The disaster you could have stopped: Preparing for extraordinary risks
By Fritz Nauck, Ophelia Usher, and Leigh Weiss
The COVID-19 crisis is dramatically highlighting the potential impact of high-consequence, low-likelihood risks. Low but never zero: that is the probability of risks such as a viral epidemic ballooning into a pandemic that costs millions of lives and shuts down economies across the globe. The chances of an extraordinary regional catastrophe, whether naturally occurring or human-caused, are similar, as are the disastrous effects.
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Some high-consequence, low-likelihood risks have to do with business strategy, such as those posed by the digital disruption; operational risks are another category and include serious quality-control failures in manufacturing. Missed opportunities are another equal source of extraordinary risk.
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A recent article in the McKinsey Quarterly described the decisions by boards or management teams to ignore or act on these high-consequence, low-likelihood risks as “big bets.” That characterization is based on the broad scope of a decision and the size of its impact.
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Despite big-bet actions, the potential impact of certain risks may not diminish. As long as a process is in place for quickly identifying and addressing an emerging event, the company will survive and may also thrive (as Nokia did). Decision makers can also move risks up or down on the vertical axis as they learn more about potential impact.
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