Friday Reflections

The Black Swan Events and Risk Management

"I am interested in how to live in a world we don’t understand very well –in other words, while most human thought (particularly since the enlightenment) has focused us on how to turn knowledge into decisions, I am interested in how to turn lack of information, lack of understanding, and lack of 'knowledge' into decisions – how not to be a 'turkey'. My last book The Black Swan (and the 4th Quadrant papers) drew a map of what we don’t understand; my current work focuses on how to domesticate the unknown" - What To Do In A World We Don't Understand by Nassim Nicholas Taleb

 

Story Line:  The Black Swan Events (...thanks to Mukund Shenoy and C P Low for reference material)

The term Black Swan comes from the 17th century European assumption that 'All swans are white'. In that context, a black swan was a symbol for something that was impossible or could not exist. In the 18th Century, the discovery of Black Swans in Western Australia metamorphosed the term to connote that a perceived impossibility may actually come to pass.

The Black Swan Theory (in Nassim Nicholas Taleb's version) concerns high-impact, hard-to-predict, and rare events (opportunities and disasters) beyond the realm of normal expectations. The theory was described by him in his 2007 book, "The Black Swan". Taleb regards almost all major scientific discoveries, historical events, and artistic accomplishments as "black swans"—undirected and unpredicted. He gives the rise of the Internet, the personal computer, World War 1, and the September 11 attacks as examples of Black Swan events. The main idea in Taleb's book is not to attempt to predict Black Swan events, but to build robustness to the negative ones, while being able to exploit positive ones.

In the following video (highly recommended), he describes Black Swan Events, consequences and remedies in a very humorous way. It is entertaining, thought provoking and educational.

Short Introduction: click here

Some Quotable Quotes from Nassim Nicholas Taleb:

Instead of trying to anticipate low-probability, high-impact events, we should reduce our vulnerability to them. Risk management, we believe, should be about lessening the impact of what we don’t understand.

Psychologists distinguish between acts of commission and those of omission. Although their impact is the same in economic terms—a dollar not lost is a dollar earned—risk managers don’t treat them equally. They place a greater emphasis on earning profits than they do on avoiding losses. However, a company can be successful by preventing losses while its rivals go bust—and it can then take market share from them. In chess, grand masters focus on avoiding errors; rookies try to win.

Standard deviation—used extensively in finance as a measure of investment risk—shouldn’t be used in risk management. The standard deviation corresponds to the square root of average squared variations—not average variations.

We don’t appreciate that what’s mathematically equivalent isn’t psychologically so.

Most executives don’t realize that optimization makes companies vulnerable to changes in the environment. Biological systems cope with change; Mother Nature is the best risk manager of all. That’s partly because she loves redundancy. Evolution has given us spare parts—we have two lungs and two kidneys, for instance—that allow us to survive.

You often hear risk managers—particularly those employed in the financial services industry—use the excuse “This is unprecedented.” They assume that if they try hard enough, they can find precedents for anything and predict everything. But Black Swan events don’t have precedents. In addition, today’s world doesn’t resemble the past; both interdependencies and nonlinearities have increased. Some policies have no effect for much of the time and then cause a large reaction.

Sources:
1. The Six Mistakes Executives Make in Risk Management by Nassim N. Taleb, Daniel G. Goldstein, and Mark W. Spitznagel Harvard Business Review
2. Wikipedia
3. fora.tv

Blue Ocean Organizations and People

Grow or Constrain? Only you can put limits on yourself.

Story Line: Blue Ocean Organizations and People

About three years ago, Friday Reflections covered the highlights of a book called "Blue Ocean Strategy", by W. Chan Kim and Renée Mauborgne of INSEAD. The concepts and stories covered in that book are very relevant in today’s economic environment: for both organizations and individuals.

Let us ground on what the authors call Red Oceans and Blue Oceans:

“In the Red Oceans, industry boundaries (opportunities) are defined and accepted, and the competitive rules of the game are known. Here, companies (people) try to outperform their rivals to grab a greater share of existing demand (jobs, product sales). As the market space gets more and more crowded, the prospects for profits and growth are reduced. Products (skills) become commodities, and cutthroat competition turns the red ocean bloody.

