black swans, friday the 13th, scenario analysis, and game theory workshops

Recording of this session via any media type is strictly prohibited.

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Black swans, Friday the 13th, scenario analysis, and game theory

workshopsYou can do more!


• Sandra Carson (in absentia)Vice President Enterprise Risk Management & ComplianceSysco

• Paul Walker, Ph.D., CPASchiro/Zurich Chair in ERM, St. John’s UniversityExecutive Director, Center for Excellence in ERM

Presenters


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 swansConfirm have all risks identified (black, grey, white)Get management excitedGive board comfortEstablish accountabiityInfluence the risk culture


Black Swan 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 turkeyQuick 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 servicesBiases 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

* 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

DRAFT – FOR DISCUSSION PURPOSES ONLY

Why need a pre-read?

Who is my Amazon?


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!


Workshop ObjectivesDRAFT – 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?



Addressing Black Swan Scenarios and Preparedness

What if Amazon teams with Costco to deliver food?


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



Copyright © 2012 Deloitte Development LLC. All rights reserved.11

Sysco Halloween Workshop

2. Three scary scenarios

3. How each scenario could affect Sysco’s business

4. Additional discussion

1. How bad is bad? The economic benchmark for the scenarios


Fiscal policy Geopolitics Nature

WitchFederal fiscal cliff Trouble in waters

off AsiaFranken-bug pandemic

VampireStates go off the fiscal cliff

Panama Canal shutdown

Mid-America earthquake

BatmanBudget deal leads to inflation

Energy shock from Russia

ARkStorm hits California

Discussion


Copyright © 2012 Deloitte Development LLC. All rights reserved.13

Impact on Sysco’s business

Factor Definition

Product supply Food and other products

People Sysco managers and staff

Facilities Sysco buildings and systems

Transportation Land, air, water shipping

Costs Products, fuel, interest, taxes

Revenues Amounts, collectability

Negative Serious Severe


Witch scenario impact on Sysco

Federal fiscal cliff

Trouble in waters off Asia

Franken-bug pandemic

Product supply

People

Facilities

Transportation

Costs

Revenue

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


16 Company Confidential

Risk Management Process Flow

Top mgnt; then middle mngt…Challenge the sacred cows.Avoid becoming the next hummer.Did so well…


Source: http://www.imdb.com/media/rm3925448960/tt0268978

A nobel thought

Purpose?A slow leak risk…Not understood >> GTMiddleman:

margins/products/services & Stickiness!


Game TheoryPredict 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 Key activities

Brainstorm scenarios to better understand the risk exposure:• For example:

– Worst-case scenario– Most-likely scenario– Common historical scenario

• Analyze each scenario– Describe the chain of events that make up each scenario.– What is the potential impact? What is the likelihood of this scenario playing out?– Rate the effectiveness of existing risk mitigation strategies to

prevent/detect/correct/respond to each scenario.– Describe potential risk management improvement ideas and the impact each would have on

the organization’s exposure to each scenario?

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

Recording of this session via any media type is strictly prohibited.25

Lewis & Hurst, 2005, Strategic Risk

Bow-tie


Lewis & Hurst, 2005, Strategic Risk

Bow-tie


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

[email protected] [email protected]

black swans, friday the 13th, scenario analysis, and game theory workshops

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