialized in technological solutions for business processes, says that "over the last three years, we have hired almost 300 people, giving them the opportunity to work on international projects for an Italian company, instead of migrating abroad." These examples should be contagious. What Italians need is a return to the entrepreneurial spirit of the 1950s, when the foundations were laid for the economic boom of the early 1960s.
How to do it? Our study compared managerial choices and performance in companies that have positively reacted to the crisis with those which have suffered from it. In detail, by analyzing a sample of 705 international listed companies, operating in seven industries that have been very affected by external shocks, we have developed a model that enables any firm to start testing its resilience capability. The result was a 4-step methodology to increase organizational resilience.
Firstly, a company must identify its resilience level. At the start of every process, a need of urgency must be created around the issue. "Why should we raise our resilience level, if we are evaluated on the basis of quarterly earnings?", it's the typical reply. Both top management and shareholders must come to appreciate the value of high levels of resilience, even if this means to forego a portion of short-term profits. That's because resilient companies have stable profits over time. In order to measure performance, we employed Volare (learninglab.sdabocconi.it/volare/), an indicator that looks at the10-year average of ROE and its volatility over the same period of time, through the comparison of industry peers.
Secondly, discontinuity scenarios must be developed. In order to improve business resilience, one must identify the factors that could have a major impact on a company's balance sheet. We have by now become used to the notion of stress tests, which assess the impact of financial shocks on the assets and liabilities of banks under various scenarios. The same needs to be done for firms.
Thirdly, a thorough resilience check-up must be conducted. This stage looks at how firms react to discontinuity. While a bank that doesn't pass a stress test usually raises additional capital, a company needs to go further and analyze the factors that are capable of increasing resilience. Our research study proposes seven main factors.
Fourthly, and lastly, elements that are critical for resilience need to be seriously addressed. Check-up results will highlight courses of action that need to be taken to implement change. However, modifying a company's mindset is by no means simple. How to decrease the temptations of management and shareholders to cash in short-term profits at the expense of long-term performance? Something for the next board meeting to discuss.