In a recent interview conducted by the McKinsey Quarterly with Nassim Nicholas Taleb (Taking improbable events seriously: an interview with the author of the Black Swan - Number 1, 2009) link, the author shared some less than flattering views on scenario planning and other prevalent financial and management techniques. This interview prompted a response from a well respected strategist and risk manager, Hans Lessoe, from Lego Systems in Denmark. Mr. Lessoe contended that a “blunt dismissal” was uncalled for given that traditional tools worked most of the time. He also noted that “black-swan thinking” should be done in parallel with portfolio and other planning techniques (e.g. scenario planning).

In view of this exchange exchange, and other valuable conversations with colleagues and clients, I feel compelled to share my own experience of many years working as a practitioner in scenario planning in both developed and emerging markets (where disruptions are more frequent, but still often “unpredictable”). Here are my thoughts on the topic:
- It is indeed true; scenario planning cannot completely shield you against true Black Swans.
- After all, scenario planning creates a finite number of future archetypes and often bounds the future cone of possibilities at 90% to 95% (a small technical note, but an important one nonetheless, given that black-swans happen at the tails).
- However, the fact that scenario planning cannot completely shield you against Black Swans should not discount its strategic planning and risk management value.
- On the contrary, scenario planning provides a head start for many companies that still conduct straight line projections into the future or are frozen by the current state of events.
Also, the current financial and economic crisis is not a true Black Swan (even by Taleb’s own admission). It was envisioned by various strategy and risk management practitioners and even some contrarians in large organizations (for an intriguing reference, read “Describing the current financial crisis…in 1997!“). To me, the crisis is less a failure of foresight than one of weak governance models and wrong incentives.

This still leaves companies operating in sectors prone to disruptions and Black Swans emerging from the tails. So, what is an executive to do? Here are some suggestions:
a) Start by developing scenarios to expand the current view of the world; in doing so, use industry analogies, wild cards, and other techniques that truly expand the current frame of thinking.
b) Continue by stress-testing your operation (e.g. how big of a hit can we absorb, what could kill our company or derail our strategy) and updating your strategy or operation (focus on the upside as well as the downside)
c) Further the exercise by changing your policies (e.g. how much slack should we add to the operation) and risk management practices (e.g. how much risk should we take / accept, what risks should we scale to a higher level)
d) Finalize by implementing a real-time monitoring process / system and link it to decision-making.
These measures will not completely shield you from true Black Swans, but will increase your level of preparedness and adaptability to manage market disruptions and profit from the emerging opportunities they provide.

In the words of the French scientist Louis Pasteur…”Chance favors the prepared mind”; scenario planning is a powerful means to achieve preparedness of the corporate mind.

If you want to learn more, please contact me at sichel@thinkdsi.com or visit www.thinkdsi.com

More about scenario planning:
Scenario Planning Executive Training
Scenario Planning articles and books