Remember the economic meltdown (almost) of eight years ago? Two buzzwords came to the fore at that time. One was “systemic risk”, the risk that applies to an entire sector or domain; in this case, the global economy. The other one was “too big to fail” (TBTF) or TICTF referring to any entity that could by its own failure cause systemic failure. Thus, American investment bank Lehman Brothers was “too big to fail”.
However, fail it did, triggering a financial crisis worldwide. However, rather than TBTF, another measure known as TICTF may be a smarter way of understanding which measures for resilience you should be taking.
Interestingly, TICTF (Too Interconnected to Fail) was also the measure preferred by the US government in many cases, when deciding whom to help financially.
The impact of a “TICTF” enterprise is measured in terms of the products and services supplied by that enterprise, plus all other activities that depend on that enterprise, plus the exposure of the enterprise to other systemic risk.
By comparison, TBTF is measured according to the size of an enterprise, its market share and the ease of finding substitute products or services.
TICTF goes further, in the sense that it obliges you to trace out the ramifications and their effect on resilience, rather than stopping at size, share and substitution.
The same concepts apply to individual enterprise resilience as well. Reputational damage can be seen as a kind of systemic risk with connections to the market, suppliers and the administration.
That makes reputation “TICTF” for most enterprises, and explains why they go to such pains to protect it. Systemic risk has another important characteristic.
Diversification to mitigate the risk is not possible, at least not within the sector or domain presenting the systemic risk.
You have look outside the sector if you want to diversify, which naturally is a difficult proposition when the global economy is concerned.
Otherwise, take a leaf out of ski manufacturers who, faced with the systemic risk of lack of snow, have often diversified into manufacturing sports equipment for other seasons, such as tennis rackets.