Hélène Galy is Managing Director of WTW Research Network. Hélène has a background in environmental economics, natural hazard modelling and reinsurance optimisation, and currently leads the WTW Research Network, an award-winning public-private partnership, which since 2006 has formed innovative long-term collaborations with academia and think tanks, to better understand risks and use a science-based approach to resilience.
Hélène’s article on the need for a better economic framework for resilience raised some important questions about how markets can act in support of resilience. The article was published at around the time that the Competition and Market Authority (CMA) published a series of papers on market resilience. In this the latest of our series of interviews with NPC Commissioners, Hélène Galy joins NPC Executive Director, Katie Barnes reflecting on those publications, and on market resilience more widely – including an exploration into what biology and anthropology can teach us about the behaviour and future of markets through graceful failure, collaboration, and sustainable resilience. This article summarises that discussion.
A Framework for Understanding Market Resilience
In today’s dynamic and interconnected world, supply chains and markets often operate beneath the surface, unnoticed until a crisis emerges. The intricate web of industries, regulations, and economic forces that underpin these vital systems is frequently taken for granted. However, recent papers[1] from the Competition and Market Authority (CMA) shed light on the critical importance of understanding and fortifying these often invisible networks.
The CMA papers propose a conceptual framework to bring clarity to the complex realm of supply chains and market dynamics. The framework investigates market fragility through the lenses of financial risk and lack of diversity in the supply chain. It also considers amplifiers of harm – criticality, barriers to entry and consumer vulnerability. This framework is more than a theoretical construct; it is a tool that enables us to dissect and comprehend the intricate workings of these systems. One of its strengths lies in its ability to combine compelling narratives with clear and user-friendly metrics. In doing so, the CMA successfully brings to life the stories of these markets and validates the framework itself.
Take, for instance, the case study on the forensic services sector in the UK. As a critical service for the delivery of justice, it has faced significant challenges since 2012 when the publicly-owned Forensic Science Service closed. With financial pressures, shrinking budgets, and market concentration, service continuity has been at risk; as seen in instances like a major provider entering administration in 2018, a ransomware attack on a significant provider in 2019, and the exit of another major provider due to data manipulation in 2018, which resulted in the re-examination of thousands of cases and overturned convictions. It serves as a powerful reminder that some services are often taken for granted until they falter. In the realm of forensic science, the critical nature of this service only became evident when it faced a breakdown. This example highlights the risk of overlooking essential services within the supply chain.
Another case in point is antibiotic investment within the pharmaceutical industry. While not the most profitable segment of the pharmaceutical portfolio, these medicines are vital for combating antimicrobial resistance—a global health threat. The misalignment between pharmaceutical companies’ motivations or spending priorities and the collective need for resilience is evident in this case.
The Fragility Factor
Fragility, a key factor identified in the CMA papers, often stems either from a lack of supplier diversity or the presence of financial risks, especially among highly leveraged suppliers. While this characterisation offers valuable insights, it also prompts us to explore whether there are additional factors contributing to fragility, such as the inherent complexity of certain supply chains.
In today’s globalised world, the illusion of isolated markets is easily shattered. Markets are connected through human talent flows, investment channels, trade networks, and more. This interconnectedness makes optimising markets an almost insurmountable challenge.
Consider, for example, the supply chains for rare earth elements: these elements are challenging to extract due to their dispersed nature and the messy processes involved. (See NPC article on issues surrounding UK’s accessing critical raw materials.) Our heavy reliance on less stable regions, such as China and the Democratic Republic of Congo, has been driven by the convenience of easily accessing low-cost materials. Off-shoring supply is even more valuable when we consider that the extraction of these elements often generates radioactive waste and other environmental concerns, making domestic production less appealing.
While this reliance on market-driven procurement has its advantages, it becomes problematic when geopolitical tensions and uncertainties come into play. This raises concerns about the risks associated with overdependence on countries, whose political context is inherently unstable. As a result, it becomes crucial to explore alternative, more sustainable options. For instance, Sweden has recently discovered a substantial repository of rare earth elements and their investment in extraction presents a promising future source of supply. Additionally, investing in technology for post-processing domestic mining waste to extract maximum value becomes a priority and a more sustainable potential strategy.
However, pursuing such alternatives comes with trade-offs. It may involve accepting higher costs, addressing environmental impacts, and investing in new extraction infrastructure. The decision-making process revolves around balancing these trade-offs, as we consider whether it is worth paying a premium and enduring potential environmental consequences or community disruptions to reduce the risk of material supply interruptions.
This theme of making difficult choices in supply chain management is a central aspect of Hélène’s own research. Such decisions go beyond mere economic factors and must also incorporate political considerations and align with stakeholder objectives to ensure a comprehensive approach to supply chain resilience. The issue of complexity supply chains for rare earth elements can be illustrated by lithium, which even though extracted in the US and Europe, would still likely need to be refined in China. The supply chain extends beyond initial mining activities and necessitates a holistic view of the entire production process, including identifying potential vulnerabilities downstream.
Modelling Supply Chain Disruption
In the realm of insurance, one of the “holy grails” is the development of better models for supply chain disruption. Current models assess supply risks individually, lacking a networked understanding of interconnected nodes. We need to stop thinking in terms of supply chains and embrace the concept of supply networks and systems if we are to capture vulnerabilities comprehensively. Amid evolving and dynamic systems, measuring outcomes becomes less effective. Instead, focusing on vectors—indicators of changing directions—can provide a more accurate depiction of shifting scenarios.
