Strategis Partners THINKING ABOUT UNTHINKABLE RISKS Palisade Asia Pacific User Conference 29th May 2012 Level 57, MLC Centre 19-29 Martin Place Jay Horton www.strategispartners.com.au Sydney NSW 2000 © Strategis Partners T +612 9338 6886 www.strategispartners.com.au 0 1 Stories of unthinkable risk using narrative 1. What is narrative? 2. Why is narrative risk analysis important? 3. How to write risk narratives? © Strategis Partners 1 A critical skill is to imagine what might happen in the future Source: The Economist Magazine © Strategis Partners 2 COUNTERFACTUALS © Strategis Partners SCENARIOS 3 Risk isn’t always where you expect it © Strategis Partners 4 How scenarios make a difference “Scenarios deal with two worlds: the world of facts and the world of perceptions.” Pierre Wack "Scenarios: the Gentle Art of Re-perceiving" © Strategis Partners 5 5 Evolution of Narrative Man Grunts Draws © Strategis Partners Talks Writes Twitters 6 The integrated approach to risk management COMPUTATION © Strategis Partners NARRATIVE The integrated approach to risk management COMPUTATION NARRATIVE Accommodates diverse forms of knowledge in a transparent form “Stretches the mind,” producing insights by the synthesis of ideas Reproducible calculations Bounds uncertainty Allows explicit sensitivity analyses Reduces complexity, by identifying interdependencies Focuses action, by identifying the factors most worth understanding and shaping Facilitates evaluation of potential actions, and joins users around shared narrative(s) © Strategis Partners THE GAMBLING METAPHOR © Strategis Partners 9 UNCERTAINTY = RISK Risk can be quantified and insured, but uncertainty has to be continuously interpreted © Strategis Partners 10 In uncertain, complex and fast-moving environments, risk management is about imagining new scenarios, experimenting and learning REAL OPTION THINKING Consider a variety of future scenarios Probe and experiment; monitor; fail fast Design a range of options / decisions to respond Stage initiatives and embed real options at each stage Keep costs down when uncertainty is high Favour actions that are informative, and robust to uncertainties © Strategis Partners 11 2 Stories of unthinkable risk using narrative 1. What is narrative? 2. Why is narrative risk analysis important? 3. How to write risk narratives? © Strategis Partners 12 We are dealing with uncertain, complex, ambiguous threats and opportunities DRIVERS OF INCREASING UNPREDICTABILITY Post-Western globalisation New competition Cheap, abundant, mobile, always-on interaction Energy & resource scarcities Climate change Global financial instabilities Increasing unpredictability Threats which challenge a firm’s ability to sustain value Shifting customer needs BANG technologies (Bits, Atoms, Neurons & Genes) © Strategis Partners • Increased “sudden-death” hazards Higher-order interactive effects • Shifts in the competitive landscape New golden opportunities 13 A key issue for risk professionals: justifying the computational model © Strategis Partners 14 We need narrative skills to become better communicators © Strategis Partners 15 3 Stories of unthinkable risk using narrative 1. What is narrative? 2. Why is narrative risk analysis important? 3. How to write risk narratives? © Strategis Partners 16 MTR Corporation’s asset replacement program to meet the needs of a changing Hong Kong The focal question: What will Hong Kong demand of public transport in ten years time, and what will this mean for MTR’s Asset Renewal Program? © Strategis Partners 17 1. Generate as many ideas as possible © Strategis Partners 18 2. Filter down down to the best ideas © Strategis Partners 19 3. Cluster ideas by topic © Strategis Partners 20 4. Create messages Turn topics into vital messages Democratic party in control in HK Growth in Tourism Population movement to the hinterland Increasing government regulation Increase in oil prices More demand for value-added services Stability of China’s Policies Work life is changing … © Strategis Partners 21 5. Organise Prioritise according to importance and uncertainty IMPORTANCE High Low Low High UNCERTAINTY © Strategis Partners 22 6. Create scenario logics on most uncertain and most important variables A Single axis of critical uncertainty Nature of Economic Environment Unfavourable market High confidence Revolutionary B Two axes of critical uncertainties State of Technology Development Different Scenarios Incremental Unfavourable market High confidence Nature of Economic Environment