Butterflies and swans: Virus crisis calls for stress tests in business planning


The butterfly effect was first coined in the 1952 short story “A Sound of Thunder” (Collier’s, 1952) by Ray Bradbury in the context of a time travel story. And it was popularised in a very interesting theory propagated by Edward Lorez in 1961 as part of his work in meteorological studies with linkages to the broader chaos theory. The butterfly effect was based on the premise that when a group of butterflies flap their wings together in one place it could result in a tsunami in another part of the world due to the combination of a set of unconnected events. It was an intriguing theory but still quite academic.

As we today review the behaviour of a couple of bats in Wuhan, China, which appear to have infected civet cats which, in turn, passed on a virus to some humans keen on exotic food and created a global health and economic crisis, the butterfly effect does not appear to be academic anymore, it is real and has significant impact to businesses.

The impact of the butterfly effect on the economy was triggered by apparently unconnected events, separated by large geographic distances. It was further causing the rise of black swan events, like the one that we see currently.

A black swan event is a concept popularised by Lebanese-American essayist Nassim Taleb in his book “The Black Swan: The Impact of the Highly Improbable” (Random House, 2007) to define events of significant impact that emerge suddenly driven by a set of seemingly random occurrences. It was used to frame the analysis of the 2008 economic crisis and remains relevant today.

Business plans need to factor in unexpected occurrences more than ever

As the impact of the butterfly effect gives rise to black swan events that we grapple with today, the question arises on how should our scenario and business planning be improved to better spot such occurrences early. Namely in a way that business plans are getting stress-tested to allow for a wide set of event possibilities, as well as for potential remedial actions, all of which should be planned for in advance in anticipation of such possibilities.

In my experiences in business planning over the last 20-odd years, most scenarios that are generated for developing such plans are built on linear perspectives. Projected growth of a business is extrapolated linearly based on industry growth, competitive players in the ecosystem, unit economics, technology improvements etc.


However, black swan events like the coronavirus pandemic are not captured by any of the current scenario planning efforts, and neither their impact nor responses to it are being planned for. It is also quite true that black swans, by definition, are not commonly occurring, hence are difficult to identify and it is only in hindsight that one can truly rationalise them.

So far, most scenario planning exercises have treated black swan events as outliers and failed to identify and incorporate them in a more exhaustive manner.

The following are a few of my thoughts on how businesses could be more robust in their scenario planning in order to better identify black swan events with the aim of identifying and preparing potential solutions to various adverse scenarios.

(A) Map the interconnected

The first effort needs to be looking beyond linear relationships in order to observe a range of interconnected events that may have potential impact on business growth, including distant associations that may not appear to be directly linked.

This can happen by looking beyond just the outbreak of viruses, by identifying all the events that may have some impact on business, however remote it may appear (e.g. the rise of terrorist activities in one geography and its potential impact on supply chain activities; political hostilities from a rogue nation; depreciation of large trading currencies due to large sovereign debt; adoption of legislation for stringent privacy control, etc.)

Ensuring that the scenario planning exercise is more horizontal in its approach allows for identifying a wider set of linkages in order to identify the not-so-obvious factors that have significant impact on a business strategy.

(B) Randomisation of parameters

In conventional business forecasting, all the linear parameters that might have positive or negative impact on the business are identified and their impact is quantified in a multivariate equation-like method. This is meant to provide a sense of reassurance that all the parameters and their potential impact to the output are identifiable and trackable.

However, in order to truly account for the potential impact of an event like a black swan, there is a need to bring in randomisation to the multivariate equation-type business forecasting. Adding randomisation factors to each of the parameters will allow the business forecast to simulate impacts of black swan events and stress test business results to such random variables.

(C) Identify the incremental

While colossal events like the coronavirus pandemic are, naturally, easy to spot, but difficult to predict, it is incremental events that are more difficult to recognise. They have marginal impact as long as they are building up and remain unnoticed until a tipping point is reached and the business has to cope with a significant surprise impact.

