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Product Portfolio Management, Project Portfolio Management, Strategic Planning

Forget risk management; long live resilience management – Enrich Consulting

Published By Dr. Richard Sonnenblick

We are surrounded by evidence of resilience: Our immune systems fight off thousands of potential invaders every day and constantly hone their defenses in response to the threats they experience. Ecosystems evolve to use the forces that might otherwise threaten them, such as the sequoia forests of the Sierra Nevada, which don’t just survive forest fires, but use fire as a tool to foster new seedlings. Nature is full of complex systems that use threats to make themselves stronger.

But what about the companies to which we devote so much of our time and resources? They are complex systems, but are they resilient? What can we do to build resilience into their DNA?

A recent article in the magazine Nature* offers a framework for creating resilience that has much to recommend it. Although the article is focused on the threats created by climate change, the basic concept is widely applicable. In the approach it describes, risks to a system (say, your company or R&D portfolio) are characterized as threats that have some chance of occurring (based on the extent of the vulnerability) and will result in some consequence. The consequence inhibits your companies’ ability to perform, profit, and grow. As a resilient business, an inherent adaptability in your systems and processes allow you to adjust your operations, accommodate and minimize the consequences of the occurrence, and move forward. A resilient company will, over time, recover, and perhaps even exceed its performance prior to the event.

You are probably already thinking that scenario analysis and risk management—activities in which a management team ponders the bad things that might happen, and hedges its bets— are an important part of building resilience. I agree, but I think there’s more to resilience management than scenario thinking.

In risk management, you identify risks and take actions that lessen the consequences of a threat, should it come to pass. In resilience management, you consider the systems and networks that will be involved in a response to any type of threat, and take steps to ensure their effectiveness. The key to resilience lies in understanding the desirable characteristics of the systems that must respond to threats.


Resilient systems can not only recover from adversity, but grow through adversity (From Igor Linkov)

Take the example of Venice between 1400 and1600.** The city-state of Venice suffered far less from the plague than the rest of Europe. It was resilient in the face of the threat presented by the plague. Why? Because the government acted quickly to create mechanisms to head off the threat and to mitigate its worst effects when it arrived.

First, leaders considered the way goods and people moved into Venice and set up off-island areas for quarantine prior to admission. This showed an understanding of the importance of commerce and transportation networks, and their role in any threat.

Then, they organized groups of caregivers to treat the sick and dispose of bodies. These groups intensively shared protocols that seemed to lessen spread of the disease, even though they didn’t fully understand the mechanisms behind the success of these protocols. And they developed ways to share that information outside the group, as well. Group members wore uniforms that, while not entirely effective in protecting the wearers, established them as experts and enhanced their ability to perform outreach with the general population, spreading the latest information on best practices in disease prevention.

So, in Venice, a focus on networks paid dividends in two ways: communications networks facilitated the sharing of important information, and understanding commerce and travel networks helped the city-state to mitigate incursions of plague from abroad.

This idea of resilience as a systems exercise has interesting implications for startups and risky businesses of all sizes.  A resilient business begins with a few crucial steps:

–Understand the networks you live and do business in: No one does business in a vacuum. We are all aware of our customers, suppliers, and competitors, but do you understand the broader networks within which these groups exist, and how those networks affect how and why they choose to interact with us?

–Establish a culture of listening within and across your networks: Once you’ve developed a good sense of the many networks to which you’re connected, listen carefully to them—for shifts in customer needs or sentiments, changes in regulatory environments, emerging technologies that open the door to disruption, moving goalposts within your product development teams as technology, cost, and performance goals are missed or subtly adjusted.

–Establish a culture of acting on what you hear: Being first to hear key information isn’t enough; you also need to be willing to act on that information, sometimes in dramatic ways. To ensure resilience, you must act on what you hear, no matter how uncomfortable or incredible it is, or how pervasive the implications of your action are for the status quo.

