Unlocking Opportunities for Growth: Creating Black Swans
- Aug 14, 2008
Nassim Nicholas Taleb’s book, The Black Swan: The Impact of the Highly Improbable, presents the idea of black swan events that seem to come from nowhere to upset the prevailing order. Think of 9/11, which was unanticipated a minute before it happened, or Long-Term Capital Management, which almost melted down the financial system when its hedging strategies suddenly failed, or the subprime crisis that we live through today. All of these discontinuous events disproved the prevailing wisdom that existed at the time, with profound effects.
Companies produce black swans via breakthrough products and services. The iPod had a black swan effect on Apple and the music industry. EBay changed the way that we buy and sell goods forever. The positive effect that a black swan product has on a company is so profound that we wondered why there are so few of them. Why do companies by and large tinker with the tried and true to come up with a slightly better product or service, rather than pursuing discontinuous, breakthrough ideas?
We think that the answer lies in outdated financial and management tools that still prevail today, even though they have zero effectiveness for highly uncertain projects. The most commonly used financial decision making tool, net present value, takes a linear approach and cannot value the discontinuous development path that a black swan would take. As a result it leads to false negatives that kill projects that may hold promise. Commonly used project management tools also assume a linear path to project completion--all well and good if you know what the best path is, and if that path is not discontinuous.
Our book, Unlocking Opportunities for Growth, creates a growth paradigm called Opportunity Engineering (OE) that values, monitors and manages uncertain projects, which is where potential breakthrough products lie. It is simple--yet highly effective--in identifying and managing projects that may provide breakthrough growth. OE creates a flexible approach to project management that calls for continuous learning by testing assumptions against emerging knowledge before sunk costs escalate. OE addresses the key uncertainties early on to provide indications of a need for redirection, acceleration, or a quick exit. This allows companies to explore new uncertain areas because the cost of failure is tightly controlled to predetermined acceptable levels. In essence OE creates an asymmetric return in that minimizes the cost of failure while optimizing the upside potential of the project.
OE creates a mindset that looks for an early abandonment of projects that are just not working and finds ways to recapture costs if projects are failing–in essence, the mindset becomes “fail fast, fail cheap, move on.” This allows companies to rapidly and inexpensively cycle through promising ideas that may lead to breakthrough products. To support the OE mindset, the book also offers a cutting-edge way of valuing projects that captures the potential upside of projects in addition to their NPV.
OE is applicable wherever uncertainty exists. It is very useful in R&D, M&A, exploring new products and new markets, valuing intangibles, planning scenarios , and negotiating contracts. We hope that reading Unlocking Opportunities for Growth enables your company to create the next black swan.