Managing Uncertainty a.k.a “The Black Swans”

Oct 5, 2009 by

A  mute swan and its cygnets on the Heriot-Watt University lake.
Creative Commons License photo credit: Shandchem

This is part of my assignment for Business Intelligence course, answering how 9/11 terrorist attack in 2001, the collapse of Lehman Brothers financial firm in 2008, and the rise of internet age affected the way multinational consumer electronic firm approach business intelligence, especially in regards to managing business risk.

The Black Swans

The 9/11 terrorist attack in New York and the collapse of financial firm Lehman Brothers in 2008 are examples of what Nassim Nicholas Taleb called as Black Swan as he wrote in his books, The Black Swan and Fooled by Randomness. Taleb uses the metaphors ‘Black Swan’ to describe such events that has three features: “rarity, extreme impact, and retrospective (though not prospective) predictability”[5].

Both events are rare and have extreme impact, but do they retrospective? According to Fox Business Network, the two events are not necessarily unrelated.[11] It reported that after the 9/11 event, there is reduction in interest rate to increase market confidence in spending and boost the economy back. The higher liquidity in the market, added with high spending habit of many Americans (even with money they have not earned), has resulted in large sum of money created by debt. Unsurprisingly, the bubble is burst with Lehman Brothers as its first victim.

Hugh Courtney brought up the four levels of uncertainty that business has to manage [2]:

  • level 1 (clear enough future),
  • level 2 (alternative futures),
  • level 3 (range of futures), and
  • level 4 (true uncertainty).

Black Swans are examples of the level 4 uncertainty. Even though they are not prospective, they are retrospective. In other words, we might be able to predict or avoid it with enough business intelligence. Hugh Courtney also suggested that we can put our best effort to minimize residual uncertainty – the uncertainty left after the best possible analysis to separate the unknown from the unknowable [2].

A multinational firm in consumer electronics, without any exception, has to face level 3 and level 4 uncertainty as well. These are what they can do to avoid or cover themselves against catastrophic events such as 9/11 terrorist attack and Lehman Brothers’ collapse.

  1. Insurance. Firms are realizing the need to cover themselves against catastrophic events, not only the traditional risks such as fire and earthquake, but also the human made catastrophe, such as the terrorist attacks. Within few years after 9/11, insurance industry had seen severe losses, great price rises, and profit records, all in swift succession.[7] As insurance industry stabilize itself, multinational consumer electronic firm can get the benefits by covering itself from the losses due to catastrophic uncertainty.
  2. Precautionary actions. Firms are also seen to be more cautious in dealing with uncertainty. Some examples can be observed in the world trade one year after 9/11.[12] Corporations pay close attention to the so-called BERI index (Business and Environment Risk) when assessing investment opportunities in critical countries.  Companies also spread the value chain across various locations or even to multiple continents. Since 9/11, many companies have also radically restricted their number of business trips. Company regulations even specified that board members must not travel in the same plane.
  3. Backward strategy analysis. Under level 1-3 uncertainty, the analyst can move forward from situation analysis to the implications for strategy. In level 4 uncertainty, however, an alternative is needed. Analysts are now required to move backward from hypothetical strategy to the assumed conditions or situations needed. Further, analysts are required to challenge those assumptions, gathering information and intelligence to support their beliefs. Analogies and reference cases can be useful in assessing whether those assumptions and beliefs are feasible.[2]
  4. Bigger intelligence pool. Two out of four remedies to the strategic surprise suggested by Chester A. Crocker[1] are dealing with enlarging the intelligence pool. First, he suggested that leadership and management structure need to place a premium on open architecture to ensure that multiple inputs and voices are heard and to instill rewards for unconventional thinking. Second, he also suggested that the inclusion to the decision bodies and boards of various sources and expertise will help. With those practices, firm will have access to bigger intelligence pool to gain the “mega view” of the issues at hand, ensuring lesser residual uncertainty.
  5. Flexibility. To tame the beast of uncertainty, Lord Levere suggested that a firm needs to respond to the changing risk environment.[7] As uncertainty is always there, maybe the best policy is being flexible or at least include some flexibility into the planning process. As Chester A. Crocker said, “ the implication is clear: if, despite all best efforts, strategic surprises are inevitable, then it becomes imperative to do everything possible to build the possibility of surprise into the planning process and to focus particular effort on coping with and managing its potential effects”.

