The interconnected global environment can increase the number of vulnerabilities as well as the destabilizing effects of both natural and human-caused disasters. As such, when a high-impact, low-probability event occurs, the consequences can be devastating. To prepare for such events, planners must observe trends, predict futures, and create scenarios for better mitigating any potential threat.
Business and government leaders are facing an increasing number of what are called high-impact, low-probability (HILP) events – or occurrences that cannot easily be anticipated, arise randomly and unexpectedly, and have immediate effects in a world driven by globalized production – as explained in Business Zone on 15 February 2012. This observation was stimulated by a January 2012 report by Chatham House, “Preparing for High-Impact, Low-Probability Events: Lessons From Eyjafjallajökull,” which notes that the current fragility of the global economy leaves it particularly vulnerable to unforeseen shocks, concluding that “governments and businesses remain insufficiently prepared to confront HILP crises and effectively manage their economic, social, political, and humanitarian consequences.”
Interestingly, in June 2011, a comprehensive study on “Future Global Shocks” published by the Organization of Economic Cooperation and Development (OECD) reviewed risk management policies in the face of future global shocks – presumably including HILP events. The report addresses the question, “What do governments and multinational businesses need to do to prepare for the ripple effects of such events and to limit their negative consequences?” Foreshadowing the Chatham House effort, this 139-page study highlights the vulnerabilities of the interconnected, global economy. This study also acknowledges that, “extremely disruptive events, such as earthquakes, volcanoes, financial crises, and political revolutions … have been relatively rare in the past … [but] seem poised to occur with greater frequency in the future,” with a destabilizing effect on critical supply systems and adverse economic consequences that extend well beyond the impact point.
Black Swan Events
In an insightful book, “The Black Swan: The Impact of the Highly Improbable,” Nassim Taleb explains that “black swan” events mean “outliers” – occurrence that fall outside the range of normal expectations – telling the reader that this term is “derived from the previously held assumption that ‘all swans were white’ until the discovery of black swans in Australia.” However, not all black swan occurrences are HILP, though Taleb claims that, “even though the probability is low, when one … [such] event does come along the … [negative] impact is significant” (e.g., rapid stock market crash), though for some events there can be positive impact (e.g., breakthrough in cancer cures). Whether good or bad, Talib reminds the reader that these unanticipated and consequential events “can have enormous impact on us all.”
In his piece, “Black Swans and Strategic Planning,” Alan Gleeson, a fan of Taleb’s, wrote that “planning becomes more important in times of uncertainty, rather than less so.” Hence, observes Gleeson, “once black swan events emerge, businesses need to be very clear as to the likely impact on their particular business and they need to have a robust plan as to how best to mitigate against any negative implications.” Thus, in Gleeson’s view, strategic planning can no longer be based on merely extrapolating into the future with a few variations, but needs to “include contingency plans related to more extreme events.” Then argues Gleeson, planning would then become “a way to measure the difference between what was expected, and what ultimately happens and managing any resultant variances.”
A fascinating article, titled “Living in the Futures" and published in the May 2013 issue of The Harvard Business Review, discusses the concept of “scenario-based planning.” Developed by the Shell Oil Company in the early 1970s, its style of scenario planning entails development of a small number of plausible alternative futures that represent different storylines intended to “open the mind to new dynamics [and] create a safe space in which to acknowledge uncertainty.” These futures do not extrapolate from the present, but offer planners new ways of thinking about potential worst-case and best-case environments that can lead to hedging strategies.
In an article “Scenario Planning: A Tool for Strategic Thinking” published in the Sloan Management Review of January 1995, the well-known economist Paul J. H. Shoemaker argued that, in using this tool to identify trends and uncertainties, “managers can construct a series of scenarios that can expand their imaginations to see a wider range of possible futures. … [This includes plausible examples of HILP events] that will enable them to be much better positioned to take advantage of the unexpected opportunities that will come along.” In short, Shoemaker claims that “scenario planning attempts to capture the richness and range of possibilities, stimulating decision makers to consider changes they would otherwise ignore, … [while organizing] those possibilities into narratives that are easier to grasp and use than great volumes of data … [and above all] challenging the prevailing mind-set.”
In traditional models of strategic planning, the method often used is to establish a “base case” and then conduct “best case” and “worst case” scenarios. But as three planners from McKinsey & Company pointed out in April 2009, this approach is no longer valid approach given the profoundly tumultuous future environment. However, scenario-based planning can come to the rescue by developing plans on the assumptions that several different futures could occur and that attention should be focused on the underlying drivers that can shape theses futures.
Published in 2012, “Strategies for Managing Low-Probability, High-Impact Events” investigates lessons that can be learned from recent “megadisasters” – unexpected manmade or natural catastrophes of exceptional severity that cause unusually harsh damage with HILP features. In essence, this study concludes that every country should develop strategies for managing events that reflect their own as well as global experiences with megadisasters. These integrated Disaster Risk Management (DRM) strategies, the study concludes, should integrate structural and nonstructural measures tailored to local conditions, as well as forecasting and early warnings, land-use planning and regulation, hazard maps, education, and evacuation drills.
On 28-29 September 2015, a workshop entitled “Preparing for High Consequence, Low Probability Events: Heat, Water & Energy in the Southwest” was held at the University of Arizona to investigate how to deal with the increase of severe heat waves and extended droughts in the southwestern United States. Such events have increased the risk of “constrained water resources in the region, … [with participants including] regional researchers and resource managers with expertise in water, energy, climate, natural hazards, and emergency management.” Workshop participants investigated many recent case studies, focusing on “important impact cascades spawned by the plausible combination of drought and heat waves leading to diminished water supply and power outages – a low-probability combination of events – but one of high consequence if it occurred.” When these events occur and are subjected to analysis, participants note that they “provide windows of opportunity for managers and planners to learn and use gained knowledge to plan for future events – in other words, ‘never let a crisis go to waste’.”
The Chatham House report recommends that to find the right balance in planning for specific known events against “creating generic responses for events that are rare or unexpected, governments must strengthen planning processes to anticipate and manage shock events … [by identifying] common activities and actions that are relevant in the majority of disruptions.” In this connection, participants at the University of Arizona Workshop as well as McKinsey experts agreed that the use of scenario-based planning would ensure that a long-term perspective is taken to enable decision-makers to be proactive rather than reactive in their thinking. Involving key decision-makers in “red-teaming” future scenarios by providing opposing views can help prepare for unexpected future events, notably “black swan” events with HILP features. Finally, it is always useful to gather scenario planners into a room to conduct “hot washes” – after-action evaluations following the production of a set of future scenarios – to help ensure that these will result in sufficient preparations to deal with future extreme and unexpected crises, whether or not such a crises actually materialize.