Blue Oceans, in contrast, are defined by untapped market space (new opportunities), demand creation, and the opportunity for highly profitable growth. While blue oceans are occasionally created well beyond existing industry boundaries, most are created by expanding existing industry boundaries. In blue oceans, competition is irrelevant as the rules of the game are waiting to be set.

There are a few things that set apart "blue ocean" people and organizations from others. They succeed not by battling competitors, but by creating “blue oceans” of uncontested market space ripe for growth. Such strategic moves - termed “value innovation” - create powerful leaps in value for both, the firm (person) and its buyers (employers and customers), rendering rivals obsolete and unleashing new demand.”

There are a few common things that I have encountered in "Blue Ocean" organizations and people.

1. They constantly look for opportunities for offering their skills and products to areas beyond their current scope and boundaries and find new customers in new industries/organizations.

2. They are confident about their strengths and purpose and do not waste energy in comparison with existing competition (LEAN)

3. Their mindset is “How can I grow with what I have, or grow what I do not have?" vs. "How do I survive by eliminating what I have?”

Reflection: As we end the fifth year of Friday Reflections on the WWW, I remember my father's advice when I left home at the age of 17: “The world is too big with abundance of opportunities. If you believe in yourself, there is always room for your talents somewhere in this world.” (The world full of Blue Ocean with infinite horizons)” Looking back, it was a very good and true advice.

Change is in the air

 

"All leadership comes down to this: changing people's behavior. Why is that so damn hard? Science offers some surprising new answers -- and ways to do better." - Alan Deutschman

 

Story Line:

About year ago, C P Low, a reader and an OBT master recommended an excellent book, "Change or Die" by Alan Deutschman. The book is captivating and also very relevant for the current times. Last week I came across an excellent review of this book by Robert Paterson. So instead of writing my version, I am sharing Robert's review in this FR:

"Change or Die: I am convinced that the central belief of our age, that we are parts of a machine that works only in an economic sphere, is the single most dangerous threat to the future of our species and our planet.  This threat is made more dangerous by the fact that there is no work more difficult than trying change deeply held beliefs."

http://smartpei.typepad.com/trusted_space_books/2007/01/change_or_die_a.html

 

Special Feature:

People all over the world has been through turbulent times and lots of changes since last October. But one thing that has not changed through the ages is the ability of good music to provide relaxation and relieve stress. Since Spring is in the air, let us enjoy some good music created by great artists. Enjoy the beautiful music and relax.

 

April Flowers Show by Andre Rieu

http://www.youtube.com/watch?v=IcMiKulC1rI&feature=related

 

Sound of Silence

http://www.youtube.com/watch?v=9hUy9ePyo6Q&feature=related

Change before you have to (or before it becomes too late)

All through my life, I knew what was right but I could not engage in it. All through my life, I knew what was wrong, but I could not abstain from it.” - King Duryodhan on his deathbed, in the great Indian epic Mahabharata (3102 BC)

Story Line:

This two-part series about change covers the beliefs and forces that cause people to resist change in Part 1 (today).  Part 2 (next week) covers the key things that are needed to bring about positive changes.

What are some of the things that hinder or prevent positive change?

1. My way is the only way and others can take the highway. King Duryodhan, the most powerful and intelligent man of his era, knew that failure to change his behaviors and techniques could lead to his downfall and the demise of his empire. However, his blind ambition (with added ego) prevented him from changing his behaviors to what he knew was right.  

2. You’ve got to do your own growing, no matter how tall your father was aka “The Way We Were Syndrome” i.e., resting on past glories of their culture, family and company history. What matters is what you do NOW. Past is history, tomorrow is mystery, TODAY is REALITY.

3. As long as the others change it will be good i.e., Expecting others to change while refusing to change our own behavior. Change begins with you and it does not begin until you do. The best way to inspire people to change is by our actions and results.