C Three axis of critical uncertainties Revolutionary State of Technology Development Incremental Unfavourable market Less restrictive More High restrictive confidence Nature of Regulatory Environment Nature of Economic Environment © Strategis Partners 23 A time line of the future can illustrate your scenario EXAMPLE: CLIMATE CHANGE SCENARIO Developed countries focus on reducing GHG emissions Exports of high quality products and goods from China grows Protectionist measures are taken by the Western World with developing nations who refuse to regulate GHG emissions Series of natural disasters perceived to be linked to global warming Global temperatures forecast to rise by 2oC by 2025 rather then 2035 back in 2006 2010 Major shifts in public opinion Carbon capture tech proven but not as effective as hoped © Strategis Partners Removal of protectionist measures put in place by developing nations 2020 2015 Developed countries implement regulations to reduce GHG emissions, but developing countries resist India’s economy continues to grow and continues to utilize low GHG emissions technologies Increasing levels of recycling in developed countries New technologies emerge to reduce GHGs International treaty on climate change Developed country economies begin to pick up, but production lags 2025 New technology commercialised 24 Three scenarios were developed with different overarching themes City is reborn The ‘expected’ future City loses its vitality 2010 © Strategis Partners 2020 25 The expected future is the “benchmark” scenario The Expected Future Aging population More demanding customers More demand for value-added services Population movement beyond the inner city Improvement in competitors Work life is changing Tighter regulation © Strategis Partners 26 The “challenging” Scenario sees testing times ahead Tougher economic conditions Environment less attractive City loses its vitality The disappearing commuter © Strategis Partners 27 The “rebirth” scenario sees new opportunities ahead Buoyant economic conditions Attractive environment City is reborn Attractive business & cultural hub © Strategis Partners 28 Tear down the Berlin Wall dividing computational and narrative risk analysis © Strategis Partners 29 With practice, “thinking the unthinkable” can become routine Source: The New Yorker, 1965 © Strategis Partners 30 Strategis Partners Thank you Level 57, MLC Centre 19-29 Martin Place Sydney NSW 2000 T +612 9338 6886 www.strategispartners.com.au © Strategis Partners 31 © Strategis Partners 32 Strategis Partners consult across Asia-Pacific • Scenario planning in energy, finance, manufacturing & technology • Strategy in agri, industrial & consumer products • Transportation asset renewal in Hong Kong • Value chain organisation in electricity • Executive leadership development • Market entry strategy in Asia • Strategic sourcing of ICT © Strategis Partners About Strategis Partners Workshop Presenter www.strategispartners.com Jay Horton Strategis Partners Pty Ltd operates as an independent, strategy consultancy and is recognized for its insight and focus on complex future-oriented initiatives. The Firm’s skills and experience lie in the use of strategic decision analysis and scenario planning. Master of Economics, Australian National University Bachelor of Engineering – Electrical, James Cook University Fellow of the Australian Institute of Company Directors Jay is the Founder and Managing Director of Strategis Partners, an Asia-Pacific consultancy advising Corporations and Governments on strategy and organisation. He has over 20 years experience advising corporations and government on strategy and organisation, scenario planning, and decision & risk analysis. Jay has worked on strategic and operational risk and innovation projects for companies including BHPBilliton, Mass Transit Rail Corporation of Hong Kong, Rio Tinto, Stanwell Corporation, and Wesfarmers Limited. He is a former Partner of PricewaterhouseCoopers, with McKinsey & Company, and Managing Director of operations research consultancy ORG. At PwC he was leader of PwC’s Real Options Practice in the Asia-Pacific region. © Strategis Partners The Firm works with clients in energy and water utilities, financial services, government agencies, logistics and retailing, manufacturing and agribusiness, mining, transportation and technology companies. Advisory Services cover: • Strategy and organisation; • • • Scenario planning; Real option valuation; Strategic decision making processes; 34