Black Swan Events and Their Impact on Business

  By Michael Neidle  |    Wednesday June 28, 2023

Category: Columns, Expert Advice


Black Swan events are reshaping our world. By definition, these are events that are rare and usually unpredictable but have a significant impact on society, politics, and of course business. Although these events individually are rare, in our fast-moving interconnected world, the en mass rate of newly hatched Black Swans is occurring more frequently. It’s similar to rogue waves which can cascade one on top of each other to create a monstrous wave overwhelming a ships ability to deal with it resulting in a catastrophic failure that sinks the ship. We will explore several recent Black Swan events, their profound effects in general and then their impact on ones business in particular. By better understanding Black Swan events and their precursors, entrepreneurs and managers can hopefully mitigate their impact on their business. 

Businesses can be vulnerable to these events even if they think that they are in the direct line of fire. Nevertheless, secondary, and tertiary impacts may still affect them, although there may be a time lag. Each of the areas below will be explored, followed by business threats as well as opportunities where creative minds can find hidden opportunities. Small to mid-sized staffing companies need to be particularly cognizant and on the lookout for the types of events discussed here. You have no big brother, or Fortune 500 Company to provide an advisory about Black Swan hazards or opportunity to be aware of.  

The Ukraine-Russian War: The Ukraine-Russian war was a geopolitical Black Swan event. Starting with the annexation of the Crimea by Russia 9 years ago. This was pretty much ignored as a precursor to this full-on war due to a farcical “territorial dispute” by the protagonist-Russia. This has exacerbated international tensions, with economic repercussions and the threat of a thermonuclear war. This conflict has already altered regional dynamics, affected energy markets, and exposed the  vulnerability of global supply chains. Although this event is far from over and the outcome in doubt, much of the damage has already been done. This resulted in billions of $ spent on defense, new political alliances, strained international relations, and historic economic consequences. With the embargo against Russia and our poor relations with China will likely result in problems in us getting critical minerals that are essential for electronics ranging from iPhone to Tesla. This can and did result in severe problems if their supply chains falters. But some business will find opportunity and work arounds, finding a better alternative to repair that break. For example, you may need products that are very cost sensitive. If this is the case don’t enter into fixed price contracts without proper protection for such events, such as hedging or using future contracts where that is an option.

The Election of Donald Trump: The surprising victory of Donald Trump in the 2016 U.S. presidential election disrupted political norms, with unanticipated consequences as  on January 6th. It exposed deep societal divisions in the country and identity politics (see this discussed below), challenged established norms and tax policies, and impacted trade relations, leaving businesses uncertain about future regulations and international trade agreements. Not to be political, the shoe could be on the other foot with a non-traditional Democratic President precipitates his own Black Swan events. Businesses should try to navigate around politics as much as possible although even with no basis in fact this can be misused by others with their own agenda. Here are two examples. First is the case of the Teletubbies and the other is  Ben & Jerry’s rainbow’ flavored ice cream. Both become the victim and avatar in fostering a gay rights agenda which they were not. They were simply marketed as new children’s cartoon characters and a novel flavor of ice cream, respectively. Nevertheless, these two innocuous products have become the unwitting targets for those with political agendas... 

The COVID-19 Pandemic: The COVID-19 pandemic, originating in late 2019, unleashed a global health crisis, overwhelmed the healthcare systems, severely impacting the worldwide economy, problems for children involving remote learning, lockdowns, travel restrictions, and supply chain difficulties cascading one on top of another. This posing significant challenges for businesses, leading to severs logistical problems, bankruptcies, and accelerated transformations of doing business. It opened up the argument of what are provable facts vs. what are opinions dressed up as facts and the  “post-fact” and “post truth ” and QAnon. Many industries experienced declines, while others had to adapt rapidly to remote work, e-commerce, and digital solutions to sustain operations, while creating new business opportunities, such as changing the mode of delivery of the entertainment via streaming services at the expense of theaters, internet shopping at the expense of going to retail malls to physically buy things, funding for biotech firms for new variants and dining out vs. Uber Eats and Door Dash.  