Supply chain vulnerabilities may be a keen concern for organisations, but their effects of failures can be felt just as keenly by individuals and communities. Engaging communities in resilience planning is therefore essential. While the UK might lag in this regard, other countries (notably like Scandinavian nations), have made significant strides in community preparation and mobilisation. Cultural norms and expectations play a significant role in resilience planning for supply chain disruption. Balancing individual freedoms with collective responsibility is a cultural dilemma that requires careful consideration.
In the UK and around the world we witnessed highly networked and resourceful communities coming to the fore during the Covid-19 pandemic, with local residents organising themselves to mobilise resources and support. However, habits formed during the crisis have not necessarily been ingrained post-pandemic and in many cases, citizens are once again looking to the State as the primary provider of resilience or crisis response. The UK government recently sent a push SMS notification via the mobile phone networks to test a nationwide capability for emergency alerts. Some people responded to this alert as an unwelcome intrusion into their privacy, rather than an opportunity to engage in a dialogue about national preparedness and shared responsibilities. This points to a cultural conundrum around expectations of personal responsibility and freedoms versus state provision and interventions – a conundrum that will need to be resolved if we are to address vulnerabilities in supply chains.
Rethinking Regulation
The CMA papers also highlight cases where regulation is absent or inadequate, leading to catastrophic failures, e.g., the failures of utilities in Texas during early 2021. These failures resulted from natural events that were beyond human control. However, the root cause can be traced back to the process of deregulation and privatisation in the utilities industry. In this competitive landscape, companies were not provided with adequate incentives to invest in grid resilience and maintain a reserve power capacity. Doing so would have made them less competitive and disadvantaged them compared to their industry peers.
This situation led to a scenario where immediate profit-making took precedence over ensuring the resilience of the energy grid. Consequently, when faced with these natural disasters, the utilities industry was poorly prepared to prevent prolonged blackouts and widespread power losses. In response to this crisis, the regulator was compelled to step in and take corrective measures to avert further disruptions.
This example serves as a stark illustration of the consequences of leaving an industry to self-regulate, particularly when profit motives outweigh considerations of public welfare. It stands in contrast to sectors like insurance and finance, where regulators mandate that companies maintain reserves to weather worst-case scenarios or disasters, thereby safeguarding the interests of both businesses and the general public.
In cases of recognised market failures, incentives can stimulate industries to address critical issues. The example of antibiotic development illustrates how, with the right incentives to stimulate the market, i.e., speeding up the approval processes or providing greater and longer exclusivity periods that can allow companies to recoup their investment, markets can drive crucial investments.
It can be argued that current level of incentives for companies to undertake decarbonisation efforts is not as developed as it should be to effectively address the climate emergency. A significant challenge arises when competition law impedes essential collaborative efforts among industries aiming to mitigate a crisis effectively. However, the CMA paper highlights the concept of public policy exclusion orders – a mechanism through which the CMA could potentially relax competition rules during crises. However, given the urgency of the climate emergency, there is a strong argument for allowing key sectors, such as aviation and transport, to engage in planned and well-managed pre-competitive dialogues.
These dialogues could be undertaken with the regulator’s participation and have the primary objective of exploring and identifying cooperative approaches to tackle the crisis as an industry collective. Also important is the fact that no single actor or industry can address the climate crisis by acting alone. For instance, if hydrogen fuel emerges as a viable energy solution for aviation, it would require broad industry collaboration spanning various transport sectors to establish a robust hydrogen supply chain. This collaborative endeavor would necessitate regulatory support and a comprehensive government industrial policy framework to enable and facilitate inter-industry cooperation.
This prompts us to contemplate a potential shift in the role of regulation, from a purely “stick or carrot” approach to one that acts as an enabler for fostering collaborative efforts across industries and sectors.
Looking to the Future
Both the CMA and Hélène’s own work agree on the fact that markets are not mere linear structures but operate as dynamic and living ecosystems. They are less about pure economics and more about managing a natural system following a dynamic cycle of thriving, declining and recovering. Understanding resilience in this context means allowing for an element of graceful failure. It is simply unrealistic – unnatural, perhaps – to plan on the basis of there being “no failure,” especially when dealing with humans, because we are not infallible!
Regulators must adapt and not merely ensure the market’s continuation but also understand public perceptions of “good”, especially where corporations need to address the cultural change needed to meet climate challenges. Regulation should foster stakeholder engagement and be an enabler of resilience. The evolving landscape arguably demands a re-evaluation of corporate purpose.
Alongside the questions raised about regulation, similar challenges arise with regard to insurance. The traditional approach of insuring against financial loss may no longer suffice. Is it perhaps time to shift the focus from insuring material possessions to insuring communities, lifestyles, and opportunities in order to avoid a wholesale failure of opportunity?
The framework for assessing market vulnerabilities remind us that resilience is not a matter of optimising for the best-case scenario but of navigating the complexities of an interconnected world. As we grapple with fragility and uncertainty, it is imperative that we shift from linear thinking to a holistic understanding of ecosystems and networks. Only then can we build a future that embraces graceful failure, collaboration, and sustainable resilience.
[1] CMA Market resilience: Discussion Paper https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1146096/160323_Market_resilience_discussion_paper_FINAL.pdf
CMA Resilience and Competition Policy https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1064924/Resilience_and_competition_policy_-_AC.pdf