Scenario planning efforts need to be like a seismograph keeping track on the small economic, social and political tremors that are the precursor to a larger earthquake.

It is therefore important to look beyond large business scenarios to identify the gradual impact of tremors like the rapid growth of an on-demand workforce, the increasing depletion of financial reserves within small businesses and individuals, rigid regulations in the banking sector… all of which are precursors of a potentially large economic disruption driven by dearth of liquidity, for instance.

(D) Beta state for planning

The current coronavirus event has made it amply clear that the process of scenario and business planning needs to be in a continuous beta state. Gone are the days when a five-year plan was drawn up and its way of implementation was strictly followed during the period. The fast change of market dynamics and the need to continuously monitor external parameters is creating the need to keep business plans on beta.

A strong focus and a true north-orienting point in a spinning world is needed for businesses for long-term planning, but the means for getting there are constantly open for review, taking into account all the big events and small tremors spotted on the way.

In order to facilitate the beta process in business planning, continuous tracking and in-depth reviews need to be included into the strategic planning process. But most companies that I am looking closer at tend to do nothing more than an annual review of their pre-set five-year strategic plans.

A beta approach to business planning needs to focus on reviewing and reconsidering core elements of a business plan in light of identified influencing factors and build remedial measures into planning and implementation alike. Geographical spread of markets and resources, broadening revenue lines, identification of alternate suppliers, etc. are some of the beta business planning aspects that will allow for reacting to outside occurrences which were so far not factored-in.

It would be quite foolish to believe that the above steps (and more) will allow for identifying all butterfly effects and black swan events and prepare remedial actions in business plans, but it will definitely increase the chances of picking them up earlier than others.

(Navonil Roy is an Investvine contributor. Opinions expressed in this article are his own.)

The butterfly effect was first coined in the 1952 short story “A Sound of Thunder” (Collier’s, 1952) by Ray Bradbury in the context of a time travel story. And it was popularised in a very interesting theory propagated by Edward Lorez in 1961 as part of his work in meteorological studies with linkages to the broader chaos theory. The butterfly effect was based on the premise that when a group of butterflies flap their wings together in one place it could result in a tsunami in another part of the world due to the combination of a set of unconnected...


The butterfly effect was first coined in the 1952 short story “A Sound of Thunder” (Collier’s, 1952) by Ray Bradbury in the context of a time travel story. And it was popularised in a very interesting theory propagated by Edward Lorez in 1961 as part of his work in meteorological studies with linkages to the broader chaos theory. The butterfly effect was based on the premise that when a group of butterflies flap their wings together in one place it could result in a tsunami in another part of the world due to the combination of a set of unconnected events. It was an intriguing theory but still quite academic.

As we today review the behaviour of a couple of bats in Wuhan, China, which appear to have infected civet cats which, in turn, passed on a virus to some humans keen on exotic food and created a global health and economic crisis, the butterfly effect does not appear to be academic anymore, it is real and has significant impact to businesses.

The impact of the butterfly effect on the economy was triggered by apparently unconnected events, separated by large geographic distances. It was further causing the rise of black swan events, like the one that we see currently.

A black swan event is a concept popularised by Lebanese-American essayist Nassim Taleb in his book “The Black Swan: The Impact of the Highly Improbable” (Random House, 2007) to define events of significant impact that emerge suddenly driven by a set of seemingly random occurrences. It was used to frame the analysis of the 2008 economic crisis and remains relevant today.

Business plans need to factor in unexpected occurrences more than ever

As the impact of the butterfly effect gives rise to black swan events that we grapple with today, the question arises on how should our scenario and business planning be improved to better spot such occurrences early. Namely in a way that business plans are getting stress-tested to allow for a wide set of event possibilities, as well as for potential remedial actions, all of which should be planned for in advance in anticipation of such possibilities.