Global Warming: While not a sudden event, global warming is a slow-burning Black Swan that is gradually altering the planet. Rising temperatures, extreme weather events, and environmental concerns have prompted shifts in consumer behavior, regulatory frameworks, and the energy sector, necessitating sustainable business practices and adaptability. Global warming is having profound implications from severe forest fires around the world in the summer to record breaking snowstorms in the winter.With weather extremes, not seen in hundreds of years. Businesses are being required to embrace green practices, develop eco-friendly products, and adapt to evolving regulations to remain competitive. Market opportunities in making even better solar energy for homes and industry and better wind turbines, an alternative to the increased use of air conditioning, by designing ever more efficient buildings, 

Banking Scandals: We have seen Silicon Valley; First Republic and the Credit Suisse Banks get in over their heads recently. We saw the banking crises back in 2006 with really large banks almost go over the cliff scandal involving fraudulent activities, liars loan mortgages approved, along with the derivatives gamble. I would go well beyond scandals to include any sort of problem including, but not limited to oversight, errors and omissions, incompetence, chicanery, or irregularity. So, another bank con job of one type or another will not exactly be a Black Swan event. But to be colorful, let’s call another turn of the wheel a Grey Goose event due to lobbying, influence peddling and the “too big to fail” fake credo. Therefore, another Swan-dive can certainly hit us in the financial industry. The collapse of trust, loss of investor confidence, and regulatory crackdowns could disrupt financial markets, leading to economic instability and a contraction in lending, impacting businesses relying on credit. An even more ingenious banking scandal involving fraudulent activities could severely impact the financial industry and those relying upon them  for a LOC, term loan, etc. Trust in this institution has been eroded, along with investor confidence, this even with intensified  regulatory scrutiny, another creative work around cannot be ignored which could disrupt the financial market, particularly with respect to all the other Swans discussed. Businesses should reassess their banking relationships. Often and carefully. They should have alternative and emergency sources of funds available to them, and not put too many bird eggs in one basket. Large projects that company commits to needs to have an escape clause beyond “acts of God” and specifically the failure of banks and other financial institutions to provide them the funds they need to complete their projects and other works.

High-Interest Rates: A sudden spike in interest rates not as relatively minor as the one we are in now, but that of the mid 1970’s where mortgage rates of 17%, were commonplace. So apart from banking scandals due to unforeseen economic circumstances could create significant challenges for businesses with insane interest rates (In Chile, Argentina and Venezuela, the rate exceeded an unbelieveable1,000% in the mid 1970’s). Higher borrowing costs would increase operational expenses, reduce investment opportunities, and strain cash flow, leading to business closures, bankruptcies and having to cut staff dramatically to stay afloat. Companies would need to reassess their growth strategies, manage their existing debts effectively, and explore alternative financing options. This would enable smart companies to do business using some variant of a futures market. This is typical in dealing with commodities from copper to pork bellies. This is where one sets the price of the item at the time of delivery and buys it (and locks in) that price at the time of delivery. This is also known as hedging. This is a very tricky business and only very experienced traders should be involved in this process. Nevertheless, this can be used for all sorts of business from products to services where there is high volatility and an index that could be used to lock in that transaction with a buyer and seller. 

Identity Politics: This new coined term is a Black Swan event where people are more loyal to their affinity group then their own economic interests. It is currently used to describe the “Own the Libs” credo, where people will first determine what their adversary is in favor of and then does to opposite just to try to drive them crazy. If their advisory supports Ukraine, they will support Russia. If their adversary wants to maintain Social Security payments, they will be against it, even if it would help them out as well. If the COVID immunity shots were saving lives, they would not take it even when proven that it would save their own life. It’s like the line in an old Marx brothers’ movie Horsefeathers “ if you’re for it, then I’m against it”. 

