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8/1/2018 Building a Resilient Business Inspired by Biology - Scientific American Blog Network

Guest Blog

Building a Resilient Business Inspired by Biology
Biological systems offer valuable lessons on how to manage under extreme uncertainty

By Martin K. Reeves, Simon Levin on March 17, 2017

Credit: Getty Images

Many global enterprises today have succeeded by following a simple recipe: procure,
manufacture, and assemble in the lowest-cost locations; link these using reliable,
standardized logistics and information technology; market the resulting products
globally; and book profit in low-tax havens. This powerful formula for economic
arbitrage enabled by technology and supported by the politics of open borders is the
fruit of several decades of globalization. Today, all three elements of the equation not
only are changing, but also are subject to unprecedented levels of uncertainty.

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THE STANDARD OPERATING MODEL IS UNDER
THREAT

Multidimensional uncertainty has profound implications for the standard operating


model of global business.

First, the potential for economic arbitrage is decreasing as a result of narrowing labor
cost differentials across nations and increasing capital intensity of production, leading
to a discernible trend of reshoring production. Direct-cost differentials in
manufacturing between the US and the Yangtze River Delta in China, for instance, are
now estimated to be only 1%. When indirect costs such as logistics are considered,
many goods destined for the US market can now be manufactured more cheaply in the
US. Whether this trend will persist or strengthen, however, is impossible to say given
other uncertainties.
Second, technology promises to reshape further the conventional wisdom of global
organization. Advanced manufacturing technologies with flatter supply curves create
the possibility of more customization, closer to the market. We already see this in
Adidas’s restoration of shoe production to Germany. In the near future, blockchain
technologies, sensors, and the industrial Internet of Things promise smarter, more
interconnected supply chains, likely leading to more competition on responsiveness.
Furthermore, an increasing proportion of traded value will consist of data and digital
services, whose economics are very different from those of physical products. When
and exactly how these technological shifts will reshape global supply chains is likely to
remain unknowable for some time.

Third, as if all that were not enough, the political context has become considerably
more complex. In spite of the tremendous aggregate economic impact of globalization,
inequality of income and opportunity has increased within nations enough to stoke
nationalist sentiment. That in turn shapes political outcomes in ways that directly and
materially affect trading arrangements. As a result, the UK voted to exit the European
Union, and the new US administration announced the country’s withdrawal from the
Trans-Pacific Partnership and threatened to impose tax penalties on imports. While
these pronouncements are known, the terms and details of Brexit, renegotiated US
trade deals, and new taxation arrangements are all currently unknown, and the
reactions of trading partners to these and the knock-on effects on exchange rates and
economic growth are essentially unknowable.

CURRENT PRACTICE OFFERS NO SOLUTION
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The unpredictability stemming from these economic, technological and political shifts
is unlikely to decrease anytime soon, given the continued momentum of technology
and the arithmetic of election cycles. The formula for the global enterprise itself—
where to make what and how, as a function of technology, taxes, exchange rates, and
trading arrangements—is up in the air.

The practice of supply chain management already tells us much about how to manage
for modest short-term fluctuations—using buffers, keeping supply chains short,
creating feedback loops, reducing cycle times, and reacting quickly, for example. These
approaches, however, will be insufficient for managing deep systemic uncertainties on
longer timescales. In such complex environments, uncertainty is multidimensional
and change is continuous. As a result, the right response is not knowable in advance.

The paradigm for global business therefore has to change, at least for the time being.
Leaders need to shift their attention from incrementally optimizing the efficiency of
known, stable arrangements to addressing unknown and unknowable factors. They
need to create organizational resilience and strategic optionality.

SIX LESSONS FROM BIOLOGY

What to do now? Biology can provide some inspiration. Biological systems, which have
evolved the properties of robustness and resilience on multiple timescales, offer
valuable lessons on how to manage under extreme uncertainty . Resilient biological
and social systems display six characteristics, all of which are directly applicable to
business .

1. Redundancy. Duplication of elements (factories, stocks) may be inefficient but


can provide a buffer against the unexpected. Functional redundancy offers a
smarter route to the same end: if elements (plants) can be repurposed rapidly, then
the costs of duplication are partially offset.

2. Heterogeneity. Different types of elements (contract types, factory types and


locations) make it possible to react to unexpected change and avoid correlated
responses across a system, which can lead to total system failure. Diversity is also
the substrate for evolutionary learning and adaptation to new situations, which
increases strategic optionality.

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3. Modularity. Separate modules (subsidiaries, plants), loosely linked, can act like
circuit breakers to help prevent the collapse of a system. With modularity, as with
firebreaks in a forest, one portion can sustain damage while the integrity of the
others is preserved. All else being equal, a highly uncertain situation favors a
network of loosely linked parts rather than a centralized and tightly integrated
system.

4. Adaptation. Rapid adjustment to new circumstances protects a system against


the negative effects of change. In the case of simple change, planned responses
(such as contingency plans) can mitigate disruption if the system is sufficiently
flexible and agile. For complex change, when the right response may not be
analytically knowable, an adaptive approach comprising experimentation,
selection, and amplification of successful outcomes can be effective. Global
businesses’ supply chains therefore need to evolve to match changing
circumstances, rather than being rigidly designed a priori.

5. Prudence. While the future may not be foreseeable, downside scenarios can often
be plausibly envisioned. The worst-case scenarios for taxes and trading regimes can
be posited and used to stress-test supply chain designs for economic viability.
Current levels of uncertainty justify the investment in simulation models to permit
such stress tests as well as the investment of management attention in scenarios
and contingency plans.

6. Embeddedness. Most systems are embedded within larger systems. A company


is usually part of a multi-company system that converts inputs into products for
end- customers. And those larger systems are embedded within economies and
political systems. Reciprocity and mutual benefit between levels are essential for
stability and continuity. The impact on partner supply chains and on employment
and skill building in local economies is therefore an important long-term
consideration. The articulation of social purpose and contribution is also essential
at a time when corporate capitalism is under scrutiny. Several US manufacturers
are experiencing directly the importance of these broader issues as they run into
strong political pressure to restore domestic manufacturing jobs allegedly lost to
offshoring and technology.

Applying these biological principles is an art that requires experience and judgment.
Balancing the principles is much harder than solving for known variables in a stable
equation. But uncertainty should not be an excuse for inertia or a status quo bias; in
biological evolution, selection has favored features that promote the ability to keep
functioning in changing and unpredictable environments.  Global companies that

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persist in optimizing the efficiency of a familiar, stable design, ignoring the shifts in
the economic, technological, and political environment, risk becoming victims of
change. Leaders should therefore embrace new biology-inspired ways to create
resilient global organizations.

See “Fragile Dominion”, S Levin, 2000


See “Your Strategy Needs a Strategy”, M Reeves et al, 2015

The views expressed are those of the author(s) and are not necessarily those of Scientific American.

ABOUT THE AUTHOR(S)

Martin K. Reeves
Martin K. Reeves is a senior consultant at the Boston Consulting Group and head of the BCG
Henderson Institute.

Simon Levin
Simon Levin is the James S. McDonnell Distinguished University Professor in Ecology and
Evolutionary Biology at Princeton University.

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© 2018 SCIENTIFI C AMERIC AN, A DIVI SIO N OF NATURE AMERI CA, I NC.

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ALL RIG HT S R ESERV ED.

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