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KIM Chang-Wook

Risk Management: Learning from the Nature

KIM Chang-Wook

July 9, 2010

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Toyota Motor has long been considered an automotive pioneer that Korean automakers should benchmark and British Petroleum (BP), as one of the so-called "Seven Sisters," dominated the postwar global oil market. But today they are badly tattered. First, production defects and poor quality control at Toyota led to a series of recalls and deep embarrassment. Then BP's failure to have a ready system to contain the massive oil spill in the Gulf of Mexico put its financial health in jeopardy and invited acrimony from US President Barrack Obama. These instances underscore the fact that not even global leaders are completely equipped to project risks even as their possible effects are mushrooming.

Where can companies find ways to deal with risks and learn from them? The answer lies with Nature.

Since the first life forms emerged on earth 3.5 billion years ago, nature has learned how to respond to threats to life ranging from meteorites slamming earth to climate change. Today's living creatures possess outstanding survival capability that has proven to be effective through a long history of experience. Companies can learn from this and strengthen crisis-dealing capability by understanding the principle of discovering solutions from nature.

Five key points can be learned from nature. The first one is "autonomy." When faced with crisis, nature has an autonomous system that reflexively reacts to a threat. For example, the human body's nervous system controls may activate sneezing or faster eye blinking if there is danger. Another example is animals that rely on coloration for survival; when their body senses light, it automatic changes color.

Autonomy can be adopted in corporate management in an environment that is fast-changing. Kyocera Communication's " Amoeba Management System " is a prime example; around 3,000 small groups with about ten people each share management and information as they act autonomously to cope with the rapidly changing environment.

The second feature of a nature is "modularity." The internal structure of many living creatures is divided into parts, so that the whole can continue to live even when a single part is damaged. For example, the human immune system has 500-600 lymph nodes, which are divided into sections that repel germs. Companies too can have a modularized organizational structure to develop tolerance against danger. When US accounting firms faced with audit and lawsuits after the bankruptcy of Enron in 2001, companies set up separate teams or subsidiaries to carry out tasks independently. This was effective in minimizing the effects of audits and lawsuits although critics compared it to a lizard getting rid of its tail.

The third is "variability." All living things have the ability to transform themselves or change their actions to deal with danger. Mimic octopus that live in Australian sea transforms itself into the predator's enemy and eradicates him. To look like a sea snake, the octopus hides six of its eight arms inside a hole in the sand and then changes color to match those of the snake. To mimic the lion fish, the octopus hovers above the ocean floor with its arms spread wide. Such changeability plays an important role in crisis times in overcoming and turning around.

IBM and Nokia are examples of companies who changed by shedding units and focusing on one operation. IBM was a mid-to-large computer maker but stood at a crossroads of closing in the early 1990s due to rivals gaining market share. It transformed itself into an IT service firm for a successful makeover. Nokia which were operating diverse businesses, including metals, chemicals and home electronics, closed those operations in the early 1990s and concentrated on wireless telecom, ultimately becoming a global brand.

The fourth is "redundancy." Nature always prepares a back-up. It prepares another entity to back up when one dysfunctions. For example, a spider web actually consists of two web structures. A single web is sufficient but the spider builds another for greater protection. Redundancy plays a crucial role when a company is faced with unexpected accident and is on the brink of failure. After the terrorist attacks on September 11, 2001, most of the companies that occupied the World Trade Center building were in chaos but the Bank of America was able to continue normal operations because it had a backup system at another site.

The last feature is "cooperation." When their main predator, a lion, approaches, a zebra herd forms a circle, heads inward and rear outward, enabling them to deliver powerful back kicks immediately if attacked. Companies can also, through various alliances and collaborations, counter threats coming from competition, environmental changes and way of thinking. Small- and medium-sized companies in particular can find it effective to form a symbiotic relationship. Few examples: small leather makers at Namdaemun market, Korea's largest traditional wholesale market, collaborated to make a brand named "Capacci" to compete with larger brands; small makgeolli (Korean traditional rice wine) makers in Seoul teamed up to set up "Seoul Jangsu Makgeolli," and Swiss watch manufacturers losing market share to Japanese counterparts, established Swatch.

Nature's risk management offers two valuable lessons to the corporate world. First, while it is crucial to foresee changes in the environment to survive, it is more important to learn how to survive during a crisis. This means that an organization needs to strengthen tolerance rather than merely forecast danger. Second, too much emphasis on efficiency can be disadvantageous to long-term survival. Living creatures that prospered by effectively adapting to specific environment became weak against changes and failed.

Nature is a book of wisdom that comprises survival effort experiences of the past billions of years. Taking insights from nature will help weather this era of uncertainty.

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