Nevertheless, consumer electronics firm must avoid “analysis paralysis”. The firm might be required to make a decisive action in spite of the uncertainty and along the way, reiteratively correct and fix their direction. For example, there is a need to increase liquidity after Lehman Brother’s collapse. Consumer electronic firms cannot wait for a perfect product to be launched, they need to come out with products soon to compete and meet the market need, and possibly release patches, fixes, or new versions along the way. Multinational firm with deep pocket is also seen paying their supplier faster to increase market liquidity.[13]

The Emergence of Internet and Web 2.0

This is the era of internet, an information era where user can have access to the abundance of information anywhere, anytime. With the rise of Web 2.0, internet users do not only consume the information, but also produce the information that collectively shaped our modern culture.

However good it may sounds, this also extends another risk that a firm needs to manage; that is the risk towards its intangible asset. Besides intellectual property, Lord Levere, Lloyd’s chairman, also raised up reputation risk as an important asset whose loss may lead to years needed in regaining market position and public confidence.

Reputation risk is one of the intangible asset that has to be managed better with the growth of Internet and Web 2.0. There are customer’s reviews everywhere, from reseller sites (such as Amazon) to the individual blog in the blogosphere. They provided user feedback on firm’s products and services, both the satisfactions and dissatisfaction. Most potential customers will now also search for review before buying a certain product. Hence, customer electronic firm needs to be careful in managing its product quality and its brand reputation. Well-managed reputation will also pay very well as potential buyers put high value on such reviews.

Besides the risk, Internet and Web 2.0 era also brings up bigger pool of intelligence that businesses can be benefited from. As I stated earlier, this is necessary to manage the risk against uncertainty better. Here is some the additional intelligence that the modern internet has brought in.

  1. Online community of practices. A firm can benefit from them to learn more about various expertise to get a better bigger picture of the uncertainties they are facing. Knowledge sharing has also revolved in which an individual firm does not only capture information content, but at the same time build contacts and its knowledge networks.[10]
  2. Accessible information about their competitors. A firm can find out more about the strategy movement and updates from its competitors faster and easier. They can also find out more about the customer satisfaction or dissatisfaction against their competitors. The firm can then convert it into product idea and strategy to meet the unmet needs.
  3. Collective intelligence. Don Tapscott defined it as the “aggregate knowledge that emerges from the decentralized choices and judgments of groups of independent participants”.[8] As more web tools are provided for user to tag and comment on what is good and what is bad, collectively a pattern will emerge and firm will be able to identify what is popular and important for their customers and potential markets.

The ‘Swans’ fly in flock

According to James Shinn, “Swans fly in flock. Though their appearance individually may be close to random, Swans may be linked causally and sequentially in time.”[5]  Shinn also emphasized that they are not necessarily bad. In fact, good and bad swans can be linked together.

To emphasize his point, Shinn shared an example of the bad swan, December 2004 tsunami that has devastated northern part of Sumatra. That tsunami (‘bad swan’) brought along the peace into the island (‘good swan’). The tsunami devastated Sumatra’s Aceh separatist movement, Gerakan Aceh Merdeka (GAM) that it was finally willing to come to a peace arrangement with Indonesian government.[5]

Similarly, a firm can look into the unexpected surprise they are facing and take another look into the situation. With enough intelligence, business can identify potential trend they can tap into to make profits from them.

Consumer Electronic Association (CEA) President and CEO, Gary Shapiro has a good perspective on the recent economic turmoil as posted by TheTechZone.com[6]. “The CE (Consumer Electronic) industry is resilient but not immune from the business cycle. In a tough economy our products offer high value for entertainment and an entry point for entrepreneurs creating new businesses,” said Shapiro.

