UNKNOWN-UNKNOWNS AND STRATEGIC EXPOSURE

Strategic Exposure Group’s work on Unknown-Unknowns begins with a basic proposition:

All decisions are made using what is known, assumed, or believed at the time the decision is made. What is not known, not considered, discounted, or ignored is not incorporated into the decision.

Because decisions concern future outcomes, and the future cannot be fully known, every decision contains unknowns.

Traditional risk management addresses an essential part of this challenge. It is event-centric. It seeks to identify potential adversities, estimate their likelihood and impact, and then prevent them or mitigate their consequences.

That approach is valuable and necessary.

But it does not address the full spectrum of uncertainty.

Uncertainty exists on a spectrum. Some outcomes may be virtually certain. Others may be most likely, likely, probable, or merely possible. Risk management is most effective when the potential adversity can be identified with sufficient clarity to evaluate, prevent, or mitigate it.

Unknowns present a different challenge.

In decision-making, an unknown does not always mean that something was unknowable to everyone. Sometimes information was available but not known to the decision maker. Sometimes it was known but discounted. Sometimes it was considered too unlikely to matter. Sometimes it was ignored because addressing it was inconvenient, costly, or inconsistent with the preferred course of action.

These are failures of recognition, judgment, or nerve.

Other unknowns arise from a failure of imagination. These are circumstances so unusual, unfamiliar, or outside the existing frame of reference that they could not reasonably have been envisioned in advance.

The distinction matters intellectually.

But the impact on the decision may be the same.

If a circumstance is not taken into account when a decision is made, the decision is exposed to consequences that were not incorporated into the analysis.

This is where Unknown-Unknowns create a different kind of strategic exposure.

Adversities arising from the unknown cannot be prevented in the ordinary sense because the triggering event or circumstance was not identified in advance. 

In some situations, such adversities can escalate into catastrophes.

We can only prevent what we know or can envision. 

Thus catastrophes arising from the unknown cannot be prevented.

When the source of adversity is unknown, the focus must shift from preventing the event to surviving the consequences.

That is why addressing Unknown-Unknowns requires an exposure-centered framework. 

The question is not:

What specific event should we prevent?

The question is:

What level of exposure could threaten the organization’s ability to continue, and what decisions should be made with that survivability boundary in mind? 

In extreme cases, unknowns can produce consequences that threaten the viability of the organization as a going concern. These consequences may arise from technology shifts, market disruptions, policy changes, operational failures, financial shocks, geopolitical events, or previously unrecognized correlations among conditions that were never considered together.

Because the triggering source may be unknown, the discipline is not prediction.

Nor is it traditional prevention.

The discipline is to understand the organization’s survivability boundaries and incorporate them into decision-making before an extreme adversity occurs.

This requires asking different questions:

How much adversity can the organization withstand?

Where are its most serious vulnerabilities?

Which assumptions, concentrations, dependencies, or constraints could magnify the impact of an unknown event?

What strategic flexibility, financial capacity, operating resilience, or organizational capability would improve survivability?

And how can decisions be made so that the pursuit of opportunity does not unknowingly create exposure to catastrophic consequences?

This does not replace risk management.

It supplements it.

Risk management remains essential for adversities that can be identified, assessed, prevented, or mitigated. Addressing Unknown-Unknowns extends the decision framework to include exposure arising from what is not known, not considered, discounted, or beyond current imagination.

The objective is not to eliminate uncertainty.

That is impossible.

The objective is to improve decision-making by recognizing that some future adversities cannot be predicted or prevented, and by ensuring that the organization is better positioned to survive and continue pursuing its objectives if such adversities materialize.

This perspective is especially important because survivability and opportunity are not opposites.

In some cases, examining exposure to Unknown-Unknowns leads organizations to reconsider business models, concentration risks, capital allocation, revenue dependencies, strategic flexibility, and operating capabilities.

Done properly, this can reduce existential vulnerability while also revealing stronger strategic alternatives.

The purpose is not to make organizations more cautious.

It is to make them more capable of pursuing opportunity without ignoring the unknowns that could threaten long-term viability.

For a more detailed discussion of these concepts, please see “Surviving Meltdowns That Cannot Be Prevented.”

To learn more about how Strategic Exposure Group can help your organization address strategic exposure arising from Unknown-Unknowns, please contact us at KPaul@StratExpoGroup.com.