“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.” — Donald Rumsfeld, former U.S. Secretary of Defense
A manager’s job is to manage. That becomes increasingly difficult in a progressively interconnected world, where complexity grows every day. We may think that we understand the risks to our business, but what we do not understand is how this highly connected, sophisticated, and complex world can react in ways we did not think possible.
We sit in our bubbles and believe we can manage and grow our businesses, despite what is thrown at us. So did the 80-plus percent of Fortune 500 companies from 50 years ago that are no longer with us today. Who would have thought 30 years ago that the thing in your pocket was not just a simple voice communication device, but would become the main form of communication, voice, text, social media, digital camera, information hub, and so much more?
At the time, the above quote from Donald Rumsfeld got a lot of commentary, quite a lot of it negative, when he said it in early 2002 about Iraq and the evidence for (or lack thereof) weapons of mass destruction. I think Secretary Rumsfeld had at some point been in therapy or studied psychotherapy, as the quote brings to mind the Johari Window, which is a mechanism for building trust. It allows you to explore what you and others know about you, what they know about you and you do not, what you know about yourself and they do not, and things about you that are hidden to you and others. But I digress.
We may know a great deal about the risks on an individual basis that affect our business, but we do not know how the risk profile increases as these risks are compounded. Multiple things happening at the same time can add up and overwhelm a business.
During the pandemic, a number of things happened that led to a severe worldwide shortage of CPUs and GPUs. Very few realised how critical the shortage would become.
Building factories to produce CPUs (central processing units) and GPUs (graphics processing units) takes more than five years and the equipment to manufacture them is highly specialised, using extreme ultraviolet lithography (EUV) to etch the chips. Only a few companies make these machines. Capacity cannot be switched on and off.
The demand for computer chips is increasing, as more and more devices are using microprocessors as control and reporting systems. GPUs not only process the graphics in HD televisions, mobile phones, and slot machines, but they are also ideal for cryptocurrency mining. One company, Nvidia, controls over 80% of the worldwide market for GPUs. This in and of itself is an existential threat to numerous businesses — fragility at its worst.
The pandemic meant that manufacturing, transportation, and logistics businesses had to close for periods of time. Ships, airplanes, and trucks were in the wrong places, which led to containers stacking up in ports and pallets of goods at airports. We discovered how brittle our systems were.
In addition to the pandemic, in 2020 there were fires in a company in Germany that manufactured EUV machines, in a company in Japan that is one of the leading manufacturers of CPUs for cars and trucks, and in a factory in Japan that produced a special type of glass fibre used in the manufacture of circuit boards. Meanwhile, the demand for GPUs from crypto-mining companies was going through the roof. All of these events combined to create a massive shortage of electronic components that go into any number of consumer goods. Slot-machine lead times were being quoted at eight months or more.
Recently, Melco opened the City of Dreams Mediterranean in Cyprus. According to their stock market filings, the company was expecting a large amount of play from Russia and the surrounding countries, Israel, and the Middle East. The war in Ukraine and the atrocities in Gaza have meant the number of guests from these countries is woefully short of expectations. The resort probably could have survived one regional conflict without too much damage, but two at the same time have been devastating.
These are examples of two types of risks that can be existential threats to a business: linked and discrete. Linked risks, such as the pandemic, cause a downturn in manufacturing and transport capacities, leading to component shortages. Fires, crypto mining, and wars are example of discrete risks; one does not cause another.
A different example is those risks that are known and can seem acceptable, but can, with time, build and become catastrophic. Suppose you have a CRM system and it is known to be unreliable a small percentage of the time, but not so much that it flags up on senior-management’s dashboard as something that needs to be dealt with.
Each time the CRM system misfires, it leads to a loss of revenue. The quantum of business lost may not be remarkable for each event, but over time, the cumulative impact of revenues lost, reputational damage, and even loss of customers all adds up. There is the added risk that social media amplifies the effect; bad reviews and negative posts can go viral. This should be something that management care deeply about.
What to do about it? Can we ever know if our businesses will be impacted by a combination of events, whether linked or not? What are the known knowns, the known unknowns, and the unknown unknowns? Most of what I have written about is unpredictable, so how do businesses become more resilient, so they can overcome these combined risks?
Senior managers should war game the “what ifs.” What if interest rates double? What if another pandemic hits, a new technology takes a bite out of our market share, a law and/or regulation is enacted that takes away a significant number of customers? What happens when a “black swan” in the shape of a few of these arrives at the same time? What happens to the business? Can we survive? If not, what should we be doing now to ensure survival?
There is a risk that these sessions turn into an exercise of group think, so it is vital the scenarios that are to be tested are not easily overcome and the challenges robust.
The output should be the building blocks of a new strategy, one that will mean, 50 years from now, the company is still thriving, even after the unknown unknowns become known.
