Black swans, Friday the 13th,
scenario analysis, and game theory
workshops
You can do more!
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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
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Outline
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Black swan workshops
Friday the 13th workshops
Game Theory
Scenario Analysis, bow-tie, event tree, etc.
“We just missed two really big risks!!”
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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
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DRAFT – FOR DISCUSSION PURPOSES ONLY
Black Swan Pre-read
Why need a preread?
*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
Who is my
Quick strike Black Swans
Amazon?
 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
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* 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
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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!
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DRAFT – FOR DISCUSSION PURPOSES ONLY
Workshop Objectives
Highly
improbable
Carries an
extreme
impact
Define
Impact
Financial
terms
Nonfinancial
terms
Brainstorm
Black Swans
Strategic
Direction
Current
Business
Model
Prioritize /
Address
Black Swans
Prioritization
criteria
Define Black
Swan
Explainable in
hindsight
People
Financial
Reputation
External/
Governance
Regulatory
Options to
address
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DRAFT – FOR DISCUSSION PURPOSES ONLY
Next Steps & Questions
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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?
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What if Amazon teams with Costco to deliver food?
Addressing Black Swan Scenarios and Preparedness
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DRAFT – FOR DISCUSSION PURPOSES ONLY
Next Steps - Continued
 Create a road map to address prioritized swans:
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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
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Sysco Halloween Workshop
1. How bad is bad? The economic benchmark for the
scenarios
2. Three scary
scenarios
3. How each scenario
could affect Sysco’s
business
4. Additional discussion
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Copyright © 2012 Deloitte Development LLC. All rights reserved.
Discussion
Fiscal policy
Geopolitics
Nature
Federal fiscal cliff
Trouble in waters
off Asia
Franken-bug
pandemic
Vampire
States go off the
fiscal cliff
Panama Canal
shutdown
Mid-America
earthquake
Batman
Budget deal leads
to inflation
Energy shock from ARkStorm hits
Russia
California
Witch
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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
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Copyright © 2012 Deloitte Development LLC. All rights reserved.
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.
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Other Black Swan Attempts
 Harley-Davidson Inc.
 Southeastern NYSE Manufacturing
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Risk Management Process Flow
Top mgnt; then
middle mngt…
Challenge the
sacred cows.
Avoid becoming
the next hummer.
Did so well…
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Company Confidential
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A nobel
thought
Purpose?
A slow leak risk…
Not understood >> GT
Middleman:
margins/products/services &
Stickiness!
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Source:
http://www.imdb.com/media
/rm3925448960/tt0268978
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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.
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Game Theory (Open Options)
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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.
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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.Recording of this session via any media type is strictly prohibited.
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Scenario Analysis
 Trying to understand a specific risk
 Turn the related assumptions on their head
 See from new and different angles
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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
Version 2:
What if ___?
Risk drivers are ____?
Consequences are ____?
Organizational may respond…
– 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?
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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.
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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:
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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
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Bow-tie
Lewis & Hurst, 2005, Strategic Risk
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Bow-tie
Lewis & Hurst, 2005, Strategic Risk
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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
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Lessons
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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
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St John’s Univ/Tobin College of
Business
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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
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Contact
walkerp@stjohns.edu
Carson.Sandra@corp.sysco.com
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