4. Your successful path will block your vision to the future i.e., clinging to the practices that have made us successful and not recognizing the environmental forces dictating fundamental changes. In my early career, the largest customer companies I dealt with were CDC, Sperry, Burroughs, Digital and IBM. Failure to recognize or act upon market changes related to the PC revolution resulted in the demise of all but IBM, who eventually went through fundamental changes in the 1990s and is now thriving.

5. Old habits die hard or you die with them. Dennis Waitley, in "Psychology of Winning", narrates a story about a tribe in one country. Research showed that high premature death rate in that tribe was due to the disease created by some kind of insects in the area where they lived. But they refused to move to better place offered by the government and continued dying.  There are many similar examples all around us.

6. Failure to recognize the "Web of Life". All things are connected. Whatever befalls the earth befalls the sons and daughters of the earth. Man did not weave the web of life; he is merely a strand in it. Whatever he does to the web, he does to himself.  These words represent the wisdom of the ages from every culture: “As we sow, so shall we reap.”  Just look at the root causes of the recent global economic collapse, wars, natural disasters, spread of diseases, crimes and all kinds of excursions.

7. Those who never learn from history are forever condemned to repeat it.  No further words needed for this, just reread the Point To Ponder above from 3100 BC.

Reflection: There is an age old saying “Only thing constant in life is change.” Then by resisting change, one is going against the very process that keeps them alive (Life).

Next Week: Change or Die. How to make old habits die and change (for better).

When one door of happiness closes, another opens ...

Last week a friend in Penang sent a message:

"I have a suggestion for the upcoming article: sharing of your past Friday Reflections  – I can see this as a very motivating approach, and people will benefit a lot from the learning, wisdom and experience [and] apply it to daily life, especially at this difficult time. I don’t mind reading or listening to the repeat topics because it triggers new ideas and thinking that helps to improve my daily life."
 
Here you go my friends: some old articles that are relevant in these times:

 

Points to Ponder:

"There is no such thing as can't, only won't. If you're qualified, all it takes is a burning desire to accomplish, to make a change. Go forward, go backward. Whatever it takes! But you can't blame other people or society in general. It all comes from your mind. When we do the impossible we realize we are special people." - Jan Ashford

"Never be bullied into silence.  Never allow yourself to be made a victim.  Accept no one’s definition of your life; define yourself." - Harvey Fierstein

Story Line: 

"When one door of happiness closes, another opens; but often we look so long at the closed door that we do not see the one which has been opened for us." - Helen Keller

1.  "I have said many times that the difference between successful people and unsuccessful people is that successful people do a lot of the things that unsuccessful people don't want to do. Like when the door is slammed in your face ten times, you go on to door number eleven with just as much enthusiasm.” - John Paul Dejoria. The person who was laid off in his first two jobs and never gave up trying and became a very successful businessman and a philanthropist: http://fridayreflections.typepad.com/weblog/2007/11/persistence-pay.html
    
2. Persistence Pays Part 2: Silicon Valley's Midas: Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will ... http://fridayreflections.typepad.com/weblog/2007/05/persistence-pay.html
    
3. Persistence Pays Part 1: But there is suffering in life, and there are defeats. No one can avoid them. But it’s better to lose some of the battles in the struggles for ... http://fridayreflections.typepad.com/weblog/2007/03/persistence-pay.html
    
4. You never know unless you try! During my college days in the 1970s, I met this fellow who was studying for a degree in Pharmaceutical Engineering. After graduating, I left for the USA and he stayed home and started a business. The first product he introduced was an insect repellent cream. Irony of fate or what, but the formula he used created an opposite effect: i.e. instead of repelling insects it was attracting them. This young entrepreneur became the laughing stock of the town ... http://fridayreflections.typepad.com/weblog/2007/09/you-never-know-.html
    
5. Consider the case of a young woman who became a news anchor only to be subsequently demoted because management did not think she is right for that kind of job. TV producers of that station in Baltimore concluded that her delivery was just too emotional for hard news stories. So they relegated her to a morning talk show, “People are Talking”. The new opportunity that looked like a demotion helped her unlock her potential and her show even beat out Donahue. This woman moved to Chicago to host another talk show, AM Chicago and it was so popular that they named it, “The Oprah Winfrey Show”.  (That show is one of the highest rated shows in USA and Oprah is one of the wealthiest women in the world)

Reflection: Your sense of empowerment comes from how you view yourself, and your view of yourself must not be dictated by others.

