By: Jonathan Brill

4,200 WORDS (10 PAGES)

SYNOPSIS

Rogue waves that upend entire industries and break businesses, like pandemics and financial crises, occur more frequently than ever. In Rogue Waves, author Jonathan Brill shares the five-step ROGUE framework that helps turn major systemic threats into outsized opportunities.

The first step is the Reality Test, used to deeply understand your present state. The Organize Your Forces step helps you model the forces that keep your current system stable. Step three is to Generate Your Futures through simulations to identify potential opportunities and threats. Step four is Uncouple Opportunities from Threats to identify where and how to intervene. The fifth step is Experiment, where you build an experiments portfolio to maximize your odds of success.

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EXPLAINER VIDEO

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TOP 20 INSIGHTS

1. As the world moves faster and becomes more connected, Rogue Waves are no longer edge cases. External events of large magnitude like wars, financial crises and large natural disasters have severely affected large companies every seven years on average. American business leaders respond to radical external change nearly 45% of the time.

2. In an increasingly volatile world, resilience is the new growth strategy. Resilient organizations have more redundancies than what Six Sigma advocates find acceptable. But today's organizational mandate is not just about performance. It's also about surviving and recovering from unexpected systemic shocks. 

3. Any business or economy is just a combination of games with different rules, different winning probabilities, and different payouts. In a casino, while individual players win or lose, the house always wins the night because it places systemic controls on the flow of information. Similarly, a business can beat randomness and win by placing systemic controls around the unknown. 

4. All business risks can be slotted into the FOES framework: Financial, Operations, External and Strategic Risks. Financial, External and Strategic risks combined have accounted for significant, sustained value loss of over 20% in 92% of occurrences over 20 years. Therefore senior managers look out for Financial, External and Strategic Risks, while mid-level managers primarily focus on Operational Risks. While the above approach works in regular times, it can sink an organization when rogue waves hit. When change is rapid, junior people on the ground will see it first. Organizations must teach them what to look for, create effective mechanisms to process their warnings and give them the confidence that they will be heard.

5. Rogue waves can have four types of characteristics. First, they can be Static, with constant probability or Dynamic, with varying probabilities. Second, they are Symmetric or Asymmetric based on whether they affect all parties equally or unequally. Third, they are either Synchronous or Asynchronous, based on whether they impact all parties simultaneously or at different times. Finally, their impact can be Sustained or Temporary. Covid-19 was a dynamic, symmetrical synchronous wave as its probability changed over time, and its impact was on every business in the category within the same time frame. In contrast, the rapidly growing cyberattacks on companies are static, asymmetric and asynchronous. 

6. Three things are required to spot the next rogue wave before your competitor does. First, be familiar with today's prominent economic, technological and social undercurrents. Second, pay special attention to events that cause two or more undercurrents to interact. Finally, build awareness throughout your organization so that everyone can scan the horizon for critical indicators. 

7. To build systemic intuition about the threats and opportunities created by rogue waves, think through the impact of the different types of rogue waves on the four FOES of your organization. Ask how they can impact you and create new opportunities for your organization to create outsized value.  

For the remaining Top 20 Insights, scroll to the bottom of this page.

SUMMARY

The world has become more volatile than ever, with once-in-a-lifetime events happening once a decade. Jonathan Brill calls them Rogue Waves. But organizations and management theories have been designed for stable operating environments. This book provides actionable frameworks to reduce risk, build resilience and best position your organization to take advantage of future rogue waves.

ASSESS YOUR THREATS AND OPPORTUNITIES

1. HORIZON SCAN

Identify the top ten economic, technological and social undercurrents that could create the next rogue wave and impact your business. These could include trends like the change of demographics in the West, the rise of Asia and the impact of emerging technologies like 5G and IoT. For each of them, list the high impact changes in politics, markets and consumer behavior they could cause.

2. IDENTIFY IMPLICATIONS FOR YOUR ORGANIZATION

After you have listed the significant undercurrents relevant to your business, identify the risks and opportunities they could create. Risk can be modeled using the FOES Framework: Financial Risk, Operational Risk, External Risk and Systemic Risk. Since your junior staff is closest to ground reality, train them to keep a lookout for the right issues and install organizational mechanisms to ensure warnings are heeded. 

3. IDENTIFY RESPONSE WINDOW AND BUILD AN INDICATORS DASHBOARD

Your response window is the period between the earliest time the changes become relevant to you and the latest time your organization can still course correct. Set up a dashboard to systematically track threats and opportunities. Review your Four FOES Dashboard every quarter and do an in-depth assessment every 12 months. 

THE ROGUE METHOD

When a rogue wave hits, it will be the process you have installed, not your individual performance, that will drive results. To prepare your organization, you must provide your team the training they need to look out for rogue waves, the processes that will enable them to speak up and the confidence that they will be heard. The ROGUE method is a broad set of mental models to build organizational resilience to handle rogue waves. 

STEP 1: REALITY TEST

Organizations often spend significant effort collecting data on the past to forecast the future but far less to understand the present. But if your present model is wrong, your future projections are likely to go wrong as well. Use the REAL framework to investigate current reality. 

