Here is an excerpt from an article by Ananya Sheth and Joseph V. Sinfield for the MIT Sloan Management Review. To read the complete article, check out others, and obtain subscription information, please click here.
Credit: Simon Prades
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Applying a more sophisticated approach to risk management can help leaders continue to generate value through disruption and uncertainty.
Building the resilience of large, complex enterprises is critical in today’s uncertain and interconnected world. At a time when a container ship grounded in the Suez Canal can bottle up 12% of the world’s trade, or a virus can disrupt the global flow of commodities, components, and talent, a corporation’s ability to quickly adapt in the face of unfolding events is essential to its survival and prosperity.
Business resilience is a dynamic property that is retrospectively measured by the stability and longevity of corporate value across changing contexts. In real time, it manifests in an enterprise’s timely adaptation to both immediate and gradual changes in the business environment.
Our work, which employs a complex adaptive systems view of businesses, shows that resilience derives from three fundamental adaptive capacities: sensing and monitoring, to recognize emerging changes in the business environment; business model portfolio development, to build and test capabilities across operating contexts; and fundamental capability development, to drive growth with longevity and avoid corporate stall.1 Moreover, each of these capacities hinges on the development of a capability for risk intelligence.
We define risk intelligence as the honed ability to rigorously interpret risks and the consequences or opportunities they pose for a company.2 It allows leaders to see through environmental complexity and systematically identify, categorize, and interpret risks. This enables them to look beyond known risk factors and intentionally explore yet-to-be-known risks, thereby embracing rather than avoiding uncertainty.
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REFERENCES (11)
1. A.B. Sheth, “Pathways to Enterprise Resilience” (Ph.D. diss., Purdue University Graduate School and the Lyles School of Civil Engineering, 2021). We define “growth with longevity” as multi-decadal business growth founded on one or more fundamental capabilities that enable the pursuit of multiple new markets across contexts over time.
2. “Risk intelligence” has been defined in various ways. See F. Caldwell, “Risk Intelligence: Applying KM to Information Risk Management,” Vine 38, no. 2 (June 2008): 163-166; D. Evans, “Risk Intelligence,” in “Handbook of Risk Theory: Epistemology, Decision Theory, Ethics, and Social Implications of Risk,” eds. S. Roeser, R. Hillerbrand, P. Sandin, et al. (Dordrecht, Netherlands: Springer, 2012), 603-620; S. Mashingaidze, “Risk Intelligence: How Lessons From Folktales/Fables Contribute to the Implementation of Risk Management in Banks,” Risk Governance & Control: Financial Markets & Institutions 5, no. 4 (October 2015): 19-25; D. Wu and J. Birge, “Risk Intelligence in Big Data Era: A Review and Introduction to Special Issue,” IEEE Transactions on Cybernetics 46, no. 8 (August 2016): 1718-1720; and A. Marshall, U. Ojiako, V. Wang, et al., “Forecasting Unknown-Unknowns by Boosting the Risk Radar Within the Risk Intelligent Organisation,” International Journal of Forecasting 35, no. 2 (April-June, 2019): 644-658.