Successful strategies that helped companies survive and thrive in the great depression

Point to Ponder:

"It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change" - Charles Darwin

Story Line: Successful business strategies during the great depression

By now It is pretty clear that the global economy is in severe recession. The main driver for customer's choice is not between the technical merits of your company's products vs your competitor's products. It is a choice between: To buy or not to buy at all.

As one young man, Michael A. Choi puts it, "Rather than making cosmetic changes in the balance sheet, companies need to focus on fundamental shifts in the way they do business”

Since the toughest economic times of the past 100 years was during the Great Depression of the 1930s, and because experts have drawn many similarities between the conditions that led to the Great Depression of 1930s and current times, my curiosity compelled me to do some research about that period during year end holidays to see if there were any "ponies in the dung heap" of the 1930s.

Actually, it was not all bad during that period. Many companies that were creative, not afraid to try new approaches and had the positive mental attitude did well, becoming stronger and thrived in the future. Most of the successful ones focused on one primary thing: emotional connection with the people. They kept themselves visible to consumers, community and people (brand association).

1. Those companies who not only survived but did well and grew during the Great Depression are those who continued to act as if this was an ultimate challenge in selling and believed that consumers would spend if there was a good value proposition and feel connection with their brand. Those companies didn't wait for public demand for their products to rise, they created that demand even during the most difficult of times.

2. While their competitors were focused primarily on cost reduction, the successful companies stayed focused on advertising as one of the primary means to keep the consumer connected with their brand. The successful companies increased their spending in this area, used the emerging technology of radio to keep visibility to the consumers. Those that disappeared focused too much on cost reduction and thus lost visibility to the consumers about value of their products and brands. Also, consumers interpreted their behavior as lack of staying power and stayed away from those brands.

3. Some other companies used print media to connect with consumers. Radio and printing industries thrived during that period.

4. A very innovative approach in creating an emotional connection with their brand was developed by Proctor and Gamble where they sponsored evening shows on the radio to entertain the masses who were looking for any kind of stress reliever during tough times. These shows did not focus on P&G products but they were called "Soaps." (Forever Young connected to Camay Soap, O'Neill for Ivory Soap). There lies the origin of today's "Soap Operas", a huge cultural phenomenon.

Are there similar opportunities for your current products to create associations with TV shows or internet games or Movie/Cartoon characters and open up a brand new opportunity?

5. A few months ago, Business Week had an excellent article about nine small companies who "All have weathered wars, economic downturns, and changes in technology and society. Moreover, they all endured the Great Depression and emerged intact.” It is a must read to get clues for what we can do in current environment. There are some really good stories about diversification, leveraging resources, helping community, creative payment terms and most importantly staying connected with the people.

Reflection:

1. Are there similar opportunities as a "Soap" for your current products, e.g. to create associations with TV shows, or internet games, or movie / cartoon characters? There is a possibility of a creating a brand new culture and market through association.

2. Where are opportunities to leverage your current skills, experience, process and tools for use in other industries, government affairs?

3. Is there something you can do in the community to make a positive impact and create goodwill?

Opportunity often comes disguised in the form of misfortune, or temporary defeat.

Sometimes what you think initially as bad for you turns out very good for you. - Thaddeus Gardner.

