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Building resilient operations | McKinsey

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At the market level, meanwhile, further forces are at work. From the rise of e-commerce in retail to the impact of alternative power trains, new mobility solutions, and autonomous driving in the automotive sector, few industries have been spared the impact of technological disruption. New digital technologies are also reshaping the way operations are done, with sophisticated automation powered by the Internet of Things (IoT), for example, or the use of advanced analytics and augmented intelligence certification technologies to support or augment human decision making.

These changes bring significant opportunities as well as risks. In response, companies in multiple sectors are already transforming their products, processes, and business models. Now they need to go even further, accelerating internal initiatives and pursuing new forms of collaboration with customers, suppliers, and partners. With so many variables in play, however, the challenge for many organizations will be to learn how to thrive in a world of continual turbulence.

The past provides a clue. Some companies have made structural, strategic, and operating decisions that dramatically improved their ability to perform in the face of volatility and uncertainty. In this article, we draw on proprietary research that shows how these resilient organizations succeeded. We explain why future challenges may require an even bolder approach, and why companies should strive to build greater flexibility into their end-to-end value chains.

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Lessons from the past

The most significant period of volatility in recent history was the global recession triggered by the financial crisis of 2007. Over the ensuing 18 months, global GDP fell by 1.9 percent, its steepest and most widespread contraction in the modern era. Industrial output, trade, and investment plummeted in most developed countries. The US unemployment rate doubled.

Some companies rode out the turbulence far more successfully than the majority of their peers, however. McKinsey analyzed the performance through the crisis of around 1,000 large, publicly traded companies from multiple industry sectors. That research identified a subgroup of resilient organizations that delivered a growth in total return to shareholders (TRS) that was structurally higher than the median in their sector. The performance of these companies dipped less overall during the recession, and improved faster during the ensuing economic recovery. By 2017, the cumulative TRS lead of the typical resilient had grown to more than 150 percent over their non-resilient counterparts.

That difference wasn’t down to luck. Resilient companies were not insulated from the impact of the downturn: their revenues fell in line with their peers during its early stages. By 2009, however, the earnings (EBITDA) of resilient companies had risen by 10 percent, while industry peers had lost nearly 15 percent.

Our analysis suggests that these companies succeeded because they moved further and faster before, during, and after the crisis. In 2007, for example, resilient companies were cleaning up their balance sheets, reducing debt while most companies were accumulating it, and selling off underperforming businesses. They doubled down on operational effectiveness too. By the first quarter of 2008, resilient companies had cut their operating costs by 1 percent, while those of their peers continued to grow. That decisive action meant resilient organizations had access to more cash, and they used it wisely: maintaining their relationships with key customers through the recession and acquiring assets and companies from distressed rivals as the upturn began.

Tomorrow is not yesterday

The experience of the past can inform companies’ planning for future challenges, but it doesn’t provide a blueprint for action. In part, that’s because history is unlikely to repeat itself in the same way. While there were significant regional differences in the impact of the 2008 crisis, markets and supply chains are even more fragmented today. Then there’s the digital difference. The large-scale adoption of new technologies, such as IoT, advanced analytics, and machine learning, is redefining the size of the opportunities available to companies, and the speed at which they can be captured.

Take the example of one global consumer packaged-goods company. It recently transformed a long-established plant in the Czech Republic using a portfolio of Industry 4.0 tools, including digital performance management, IoT-enabled automation, and widespread use of modelling and simulation to evaluate and improve its manufacturing operations. Together, those changes helped boost productivity by 160 percent, with reductions of more than 40 percent in both quality deviations and inventory.

Digitization can be a double-edged sword, however, helping outsiders slice through barriers…