Businesses today operate amid growing uncertainty and rapid change. Companies face a panorama of potential problems and accompanying risks – flaring geopolitical tensions that disrupt supply chains, regulatory shifts that alter the playing field, and technological developments, such as the advancement of artificial intelligence, that suddenly remake industries and consumer expectations. Firms have always encountered these sorts of issues, both expected and unforeseen, but the speed of change today is higher than ever before. From the Great Recession through the pandemic years, economic policy uncertainty has repeatedly spiked in the U.S., as political and financial institutions have implemented unprecedented policies while navigating unknown terrain (see Economic Policy Uncertainty below). Building resiliency is essential for managing the moment’s distinct risks, yet how do businesses develop the agility and adaptability that would make them more resilient?
It is a question built for the Kenan Institute Grand Challenge, an annual yearlong effort to explore and develop solutions to complex and timely issues facing business and the economy today. The 2024 edition – Business Resilience: Navigating Global Uncertainty and Managing Risk – focuses on understanding how businesses build resilience to rapid changes, including issues of labor input, customer demand, organizational efficiency, supply chain efficiency, the competitive landscape and macroeconomic risks. For this project, the institute will share research and knowledge through a series of insights and commentaries, host collaborative discussions with industry leaders about these issues, and share what has been learned at the culminating Frontiers of Business Conference in October.
Experts from UNC Kenan-Flagler Business School and beyond, including our Kenan Institute Distinguished Fellows, will join in a cross-discipline exploration that will include the following areas.
Rapid technological change leads to labor challenges, as established skillsets become outmoded overnight and workers have to upskill in order to remain productive. Employers, meanwhile, must match their needs to the real-world worker pool or innovate ways to train workers with up-to-date skills. How should firms strategize and operationalize hiring, training, and retaining workers in times of frequent technological change? Upskilling or reskilling workers is costly, whether undertaken by firms or through private-public partnerships. Technology-based solutions that substitute capital for labor are often cost-effective, and much discussion in popular media focuses on AI technologies’ potential for automating tedious human tasks – as much as 30% of the hours Americans work today could be automated by 2030, according to a report by McKinsey Global Institute – and also how this sea change could negatively affect workers. Smart investments in technology are one way for firms to build resilience and reduce exposure to the changing supply of and demand for workforce skills. Public investments that foster a worker pipeline, including partnerships with community colleges and apprenticeship programs run with private sector support, is also an effective means of cultivating resiliency to disruptions in the supply of skilled labor. As part of this year’s Grand Challenge, the Kenan Institute will continue and expand its exploration of technological shifts and the implications for workers and employers seeking to build resiliency to a rapidly changing environment.
The COVID-19 pandemic and recent geopolitical turmoil have created salient weaknesses in the global supply chain, and businesses and governments have become keenly aware of those weaknesses. Reshoring has become a common strategy for mitigating these supply chain issues. Reshoring, however, comes with tradeoffs, some of which pertain to labor availability. To base production in the U.S., rather than in China, for example, requires additional skilled workers in certain locales. Finding these workers is not easy. Other approaches to supply chain resiliency include improving data acquisition and communication throughout the supply chain and increasing the diversity of input suppliers.1 Supply chain failures during the pandemic were significant drivers of the high levels of inflation observed in the U.S. and many other countries in 2021-22, indicating the importance of these networks not only for the output of individual companies but also for global macroeconomic health.
How can firms hedge against the risk of losing access to large or important markets? Geopolitical turmoil like the conflicts in Ukraine and the Middle East not only affects supply chains but also can restrict firms’ ability to reach consumers in certain countries or geographies. In some instances, however, it is the consumer who turns away from the company rather than the firm losing contact with the consumer. A firm’s actions can cause certain sections of consumers to switch away from its brand and products. Thanks to the Internet, information and misinformation travel fast, and consumers can easily vote with their pocketbooks to pick favorites. The onus is therefore on businesses to be resilient relating to reputational risk. This resiliency relies on plans put in place before any potential PR crisis occurs and on actions taken after such an event happens. The Kenan Institute will present research examining which firms have done this well and drawing lessons from instances where consumer-related shocks were consequential for the companies involved and others in the industry.
A keystone of resiliency is a firm’s capacity to innovate, as companies must endure an ever-shifting competitive landscape, morphing consumer preferences, unstable input and labor costs, and rapid technological advances, to name a few facts of corporate life. Firms that adopt a long-term perspective tend to invest in R&D and innovation activities and engage in strategic mergers and acquisitions. It is no secret that funding innovation is vital for companies to survive and thrive, and R&D expenditures have steadily grown for decades in countries with the capital to make these investments. OECD countries increased R&D outlays by more than 25% on average as a proportion of GDP since the year 2000. The Kenan Institute will examine the types of firms that do well in making these sorts of investments as well as the economic environments that are most conducive to innovation and to fostering a resilient business sector.
The Kenan Institute’s Grand Challenge research output and discussions will also assess regulatory risk and its effects on firms’ ability to weather shocks. Antitrust regulation, new or elevated taxation, and consumer data and privacy laws are common examples of this type of risk, faced by firms in the US, Europe and elsewhere. Regulatory risk also encompasses policy outcomes that do not directly affect firms but impact their relationship to markets and broader society. Interest rate changes are a prime example of a key regulatory action that may not touch a business’s balance sheet but would greatly affect its ability to access financial markets and, thus, to operate. In 2023, the cost of capital was at high levels relative to recent history due to central banks’ interest rate hikes instituted to reduce inflation. A high cost of capital prevents firms from investing in projects that would have been profitable not long ago. Uncertainty regarding the future trajectory of interest rates has had a similarly paralyzing effect, inducing firms to delay making investments or engaging in M&A activities. While some firms can weather these financial markets shocks, others cannot. With translational research and expert discussion, the Kenan Institute will assess how firms can build resilience to regulatory risks, related to future regulatory actions and to developments in macroeconomic policies that concern the cost of capital.
Operating in fast-changing environments and facing new risks, business leaders are tasked to build resiliency into organizational processes and functions. The Kenan Institute will examine best practices for maximizing resilience in organizational structuring, addressing workplace hierarchy, the assignment of managerial responsibilities, and firms’ production processes in light of rapid technological change and disruptions to supply, demand, and competitive environments. Leading in times of change is a topic commonly taught in business schools, yet only some firms are able to navigate change adeptly, which, it turns out, is a determining factor distinguishing the businesses that thrive from those that do not.
As we explore the different dimensions along which firms need to build resiliency, we will examine how businesses balance the need to invest in resiliency with the need to promote profitability now and into the future. Which firms thrive because the world is rapidly changing? What are these firms doing that is leading to their success? What firm-level characteristics are associated with resiliency and success? Are larger firms, for example, better able than smaller businesses to invest in creating supply chain resiliency? Are these characteristics the same across all sectors, or does the recipe for success vary by industry? We are excited to delve into these questions and develop research and real-world based answers for this year’s Grand Challenge. We invite you to join us in this yearlong discussion by checking out our website or attending our Frontiers of Business Conference in October.
1 “Supply Chain Resilience” Issue Brief, The White House, November 30, 2023, available at https://www.whitehouse.gov/cea/written-materials/2023/11/30/issue-brief-supply-chain-resilience/