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Black swans, Friday the 13th, scenario analysis, and game theory workshops You can do more!
Presenters • • Sandra Carson (in absentia) • Vice President Enterprise Risk Management & Compliance • Sysco • • Paul Walker, Ph.D., CPA • Schiro/Zurich Chair in ERM, St. John’s University • Executive Director, Center for Excellence in ERM
Outline • Black swan workshops • Friday the 13th workshops • Game Theory • Scenario Analysis, bow-tie, event tree, etc. • “We just missed two really big risks!!”
Black swan workshops • Where are black swans on your risk map? • Purpose of a black swan workshop • Approach • Identify black swans • Confirm have all risks identified (black, grey, white) • Get management excited • Give board comfort • Establish accountabiity • Influence the risk culture
DRAFT – FOR DISCUSSION PURPOSES ONLY Black Swan Pre-read • Why need a pre-read? *Concept of a Black Swan • A Black Swan is an outlier that is highly improbable, carries an extreme impact, and retrospectively is explainable and predictable • Example: the farmer and the turkey Quick strike Black Swans • Black Swans can happen very quickly • Example: catastrophic natural disasters (e.g. mudslide, Tsunami, 195 MPH hurricane) Strategic Black Swans • Black Swans can emerge as a result of flawed business assumptions • Example: the encyclopedia industry transition from hard copy to web-based services Biases that underlie our assumptions • It is critical to recognize bias and reduce its influence on our decision making • Example: the 2009 H1N1 pandemic • IMA/ACCA Risk Challenge Culture Study • Who is my Amazon? • * The theory of the Black Swan is established by author Nassim Nicholas Taleb in his New York Times Bestseller The Black Swan: The Impact of the Highly Improbable, 2007
Establish the Workshop Objective • Engage in brainstorming to generate a list of Black Swans that are relevant to your org • Select priority Black Swans to analyze / address • Introduce an approach for addressing Black Swans on a sustainable basis • What if can’t deliver by trucks? • What if customers don’t want to see a salesperson but want to order by phone? • We are whiteboard here! Identifying!
DRAFT – FOR DISCUSSION PURPOSES ONLY Workshop Objectives
DRAFT – FOR DISCUSSION PURPOSES ONLY Next Steps & Questions • Prioritize Black Swans identified • Is the company currently seeing signs of this Black Swan? • What would key stakeholders expect? • How would the company be impacted? Reputation? • What are the financial ramifications? • Would the Black Swan result in a loss of market share? • Is there an opportunity for value creation related to this Black Swan?
What if Amazon teams with Costco to deliver food? Addressing Black Swan Scenarios and Preparedness
DRAFT – FOR DISCUSSION PURPOSES ONLY Next Steps - Continued • Create a road map to address prioritized swans: • Strategic (scenario planning, strategic options, resiliency/flexibility, exploitation of opportunities) • Mitigation (avoidance, prevention and preparedness, reduction of impact) • Monitoring (early warning system, market analysis, competitive analysis, key performance and risk indicators) • Response (manage, crisis response plan, train/exercise, awareness, repair and recover) • Assign ownership and create support structure to ensure execution • Execute the road map
Sysco Halloween Workshop • How bad is bad? The economic benchmark for the scenarios • Three scary scenarios • How each scenario could affect Sysco’s business • Additional discussion
Witch scenario impact on Sysco • ERM Director loaded these • Did I get it right? • Get the conversation going for these type A’s.
Other Black Swan Attempts • Harley-Davidson Inc. • Southeastern NYSE Manufacturing
Company Confidential Risk Management Process Flow • Top mgnt; then middle mngt… • Challenge the sacred cows. • Avoid becoming the next hummer. • Did so well…
A nobel thought • Purpose? • A slow leak risk… • Not understood >> GT • Middleman: margins/products/services & Stickiness! • Source: http://www.imdb.com/media/rm3925448960/tt0268978
Game Theory Predict the behavior of people and organizations in situations of parallel and conflicting goals. • The purpose of this project is to unlock organizational knowledge and identify the best outcome for the company and the specific tactics to achieve this result. • Analysis will identify possible competitive threats and opportunities, hidden allies and hidden opponents, and predict the likely actions and reactions of other players. • Process delivers a proven path to arriving at a trusted decision – one that is broadly understood and supported, and ready to be implemented.
Game Theory (Open Options) • Dealing with Disruptive Technology – “Leading from Behind” • This is a very unusual case study because Open Options can reveal the identity of our client - IBM - who has given Open Options permission to reveal details of the work that we did with them in relation to their strategy on dealing with the emergence of Linux several years ago. At the time, IBM saw Linux as a technology in which they had to have a strong presence. IBM faced lots of competition, a rapidly evolving technology market, a significantly different culture as compared with IBM’s traditional businesses, competing versions of similar technology, and uncertainty as to whether Linux would actually ever be widely adopted. Open Options helped IBM recognize that their path to success lay in strategic actions that were not in line with IBM’s typical way of acting, and the result was a successful outcome.
Game Theory (Open Options) • Turn the related Competitive Positioning – “Under Pressure” • A large consumer packaged goods company was suffering from intensifying competition and a loss of market equilibrium. The market dynamics were being driven by several factors including the actions of its two main competitors, the increased buying power being exercised by a major retailer, and the increased threat of substitution due to an economic downturn.
Scenario Analysis • Trying to understand a specific risk • Turn the related assumptions on their head • See from new and different angles
Develop risk scenarios • Version 2: • What if ___? • Risk drivers are ____? • Consequences are ____? • Organizational may respond…
Event Tree Process • Identify an initiating event and its probability • Follow the events through a series of possible paths • Each path is assigned a probability of occurrence and the probability of the various possible outcomes can be calculated • The risk mitigation activities designed to deal with the initiating event are located on this path • Calculate the overall probability of a particular scenario by multiplying the probabilities from various path end points to the initiating event.
Event Tree • An Event Tree is used to determine the overall probability/frequency of a risk scenario and analyzing the consequences arising from an undesired event. • Benefits include: • Forward thinking – specify/identify an initiating event and work forward • Presents scenarios as a logical step by step progression of events, decisions, and possible outcomes • Highlights the relative connectedness and dependencies of decisions and outcomes • Highlights the process, policies, procedures, controls and vulnerabilities of a risk as well as the multi-faceted nature of the risk
Bow-tie • Lewis & Hurst, 2005, Strategic Risk
Bow-tie • Lewis & Hurst, 2005, Strategic Risk
Lessons • BS success: ID’d things that actually started to happen; b/c did this and thought through and found early triggers; so saw much sooner!!! • GT Success: saw and understood competitive threat • Rethink stickiness! • More risk aware than ever before • Now send risk stories to the ERM Director
Lessons • Don’t get stuck in traditional method of risk ID • Match approach to risk needs • BS/GS/WS – stakeholders are judging • Are they really black swans? • Get help: Deloitte and others
St John’s Univ/Tobin College of Business • MS Risk • MS Enterprise Risk Management • MBA/MS Acct with a conc. in Risk and ERM • Center for Excellence in ERM • Executive Education – Certificate in ERM • Booth 735
Contact • firstname.lastname@example.org • Carson.Sandra@corp.sysco.com