Are black swan events in a business really black swan events, or do we have on blinders? Are we ignoring the signals that we see in front of us?
Black swan events offer a sizable change, like the Covid-19 Pandemic. They are large, unexpected, and unpredictable. They cause adversity, and the different things that came out of them, both good and bad, lead to innovation and societal change.
Gray rhino events are those that are right in front of you. For example, something obvious like the Mortgage Crisis or the current impending student loan crisis. We can use what we’ve learned from past events to inform our approach to current ones. With business failures, there are often signs that the failure is coming. So, how can you recognize those signs?
First, we can look at the economic vitality of the organization. This can include revenue streams, profit margins, inventory turnover, and more. Knowing your key performance indicators will help you understand the vitality of your organization.
Next, understand the risks that could affect the organization and come up with a risk mitigation plan. Risk Management is the process of identifying, evaluating, and planning the response to potential risks.
Three Categories of Risk Management
1. Operations: supply chain, labor issues, materials, etc.
2. Financial: the fluctuation of interest rates, exchange rate fluctuation, etc.
3. Natural: floods, earthquakes, fires, any sort of natural disasters.
You should ask yourself: what are the critical competitive risks? What are the critical internal risks? What are the critical personnel risks? Are there quality risks? What are the risks that we are facing in our organization now? What’s the likelihood that they could happen, and what would be the potential effect?
Four Ways to Deal With Risks
1. Avoid Risk: Not taking on a project.
2. Transfer risk: Insurance.
3. Mitigate Risk: Hedging.
4. Accept Risk: Not all risks cannot be avoided – they are a part of doing business.
To learn more about these potential problems for your business, pick up a copy of The Black Swan by Nassim Nicholas Taleb and The Gray Rhino by Michelle Wucker. What are you going to do to protect your organization from a black swan or gray rhino?