A Layman’s Guide to ERM Strategy Chapter 1 – Know Your Enemy

Ahhh the MBA…the Rooks of the Corporate board…

I’ve never wanted an MBA myself. I imagine at this point in our society you have to be given a blanket understanding of Enterprise Risk Management in order to receive so much as a Bachelor’s degree. Maybe you even work on a group project. By the time you’re reaching toward an MBA though, I hope by now you need to display a mathematically sound mind and a thorough understanding of ERM planning and optimization techniques.

ERM is a very dry subject to study if you don’t embrace it artistically. It’s a very complicated and high level system science that requires a high level of intelligence, creativity, and courage to even begin to comprehend practically. Many believe they do understand, but there are system nuances, such as discrepancies and undefinable variables, that can only be understood from a series of logical practical applications within a large enough pool of assets. The knowledge can be gained forensically or in a formulaic manner, however it takes a much longer time to obtain a “working knowledge” of the applicable usage, and therefore, we come to our first flaw of an ERM system.

The Pest Can Adapt More Efficiently Than The Poison

This is the first concept you need to understand to gain practical knowledge in the field of ERM. To give a reference point of understanding, this same concept served as an underlining theme of the Batman graphic novels, comic books, and pop cultural influences in the decades surrounding the new millennium: Setting the size of the system as a variable, the ratio of the rate of effectiveness of a vigilante vs the rate of effectiveness of a regulated defense will always move exponentially toward the vigilante’s favor as the system grows in size, with the inverse being equally true. It is important to recognize the moral and ethical difference between a vigilante and rebel. To understand practical applications, we need to move on to another pop culture icon – Star Wars.

Every Death Star Has Holes

In an unstable 1970’s US economic climate, technology began to adapt to society. During this time, Star Wars: A New Hope introduced a worldwide audience to a basic strategy within any system. You can’t build a Death Star without holes, and on the flip side, just because a Death Star has holes doesn’t make it any less effective.

As we moved into the 1990’s and students of business, law, science, and math, who had this early ERM concept embedded in their imaginations as children, were beginning their ascent up the corporate and political ladders viewing the system as a Death Star, and flying through the canyons. After the destruction of the Bell Dynasty during the Clone Wars, the Death Star was redesigned. It would be a much tougher battle, and the weakness wasn’t immediately clear.

A small group of vigilantes, however, located the hole in the Death Star once again, but this time the damage was greater, with giants like WorldCom and Enron falling victim to a lack of preparation in this important area of risk. Titans of industry still prevailed by wisely focusing resources into the risk study and eventual creation of (The Force) official ERM practices and procedures. It took another 7 years before another hole was found within a Death Star in the form of the 2008 mortgage crisis. ***Note – I understand the timeline doesn’t match right between the 2 here. I’m just getting your mind to understand the variable assignment. Don’t hate.

The Death Star, however, proved itself with formidable defenses. The hole was carefully guarded by squadrons of TIE Fighters (Lobbyists), Mounted Turrets (Attorneys), and Elite soldiers (Compliance Specialists). Canyons now wind through a seemingly impassible maze…but there’s still a hole, however small and guarded, there is always a hole…

General Dodonna: Well, the Empire doesn’t consider a small one-man fighter to be any threat, or they’d have a tighter defense. An analysis of the plans provided by Princess Leia has demonstrated a weakness in the battle station. But the approach will not be easy. You are required to maneuver straight down this trench and skim the surface to this point. The target area is only two meters wide. It’s a small thermal exhaust port, right below the main port. The shaft leads directly to the reactor system. A precise hit will start a chain reaction which should destroy the station. Only a precise hit will set off a chain reaction. The shaft is ray-shielded, so you’ll have to use proton torpedoes. 

Wedge Antilles (Red 2): That’s impossible! Even for a computer. 

Luke: It’s not impossible. I used to bullseye womp rats in my T-16 back home, they’re not much bigger than two meters. 

General Dodonna: Then man your ships. And may the Force be with you.

To get your mind ready to think, visualize the correlation between the metaphor of the movie quotes and your existing knowledge of ERM systems. If you are having trouble, try to relate it to matters of security, corporate or otherwise. Use any business knowledge that will help your mind identify the important focal points of each side and understand the relations between the 2 concepts.

Admiral Motti: Any attack made by the Rebels against this station would be a useless gesture, no matter what technical data they have obtained. This station is now the ultimate power in the universe! I suggest we use it!

Darth Vader: Don’t be too proud of this technological terror you’ve constructed. The ability to destroy a planet is insignificant next to the potential of the Force.

Star Wars buffs know that Admiral Motti is an officer who is punished at the hands of the resident ERM practitioner very shortly after the words are uttered. An effective ERM system accounts for this variable within it’s formulas to ensure this is the end result, and an effective Public and Media Relations team can relieve the damage by ensuring the weapons of the Death Star are camouflaged within it’s friendly moon shape. The larger the system, the more intimidating it becomes. You must appropriate resources into assuring the acceptance of the system into all existing systems. You want to build a Death Star instead of an Iron Giant.

This is a huge risk to carry, and thus Insurance is placed on results of concept designs, which I imagine are patented, and Texas Hold Em is played by those in control of the resources as to who has developed the best methods of Defense utilizing different combinations of the above mentioned variables, much like several popular strategies utilized in the game of Chess. You can visualize Star Wars Chess if it helps…or even Wizard Chess, but the basics are the same no matter what skin you place on it.

The reason I used Star Wars for this particular explanation is because it’s a widespread and accepted metaphor with which a large percentage of the populace can access detailed enough knowledge to bridge the gap through any misunderstood concepts in order to understand the relationship as a whole.

In comparing/contrasting the relational variables in this metaphor, the Death Star (ERM system) can not contain all possible values of The Force (ERM concepts). There will always be an ability for a Disturbance (Undefined variable) in the Force. In order to succeed, the Death Star needs a system of detecting and categorizing these Disturbances as Bounty Hunter (Vigilante) to incorporate/negotiate with or Rebel (Virus) that must be attacked/defended against. Once categorized, different strategies are implemented against the Disturbance.

In the next few chapters, we’ll review how the variables were effected throughout the Star Wars Trilogy as we know it, and we’ll begin to explore key points that effected the outcome. It is important to examine these key points in order to understand which variables be effected by understanding the effect of it’s outcome on the other points. At some points, the outcome will not matter (quick, who shot first, Han or Greedo?), and at others, it will be difficult to assess the associated risks (If Luke and Leia were switched at birth, what else in the movies would’ve been effected?).

By the time you’re done reading through all of this, you’ll be ready to answer even some of the most complicated ERM-related questions by learning how to relate the common principles to practical usage examples ranging from day to day decisions, pop culture references, and slowly into business case studies. At the end, we’ll come up with some case studies of our own and see which strategies work best in which industries and which variables have the greatest impact on the system as a whole.

For now though, It’s the time between Cinco de Mayo and Mother’s Day so it’s time for siesta. Maybe I’ll use the Terminator for the next part. I’ll be back, haha 🙂

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About Versability

Bank whistleblower
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