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The resilience paradigm
Surviving and thriving in turbulent environments
Introduction
Almost a decade ago, Ben Bernanke, Former Chairman of the US Federal Reserve stated that the world is in the worst financial crisis in history. Perhaps unsurprisingly, such a comment was not unexpected as the world economy has suffered significant economic and financial shocks from the Oil Crisis in the 1970s, Black Monday in 1987, Asian Financial Crisis in 1997, to the Dot-com Bubble Burst in early 2000.
However, the financial crisis of 2007–2008 (also known as Global Financial Crisis – GFC) can be regarded as one of the worst crises of the twentieth century, since the Great Depression or Wall Street Crash in the 1930s (International Monetary Fund (IMF), 2008 as cited in The Guardian, 2008). The GFC caused a historic contraction in global economic activity and trade (IMF, 2009), the first recorded negative GDP growth (Bloomberg Business Week, 2013), and the worst year in history of Fortune 500 (CBSNews, April 19, 2009).
Crises of this magnitude are not rare. One of the earliest, if not first recorded market bubbles of all time, occurred in Holland, The Netherlands, between 1636 and 1637. At the height of the market, rare tulip bulbs were traded as much as six-to-ten times the average person’s annual salary. The exuberant market manic behavior came to a sudden halt heralding the end of the so-called Dutch Golden Age.
Table 1.1 shows a list and brief description of the world’s significant financial crises. These turbulent events are associated with particular industry sectors and markets such as oil, banking, or financial. Spillover effects or reverberations across economies are another feature, as are the intensity of impact and subsequent growth spurts.
These crises highlight the impact of turbulent environments on individuals, communities, business, and economies. In a working paper of Fortune 500 companies between 1955 and 2012, Kam, Tongzen, and Smyrnios (2017) revealed that major economic crises have become deeper and more frequent in recent times. Figure 1.1 shows the mean profit-to-revenue ratios of the Fortune 500 companies over a six-decade period. As expected, the ratios fluctuate and slump subsequently during times of crisis. But importantly, these times of distress provide significant opportunities for subsequent growth for those companies that survive.
Table 1.1 Significant Global Financial Crises and Their Key Features | Global Turbulence | Year | Description |
| The Credit Crisis | 1772 | This crisis was caused by over-optimism and rapid credit expansion in UK and later spread to Europe. |
| The Great Depression (Wall Street Crash) | 1929 | A sudden devastating collapse of US banking and stock market prices triggered by the Wall Street Crash. |
| OPEC Oil Price Crisis | 1973 | Oil embargo imposed by members of the Organization of Arab Petroleum Exporting Countries, causing major oil shortages and increase in oil prices that led to economic crisis in many other developed countries including the United States. |
| Stock Market Crash (Black Monday) | 1987 | Stock markets around the world crashed, causing massive drop in share price. |
| Junk Bond Crash | 1989 | Collapse of the US buyout of UAL Corp (UAL). |
| Asian Financial Crisis | 1997 | Collapse of the Thai currency inflicts damage on other Asian economies (such as Hong Kong, Indonesia, Singapore, South Korea) due to the contagion effect. |
| Dot.com Bubble Burst | 2000 | Caused by excessive stock market speculation and market confidence in the ability of dot.com companies to turn their ventures into profitable ventures. |
| Global Financial Crisis (Subprime mortgage crisis) | 2007 | Preceded by a rise in subprime mortgage defaults and foreclosures and the resulting devaluation of housing-related securities. |
Note: Adapted from IFRE (2000). A history of the past 40 years in financial crises; Encyclopaedia Britannica, 5 of the World’s Most-Devastating Financial Crises; “The slumps that shaped modern finance,” The Economist (2014, April).
Figure 1.1 Mean Profit-to-Revenue Ratios of Fortune 500 Companies: 1955–2012
In 2017, Gregory Treverton, Chairman of National Intelligence Council stated that the episodic nature of turbulent economic activity made it impossible to look beyond daily headlines to what lies over the horizon (p. vi). Reflecting this sentiment, IMF warned of a looming financial crisis in the Euro area where the non-performing loans (NPLs) needed to be dealt with immediately (The Guardian, 2016). The borderless nature of risk (Smith & Fischbacher, 2009) and the interlocking fragility between countries and businesses, has the potential to erode economic growth in one nation which simultaneously undermines financial stability globally.
In a series of global trend reports, the National Intelligence Council (NIC) (2017) described the recent world as Global Trends: Paradox of Progress, stating that the future is both dangerous and rich with opportunity. There is no doubt that the business environment has become increasingly volatile and turbulent, raising the levels of concern for business, society, and governments. Consequently, it has become particularly difficult for organizations to anticipate and to respond positively and quickly to challenges within and across operating contexts (Braes & Brooks, 2010). This type of corporate activity is evidenced by a recent Deloitte Touche Tohmatsu Limited and Forbes Insights (2016) survey which revealed that less than half of the non-executive board members surveyed globally believe their companies are adequately prepared for dealing with crisis situations.
Turbulence can be in a form of stress, adversity, risk, crisis, challenge, disruption, or change in either or both internal and external environments. On the one hand, turbulence can have a positive effect on business, heralding new opportunities for novelty and innovation (Folke, 2006) such as new product development (NPD) processes. On the other hand, it can impact negatively, eliminating companies that are unable to respond effectively and efficiently.
Promise or peril depends highly on firm responses or strategies to deal with specific turbulent situations. For example, in an investigation of the relationships between different types of corporate strategies (e.g., promotion-focused, prevention-focused) and firm performance during the recent global recession, Gulati (2010) identified that 17% of the companies failed to survive. Of those that survived, however, 80% were not able to regain their pre-disruption levels. Only 9% of companies managed to thrive and outperform their counterparts. These statistics highlight the pervasive and devastating impact of environmental turbulence, posing a challenge for organizations to develop a new organizational form; one with the capability for continuously responding to change (Deevy, 1995, p. 6). Accordingly, understanding the capabilities that enable business continuation or sustainability is essential within organizational settings.
Does firm size and age matter?
Too-big-to-fail is a catch phrase that has become obsolete and invalid after a number of big multinational or global corporations went bust. Classic examples include Lehman Brothers, World.Com, and Enron over the previous two to three decades. Exposure to turmoil is inevitable for firms regardless of firm size, age, and location. Thinking about the future is vital and hard, said Gregory Treverton (2017, p. vi), Chairman of The National Intelligence Council, particularly for small-to-medium enterprises (SMEs).
Yet, some SMEs possess survival characteristics through their exposure to higher levels of environmental turbulence than that experienced by large organizations. Their relative strength is identified through their behavioral characteristics. It is not uncommon for SMEs to demonstrate a capacity to be innovative and creative (O’Shea, 1998; McCartan-Quinn & Carson, 2003; Moriarty, Jones, Rowley, & Kupiec-Teahan, 2008); flexible (Evans & Moutinho, 1999; Aragon-Sanchez & Sanchez-Marin, 2005); entrepreneurial (Tonge, Larsen, & Ito, 1998); and fast at adapting and responding to changes (Aragon-Sanchez & Sanchez-Marin, 2005) when compare...