Storyline:

Opportunity often comes disguised in the form of misfortune, or temporary defeat. But then if opportunity came in a direct form, everyone would grab it. Here are a few stories worth pondering:

1. In the late '70s, a fellow I knew got laid off. Newly married and with a new house, he had trouble making ends meet, and desperately needed some income. While looking for a job, he met this entrepreneur who had just founded a new company in the computer graphics field. Impressed with this young man's knowledge of design and passion for technology, the entrepreneur asked the young man to join the new venture. Of course he could not afford to match his old salary and offered this fellow minimum wage for engineers at the time and a share in the company. The young fellow took the offer which was a big risk. That company went on to become a very successful in the computer graphics field. Later, this fellow became Chief Technology officer of a company with $15 billion dollars in sales,  and is now a very successful venture capitalist in Silicon Valley.


2. Hilary Swank, two time academy award winner, was originally cast as a regular on the TV show "Beverly Hills 90210" when she was first trying to break into the Hollywood scene.  One day, her producer let her go, telling her it wasn't working out. She was very upset and thought she failed as an actor. Two weeks later, she got the script for a movie titled "Boys Don't Cry", and because she didn't have her commitment to 90210 she was able to take the job. She was nominated for best actress that year, and won.


3. Lee Iacocca, a President of Ford Motor Company, was fired in 1978 - despite his great contributions and having made $2 billion in profit that year. Chrysler, a competitor to Ford, was on the verge of going out of business and hired Lee to help turn Chrysler around. He revived Chrysler and made it profitable with a line of well-regarded car models. He retired in 1992 as one of the most widely recognized businessmen in the world.


4. Nathaniel Hathorne, an employee in customs house in New England, lost his job due to politics when there was a change of government in Washington. His wife encouraged him to return to his life long passion of writing. Two years later in 1850, he published The Scarlett Letters. The book became an immediate best seller and his life changed for the better ever since.

Reflection: "When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us."  Alexander Graham Bell

Your Reflection?

Ping: A Frog in Search of a New Pond

"Who can guess that precise moment when your world is going to change?"

Storyline:

In the course of writing these Friday Reflections, I receive good stories from the readers; reflections of their own from their experiences. Roger from Costa Rica recommended a book by Stuart Avery Gold: Ping, A Frog in Search of a New Pond. It is simple, short and worth one hour of reading for a lifetime of learning.

Here are a few excerpts from the book:

Introduction: This is the story of Ping, a frog who  ignored the signs of his pond drying up around him, and is stuck in the mud. Forced to leave his home in search of a new pond, he's unprepared for his journey and many challenges he confronts. Then he meets Owl, an insightful teacher who shares his wisdom, guiding Ping towards his goal.

Ping represents everybody who has encountered a setback or is struggling with change. Owl is the mentor who helps him find meaning and leap to new heights. Engaging in its warmth and simplicity, Ping's tale inspires us to lead a life with purpose and intention, to take risks and persevere, and show us the limitless possibilities that can result.

Quotable Quotes from the book:

The dream does not begin unless you do. Too many wait for just the right time and just the right place to act.The very act of waiting actually pushes the desired event away. You must do in order to be.

Risk converts opportunity into reality. A failure to take risks will result in failure to experience your destiny.

Change-real change-is unsettling. When change happens, it can create the kind of fear that can hold of even the most confident of frogs. Fear of change can grip and grab and seize you with such strength, it can paralyze you. But only if you let it.

Reflection: As an old saying goes "the only thing constant in life is change." And with the rapid changes that the technology revolution of last forty years has brought about, our surroundings and lives are changing at much faster pace than ever. Even the mightiest of empires and once most stable of organizations are not spared from the massive waves of change. I highly recommend this book Ping. It gives an enlightening points to ponder about coping with change and risk taking.

(Roger is 2/2 for good recommendations; his previous recommendation, in 2004, was the book called Jonathan Livingston Seagull. Link to Ping Site: http://www.stuartaverygold.com/ping.htm)

The bend in the road is not the end of the road unless you refuse to take the turn

On our fifth anniversary (the first FR in this form was launched on August 5th, 2004):

"If you want to be successful in this fast moving world, be ready to change the document before the ink is dry." - Robert Noyce's advice to me in 1984 when I asked if he had any tips for thriving in this industry. Noyce was the co-inventor of Integrated Circuits and co-founder of Fairchild Semiconductor and Intel.