1. RECONNAISSANCE

Decide what decisions have to be made and the degree of proof required to make them and estimate appropriate boundaries to the search. An excellent way to start reconnaissance is to identify the knowns and unknowns. Known Knowns are the things that we are aware of and understand. Equally clear are Known Unknowns, the things that we want to find out but don't have information on yet. Unknown Knowns is available information that you may have missed due to cognitive biases. Finally, there are Unknown Unknowns, which is information that we are neither aware of nor understand. An excellent way to brainstorm possible Unknown Unknowns is to consider counterfactuals or what-ifs. Unknown Unknowns could be new technology, unexpected competition, a shift in geopolitics etc. While you cannot research them, listing them down helps you expand the problem understanding. 

2. EVIDENCE COLLECTION

Decide on a standard of proof before you collect evidence. Many organizations rely on sources like newspapers, trade journals and industry analysts. However, high-risk decisions need a deeper dive. The best quality information usually comes from academic writing or direct source data analysis. To determine whether an information source is valuable, evaluate it across three factors:

1. Focus — Does the data have a detailed focus on the subset relevant and limited to your question? If you want to know LA traffic patterns, data for the US is useless. 

2. Givenness — Does the information say something new that provides fresh insights into your problem? 

3. Relevance — Will the information help you generate new insights? 

3. ALTERNATIVE ANALYSIS

Take the information gathered and create multiple theories of reality. When you have to deal with complex and ambiguous data, you could be easily prone to cognitive biases. To avoid them separate information collection from analysis and systematically evaluate alternatives. Use the Chess Tournament approach to evaluate multiple theories of reality generated. Identify four competing hypotheses and spend 15 minutes trying to confirm each. In the second hour, one person spends 15 minutes to demonstrate why each solution won't work while others attempt to defend it. When a solution fails, another is added. The structured brainstorming approach biases and forces teams to second-guess conclusions and double-check assumptions. Finally, for every theory that survives, establish the impact if your theory is invalidated. 

4. LIKELY REALITIES

Ensure you have explored the full range of options, given the level of proof you have. Confirm if you have subjected all possible theories to the same level of logical scrutiny. Make an honest assessment of how confident you are in your conclusions and rank them. Now you have a clear picture of your current reality. 

STEP 2: OBSERVE YOUR SYSTEM

Step 2 requires you to model the forces that keep your current system stable to determine what can cause the system to change or break. A system becomes unstable when there is a change in the balance of forces. 

First, identify the boundaries of the system in which you are working. Every system comprises the same elements: nodes, links, inputs, outputs, rates and frequencies. Nodes are locations within a system that contain inventory. Links are pathways to move inventory from one node to another. Inputs measure how much potential is added to the system. Outputs measure how much potential is subtracted from the system. Rates are the speeds at which inventory moves from one node to another. Frequencies measure how often inventory moves between nodes. 

Take the example of a distribution chain. The factory pushes new products as system inputs. Multiple warehouses are nodes that stock inventory. Vehicles are links that move products across warehouses. The mode of transport depends on both the Rate of transfer and Frequency of transfer. Finally, the seller is paid(output) when the product is delivered. 

1. Map the System — System models provide clarity and help you focus on the small changes that will have the most significant impact. Identify the nodes, links, inputs and outputs that you already understand. Place black boxes around the ones you don't. Identify which links are deterministic and which are probabilistic. 

2. Identify the system’s equilibrium — There are balancing and reinforcing loops that keep your system under equilibrium. Causal loops help you predict second and third-order effects of changes. Draw directed arrows to connect the nodes based on links in the system. Sometimes causal loops can be recursive. Balancing loops slow the system down while reinforcing loops that accelerate small changes. These are represented by - and + signs, respectively. Left unchecked, a reinforcing loop can rapidly produce an exponential growth situation. Causal loops help you identify which relationships are still unknown and what indicators must be tracked to receive early warnings. 

3. Identify subsystems to investigate — Based on the previous steps, identify subsystems around black boxes and recursive loops that are important to understand. Perform direct investigations where possible, as described in the Reconnaissance section. For subsystems that you cannot directly investigate, infer what is going on by looking at the rates and frequencies throughout the system. 

4. Imagine and list possible causes of disruption — Ask what could cause the balancing and reinforcing loops to accelerate, decelerate, reverse direction or snap. Evaluate the impact of major economic, social and technological undercurrents on your system. 

5. Identify most important uncertainties — Which uncertainties are most important to understand and manage? From the above list, select disruptions that are feasible within the timeline of your concern. Then identify the system elements where you can intervene to handle the disruptions.

STEP 3: GENERATE YOUR FUTURES

Simulations are a risk-free way to analyze how actions affect possible scenarios and generate a range of possible futures. Simulations help us understand three key things: 

1. Uncertainty — The likelihood of an event

2. Impact — The influence on your organization

3. Timeline — If the uncertainties and impact are relevant within the timeline considered. 

While organizations like Blackrock and Amazon use sophisticated mathematical models, simulation follows the 80/20 rule. A simple pen and paper approach supplemented by spreadsheets can get you surprisingly far if you know how to structure the simulation and ask the right questions. A simple sequence to simulate futures is… 

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