Long tails and black swans, I think there is a lot in these concepts to understand portfolios. I think it gives us a tool to use portfolio value distribution shapes as one criteria to guide decision making. Most of us are aware of using monte carlo and real options analysis methodologies to assess project value, which we then bring together into portfolio views to asses relative risk, total risk and value, usually looking at some sort of normally distributed portfolio value. I think there is something in these distribution shapes that we need to start paying attention to.
In financial risk management big financial institutions have started looking into these long tail or black swan circumstances to better understand downside risk and have better value at stake numbers. We, innovation people, deal with growth management and hence more with identifying portfolio opportunity, meaning that upside potential is more important for us to identify than downside risk. This is due to the fact that our downside risk is usually relative low compared to say financial industry, where a long tails may cause losing it all instead of just losing R&D investment and maybe losing growth.
However, long tails are not only about downside potential, additionally they are sources for tremendous opportunities, since they represent things that are very unlikely to happen but if they do they have significant consequences. Unfortunately, our standard balanced portfolio concept (as well as the way we evaluate projects) has a tendency to drive the portfolio into a normally distributed shape, consequently missing all the long tail opportunities. We can all agree that most of the transformational opportunities are in these long tails, and they represent things that all business leaders want to capture. The question is how do we find, assess, manage and communicate these in our portfolios?
There is a great presentation on innotiimi site on these long tail innovations that cause trouble in our portfolios. http://innotiimi.wm.fi/dokumentit/0811260300_black_swans__radical_innovation.pdf
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This is excellent stuff, ofcourse. It would be great if we could develop a concept to search for the long tails. I was just at PulPaper 2010 exhibition and that industry just waits for the "miracle" long tails to happen. All other development seems to have too little potential. I also think that there might be long tails both sides. If you just preserve there is a small change that the whole business collapses (no paper used, trees die, all growth of trees used for energy...)
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