This Identity politics is a social movement whose purpose is to separate people into different camps and is a well-known method to divide and conquer. We have news outlets whose audience is neatly fragmented into red and blue constituency bubbles. When people hear only one point of view their biases are reinforced and their ears are closed to hearing another point of view. Companies may face challenges related to public perception, consumer boycotts, or patronizing one company instead of another. Brands that are perceived to be out of touch with their societal values may suffer real economic damages. Examples of boycotted companies include: Disneyland, McDonalds, Barclays, and Fox News. In our now hyper-partisan country, you need to be apolitical less you alienate a part of your client base, your community, and your staff (some of which may exist a different  political environment).To avoid picking sides, although that you may have your personal preference that should remain private. Stay away from even an association with people who can cast a shadow on your company/ because of their affiliations, not yours. If you operate in a state with strong views about a certain subject do not become part of that controversy or you will be guilty by association. Remember that perception is often  as important as the facts. Stay far away from divisive news stories and have your employees do the same, even what may seems innocuous at the time can become twisted by those wanting to create in tomorrow’s headline. Whoever thought that the Boy Scouts, Disney, or the Red Cross could become controversial?

Cybersecurity Breach: A large-scale cyber-attack targeting critical infrastructure could disrupt business operations, compromise customer data, and damage brand reputation. Companies may need to invest in robust cybersecurity measures, conduct regular audits, and have contingency plans in place to minimize the impact of such an event. Regular and routine backup of all systems in a safe environment is critical. Hacking and the use of ransomware is commonplace. A smart company will stay abreast of the latest threats and defenses. It is advisable to contract  with a reliable and expert vendor to protect your company, as new threats are arising every day, and you can’t ever be too safe. 

Technological Disruption: Emergence of a revolutionary technology, such as quantum computing or advanced artificial intelligence, could reshape entire industries. Businesses would need to adapt quickly, invest in research and development, and acquire new skills to leverage these technologies or risk being left behind by their competitors. There have been many transitions from one socio-economic age or eras to another, including the original industrial revolution, the age of mass production, the age of electricity, the nuclear age, the information age, the space age, the computer age, and now the era of artificial intelligence. The latter perhaps holds the greatest promise and peril to civilization, As the likes of the late Stephen Hawking as well as Elon Musk, among other luminaries warning us of that unless we are careful, AI may be the end of us unless we are able to place indelible controls on AI which just may not be possible. That is, given AI’s limitless resources, it ability to think and find solutions in nano seconds, have all the knowledge of mankind, the ability to network with other AI’s, with a neural net and an actually be self-awareness, we may be getting to the point where AI is truly thinking of itself as conscious entity just like us. And perhaps, just perhaps we have created a Frankenstein and we are the point of singularity where AI intelligence first equals then quickly surpasses that of humans by several orders on magnitude.

The potential impact on business is beyond our comprehension right now as AI is moving at the rate of a rocket ship (and business has to assume that we will not surrender our place on Earth to AI and robots). Therefore, be as close to the leading edge of AI as reasonably possible so that you remain competitive in whatever field you are operating in so that you are not left behind by your competitors. We are moving so fast that those not on the AI train will be left standing at the station where there is no traffic anymore, like the old west town which died as did the Pony Express.

Hypothetical Events and Unfolding Scenarios: Black Swan events like the Ukraine-Russian war, the election of Trump, COVID-19, and global warming have already demonstrated their transformative effects. Understanding the significance  of water slipping back further than normal into the ocean may be the wake-up call of a Tsunami heading to your ocean front city, or an armed crowd being the first sign of an insurrection. 

Well-run businesses  have their antennas up for what is coming. This means not living in your little bubble and have yes men around you are saying that everything is going swell and there is nothing to worry about. Be alert, attend thought-provoking and informative meetings, have a business consultant to give you unvarnished advice as he does not rely on you for his job (vs. employees who you may intimidate), be well read on a wide range of subjects. Don’t get all of your news from a single source; be open to new ideas. There was a prominent radio talk show host said ”I will do the thinking for you” . Take small risks on things that have the potential for outsized payoffs with enough money in a very solvent bank to survive if the tsunami hits. When costs get out of control cut the fat not the muscle from the company. Play devil’s advocate and take a contrary view of things to see your exposures. 

This article was written in no small part with the help of ChatGPT, and AI will be the subject of an upcoming article.

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