–Listen to—and act on—everything you hear: We all have a tendency to focus on good news; when the information doesn’t square with our worldview, we want to dismiss it.  But we ignore bad, or even just weird, information to the detriment of our flexibility and resilience. Consider what might happen today in your firm under the following circumstances:

  • Someone in research discovers that the hot new prototype under development will cost 3x what was originally forecast.
  • Someone in strategic marketing learns that insurance companies will no longer reimburse patients for your just-launched drug because their studies suggest the drug doesn’t improve on the current standard of care.
  • An executive realizes that the company has 10% less for R&D funding than originally anticipated.

Difficult situations such as these test the mettle of all involved. Being honest with yourself, your team, and your customers might entail some challenging conversations, but it will help you find a path back to performance. The better you listen, consider, and act on signals within your networks, the more resilient you will be.

Netflix is an amazing example of a resilient company. I’ll give you two examples of their resilience management, one from the recent past and one from this week.

qwikster-endsA few years ago, Netflix stock was in the basement and pundits called the company “out of touch with customers” and much, much worse. They had recently announced a plan to separate into two concerns: one focused on streaming services and one focused on their DVD-by-mail offering. (Remember Qwikster? Ugh!) The billing and pricing changes were confusing and upset many customers before they were even implemented. Netflix was bombarded with thousands of emails from enraged customers within hours of the announcement.

Netflix quickly realized that its planned reorganization fell flat with customers. The CEO issued a public apology and rather than spin it or market it or fiddle with it, he completely rescinded the plan and kept the services bundled. This action didn’t redeem Netflix overnight, but it staunched the bleeding, allowing the company to refocus on the fundamentals of its value proposition and retain a majority of its subscribers. Netflix’s resilience management plan, whether explicit or not, included the ability to hear and use customer feedback to adjust its plans, even after those plans had already been set in motion.

Just last week, another piece of the Netflix resilience management plan was evident in the announcement of the company’s deal to release the sequel to Crouching Tiger Hidden Dragon at the same time the movie is released in theaters. Even before the Quikster debacle, Netflix realized it was at risk because it couldn’t control content costs. Each content provider had to be courted separately, and each contract expiration brought price increases and intransigence from the other parties, who rightly felt threatened by Netflix.

In this situation, a risk management group might focus on economies of scale, building a bigger subscriber base for leverage against the studios, or attempt to play the studios off against one another. I’m sure Netflix applied those approaches, but it also began creating its own content, first with an in-house production company (which didn’t work out great), then with independent production companies creating new series like the blockbuster House of Cards on a contract basis, and now with big-name studios like the Weinstein Company to co-release first-run titles. This is a great example of resilience: imaginatively exploring the content creation ecosystem to find other disenfranchised players who will work with Netflix.

The result has been stunning: Netflix is once again adding millions of subscribers, many of whom are joining to gain access to content available only on Netflix. As the subscriber base grows, Netflix acquires additional leverage in its periodic contract negotiations with other content providers. What started as a chink in Netflix’s armor has become a strength for the company.

What are you doing to increase the resilience of your firm? Do you understand the networks that encircle your employees, your suppliers, your channels, and your customers? Are you listening to them, and are you willing to act on what you hear?

*Linkov I, Bridges T, Fox-Lent C, Kroger W et al. (2014) “Changing the resilience paradigm.” Nat Clim Chang 4:407–409

**Linkov I, Fox-Lent C, Keisler J et al. (2014) “Risk and resilience lessons from Venice” Environ Syst Decis 34(3):378-382

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Written by Dr. Richard Sonnenblick Chief Data Scientist

Dr. Sonnenblick, Planview’s Chief Data Scientist, holds years of experience working with some of the largest pharmaceutical and life sciences companies in the world. Through this in-depth study and application, he has successfully formulated insightful prioritization and portfolio review processes, scoring systems, and financial valuation and forecasting methods for enhancing both product forecasting and portfolio analysis. Dr. Sonnenblick holds a Ph.D. and MS from Carnegie Mellon University in Engineering and Public Policy and a BA in Physics from the University of California, Santa Cruz.