Storyline:

Roger W. Johnson, former CEO of a large multinational company, told us a story about the importance of flexibility in life and career during an employee open forum in 1989.

In the early part of his career, he was working for a division of a large company based in the East Coast of the United States. A few years later, he was transferred to Chicago. The movers had come in and already taken his household stuff a few days earlier. He was driving to Chicago in his personal car with a companion. On the second morning, he stopped by a public phone and called his head office for a routine check up. His boss informed him that a very critical position had opened up in Florida due to the resignation of the local manager, and they needed him there.

Roger told us that he hung up the phone and went back to driving.  A few minutes later his companion pointed out that the road he had taken at the next intersection was not heading towards Chicago. Roger informed the person that they were going to Florida instead. He ended his talk by telling us that being flexible and available upon demand for critical needs was one very important element in his very successful career and life.

Reflection: 11 years ago, as one part of a comprehensive new employee integration program, the new hires had an open session with one of the senior executives of the company. When asked what were some of the secrets of his success, the executive said, "Willingly accepting new projects and assignments, many of them outside his familiar comfort areas, and being available to move to different places."

Age is an issue of mind over matter. If you don't mind, it doesn't matter

Nobody grows old merely by living a number of years.  We grow old by deserting our ideals.  Years may wrinkle the skin, but to give up enthusiasm wrinkles the soul.  ~Samuel Ullman

Storyline:

Many times, we hear people say, "I wish I could do that, but now I am too old." Here are some real life stories of some people that will inspire you to think otherwise.

• Michelangelo, Renaissance period Italian, creator of the statue of David, the painter of the world famous Scenes of Genesis and The Last Judgment, was 71 years-old when he designed the dome of St. Peter’s Basilica.


• Giuseppe Verdi, a great composer of romantic operas, created one of his greatest works, Falstaff in 1893 at the age of 80.


• George Bernard Shaw, the famous English playwright, who won the Nobel Prize in literature and an Academy Award for adapted screenplay, “Pygmalion”, completed his last work, “Buoyant Billions” in his 90s.


• Jimmy Carter, a science graduate, a farm owner, who later became the 39th President of the United States, devoted his time after the Presidency to serve worthy causes around the world. In 2002, at the age of 78, he was awarded the Nobel Peace Prize. He is a prolific author; and 12 of his 20 books have been published after the age of 70. At 82, he is still serving people and writing books.


• My maternal grandmother was 65 years old when my grandfather passed away. She went back to school and got her first Bachelor’s degree. After that she tried for a Master’s degree in English Literature and failed twice. As a young child my memory of her was that she used to study hard, often late nights, constantly worrying about grades; and on the two occasions when she flunked, she was in tears and needed a lot of consoling by family and friends.
  
  She believed that to go after your dream and fail is never a failure, but to have a dream and not go after it is the ultimate failure.

Reflection: at 55

As the years progress, I have made it a habit not to let a day or a phone call go by without telling my family members that I love them. So, the other day when I got three consecutive phone calls from my wife, son and daughter, I made sure that I ended each call with an "I love you" message. It so happened that the call that immediately followed the first three was from my insurance agent. While finishing the call, the rhythm followed and I subconsciously told him "I Love You" and hung up.

A minute later the phone rang again. It was my insurance agent. He seemed elated "I hope you meant it. In my entire 30 years career, no customer has ever told me that he loved me."  Now consciously realizing what I had done, and relieved that it was not misinterpreted, I thanked him for his service.

In the same spirit, if I have ever told any of you "I love you" while finishing our conversations, you can be rest assured that it was meant in a good spirit. After all I love all people who have encouraged me through the years and have been instrumental in my success.

A man is not old until regrets take the place of dreams.  ~John Barrymore