The world is going through crazy times. In 2011, a tsunami that hit Japan’s coasts caused a massive nuclear disaster. China tightened its limits on exports of rare earth minerals, which many industries rely on. Uncertainty in the Middle East and northern Africa caused a sharp increase in gas prices. Last but not least, the European recession lead to political and economic destabilization.
These high-magnitude, low-frequency events are described by Nassim Nicholas Taleb as black swans. In his book The Black Swan: The Impact of the Highly Improbable (Random House, 2007), he defines a black swan as “an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. … Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”
The effect of a black swan on businesses is extensive, even if it happened halfway across the world and is irrelevant to the industry you’re active in. Whether it is an environmental, economic, political, or technological catastrophe, because it is so massive it is sure to affect someone in your supply chain: suppliers, consumers, partners, employees, or shareholders.
Black swans carry increased risk as the business world becomes a “global village”; businesses from different countries and industries are dependent upon each other for sourcing, manufacturing, and shipping. Moreover, the financial, economic, and political systems of different countries are intertwined and affect each other constantly.
The good news is that you can prepare for these events by implementing the Disruptor Analysis Stress Test, a risk management methodology introduce by the consultancy firm Booz & Company.
The analysis includes four steps:
1. Mapping the enterprise: To assess how black swans can affect your business, you first need to map your supply chain and look beyond first-order relationships. This operational map should also include the industry structure and competitive dynamics.
2. Creating the disruptors list: Create a list of all black swans you can think of. Be creative. After the list is assembled, categorize the different possible events by the type of impact they might have on your business. This will help you prepare more efficiently by focusing on finding a possible action plan for each category rather than each event.
3. Asking “what if”: In this stage you and your team will try to determine the relative impact and consequences of a given catastrophe. This stage will help you understand which black swans could affect your business the most and think of new and unexpected consequences they might have.
4. Implementing contingency plans: Usually, while asking about “what if,” you will find yourself also thinking about operative ways to prepare for the different black swans. In this stage, focus on trying to find plans that address multiple risks, and then prioritize them based upon importance and cost efficiency.