Tapping into the good ‘swan’. The economic downturn since 2008 might have affected most industries badly. This can be reflected by the number of job loss and retrenchments. Rather than resenting the current business state we are in, Gary Saphiro raised up a very good perspective that consumer electronic industry can gain advantage from, such as offering high value for entertainment and entry point for entrepreneurs creating new businesses.

In the current internet and collaboration economy, more and more people have access to start their own online business. Competing in the market that previously dominated by the big player, people build alternative products for a specific niche that is not covered by the bigger player. This build what Chris Anderson called ‘The Long Tail’ in sales distribution.[9] More and more players in the market lengthen the tail. With easy internet access, search and advertising, these start-up businesses might also gain a considerable share of the market, and in a way, thicken the tail.

Multinational consumer electronic firm can tap into these trend by taking the role as the Long Tail “aggregator”. Chris Anderson defined it as “a company or service that collects a huge variety of goods and makes them available and easy to find, typically in single place.”[9] Apple with its application store and iTunes is an excellent example of how a consumer electronic firm has successfully put itself into a very strategic role in harvesting profit from such trends.

In conclusion, internet has brought up and widen the expertise and intelligence business can tap into. With proper business strategy supported by enough business intelligence and certain amount of flexibility, businesses can make better risk management and make decisive actions despite the uncertainty and surprises they are facing.

Bibliography

  1. Chester A. Crocker ~ Reflections on Strategic Surprise, chapter 13 of The Impenetrable Fog of War (edited by Patrick M. Cronin). 2008.
  2. Hugh Courtney ~ 20/20 Foresight: Crafting Strategy in an Uncertain World. 2001.
  3. Robert J. Rhee ~ Terrorism Risk in a Post-9/11 Economy: The Convergence of Capital Markets, Insurance, and Government Action. Online: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=898062. 2005
  4. Wikipedia ~ Catastrophe Modeling. Online: http://en.wikipedia.org/wiki/Catastrophe_modeling
  5. James Shinn ~ Tracking Asia’s Black Swans, chapter 12 of The Impenetrable Fog of War (edited by Patrick M. Cronin). 2008.
  6. TheTechZone.com ~ CES 2009 – Consumer Electronics Industry 2009 Forecast. Online: http://www.thetechzone.com/ttz/index.php/ces-2009-consumer-electronics-industry-2009-forecast/. 2009.
  7. Lord Levene ~ Taming The Beast. Online: http://www.lloyds.com/News_Centre/Speeches/Taming_the_beast_-_managing_business_risk_Lord_Levene_Chairman.htm. 2004.
  8. Don Tapscott and Anthony D. Williams ~ Wikinomics: How Mass Collaboration Changes Everything. 2008.
  9. Chris Anderson ~ The Long Tail: How Endless Choice is Creating Unlimited Demand. 2006.
  10. Donald M. Norris, et.al ~ A Revolution in Knowledge Sharing. Educause Review, September/October 2003.
  11. FOX Business Network ~ 9/11’s Impact on Business. Online: http://www.youtube.com/watch?v=FocoRIyyDSA&feature=player_embedded. 2009.
  12. Hermann Simon ~ Terrorism Hurts World Trade. Online: http://www.ip-global.org/archiv/volumes/2002/fall2002/terrorism-hurts-world-trade.html. 2002.
  13. Tom Krisher ~ GM to Pay Suppliers Faster. Online: http://www.journalgazette.net/article/20090928/BIZ13/309289956/1031/BIZ. 2009.

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5 Comments

  1. Dave Snowden ex IBM now the Cynefin Institute has good stuff on complexity and how to respond to it. Well worth reading.

  2. Hi Evan, thanks for the info. Let me know if you have any link to his article/book.
    Best regards,
    Robert

  3. Well researched article on the complexities of randomness and how offline events relates to the world on the web.

  4. I don’t know how I got here but I surely am glad to be here. I think business should really tap on technology for innovation, product enhancement and business strategies. The web is a free learning experience it self, we should all take advantage of the good things it brings us.

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