In my experiences in business planning over the last 20-odd years, most scenarios that are generated for developing such plans are built on linear perspectives. Projected growth of a business is extrapolated linearly based on industry growth, competitive players in the ecosystem, unit economics, technology improvements etc.


However, black swan events like the coronavirus pandemic are not captured by any of the current scenario planning efforts, and neither their impact nor responses to it are being planned for. It is also quite true that black swans, by definition, are not commonly occurring, hence are difficult to identify and it is only in hindsight that one can truly rationalise them.

So far, most scenario planning exercises have treated black swan events as outliers and failed to identify and incorporate them in a more exhaustive manner.

The following are a few of my thoughts on how businesses could be more robust in their scenario planning in order to better identify black swan events with the aim of identifying and preparing potential solutions to various adverse scenarios.

(A) Map the interconnected

The first effort needs to be looking beyond linear relationships in order to observe a range of interconnected events that may have potential impact on business growth, including distant associations that may not appear to be directly linked.

This can happen by looking beyond just the outbreak of viruses, by identifying all the events that may have some impact on business, however remote it may appear (e.g. the rise of terrorist activities in one geography and its potential impact on supply chain activities; political hostilities from a rogue nation; depreciation of large trading currencies due to large sovereign debt; adoption of legislation for stringent privacy control, etc.)

Ensuring that the scenario planning exercise is more horizontal in its approach allows for identifying a wider set of linkages in order to identify the not-so-obvious factors that have significant impact on a business strategy.

(B) Randomisation of parameters

In conventional business forecasting, all the linear parameters that might have positive or negative impact on the business are identified and their impact is quantified in a multivariate equation-like method. This is meant to provide a sense of reassurance that all the parameters and their potential impact to the output are identifiable and trackable.

However, in order to truly account for the potential impact of an event like a black swan, there is a need to bring in randomisation to the multivariate equation-type business forecasting. Adding randomisation factors to each of the parameters will allow the business forecast to simulate impacts of black swan events and stress test business results to such random variables.

(C) Identify the incremental

While colossal events like the coronavirus pandemic are, naturally, easy to spot, but difficult to predict, it is incremental events that are more difficult to recognise. They have marginal impact as long as they are building up and remain unnoticed until a tipping point is reached and the business has to cope with a significant surprise impact.

Scenario planning efforts need to be like a seismograph keeping track on the small economic, social and political tremors that are the precursor to a larger earthquake.

It is therefore important to look beyond large business scenarios to identify the gradual impact of tremors like the rapid growth of an on-demand workforce, the increasing depletion of financial reserves within small businesses and individuals, rigid regulations in the banking sector… all of which are precursors of a potentially large economic disruption driven by dearth of liquidity, for instance.

(D) Beta state for planning

The current coronavirus event has made it amply clear that the process of scenario and business planning needs to be in a continuous beta state. Gone are the days when a five-year plan was drawn up and its way of implementation was strictly followed during the period. The fast change of market dynamics and the need to continuously monitor external parameters is creating the need to keep business plans on beta.

A strong focus and a true north-orienting point in a spinning world is needed for businesses for long-term planning, but the means for getting there are constantly open for review, taking into account all the big events and small tremors spotted on the way.

In order to facilitate the beta process in business planning, continuous tracking and in-depth reviews need to be included into the strategic planning process. But most companies that I am looking closer at tend to do nothing more than an annual review of their pre-set five-year strategic plans.

A beta approach to business planning needs to focus on reviewing and reconsidering core elements of a business plan in light of identified influencing factors and build remedial measures into planning and implementation alike. Geographical spread of markets and resources, broadening revenue lines, identification of alternate suppliers, etc. are some of the beta business planning aspects that will allow for reacting to outside occurrences which were so far not factored-in.

It would be quite foolish to believe that the above steps (and more) will allow for identifying all butterfly effects and black swan events and prepare remedial actions in business plans, but it will definitely increase the chances of picking them up earlier than others.

(Navonil Roy is an Investvine contributor. Opinions expressed in this article are his own.)

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