“No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all of your decisions are about the future.”
— Ian Wilson, GE Planning Executive
The future is fundamentally uncertain. We may think we know what will happen in the future, including tomorrow, but until that future is here, we can’t know for sure. Further, when the past doesn’t change much, it is easy to think it never will. Until, that is, what happens today is no longer what happened yesterday.
Today’s newsletter is about taking this fundamental uncertainty into account in the way you run your business. Some suggestions…
Get Fast Feedback and Act from There
Make sure you are continually monitoring the key drivers of your business, both internal and external, so you know and react quickly.
On the internal side,
I have written before
about the importance of closing the books fast so that financials can be reviewed and adjustments to operations made quickly. But other key internal metrics should be tracked on a timely basis too.
Many years ago, I was in the corrugated box business. It was a volatile industry, with rapid swings in costs because the key input, container board, had unstable pricing. Back then, and despite having a paper general ledger system,
the books were closed by the morning of the third day after month end, the financials were reviewed, and a forecast for the next two months was prepared. By the end of the day, the trial balance was transmitted to corporate by way of
Telex (like I said, it was many years ago!).
By the fifth day after month end, a detailed report was prepared and reviewed by the entire management team. This report showed detailed financial reports, plant productivity reports, inventories, and all key statistics to run the business. The data for these key metrics was collected daily, validated, and then daily and weekly tracking reports were run. If all of this could be done in the days of paper, Telex, and Selectric typewriters, there is no reason not to be doing it today.
As for external data, that too should be examined on a timely basis. For example, when I worked for Kraft Foods, we tracked the market for our key ingredients. For my product line, that meant soybean oil, so I constantly monitored the cash and futures market for soybeans and its two end products — soybean oil and soybean meal. We also had outside data that tracked market share, competitor ad spending, and consumer trends. All of this was reviewed quarterly by senior management in a process known internally as the “brand review.”
Continually Solicit Contrary Information
Much of this will come from the deliberate process of getting out and about: trade shows, industry forums, and more.
For example, during the Great Recession, Wall Street said it was shocked by the blow up in residential mortgages. My industry wasn’t. Early on, we had heard the tales of people with small, undercapitalized businesses flipping houses. By way of a no income mortgage, they would buy houses with lots of debt and keep flipping them as housing prices rose. Common sense said this wouldn’t end well.
But then in 2007, I attended a meeting that discussed the rating process for the securities backed by these mortgages and how these securities were sliced into tranches. Basically, the top slice was rated prime, because all lower slices had to be wiped out first if there were a wave of defaults. The early generation of these securities performed well. And the rating agencies used that early experience for all subsequent generations of similar securities. The problem, readily visible with standard industry data, was that each year of new issuance led to a higher default rate. Investors and the rating agencies either ignored or didn’t look for this type of data.
Be Mindful of Confirmation Bias and Other Mind Traps
As I have discussed
previously, confirmation bias means
focusing on information that confirms our existing beliefs — and rejecting data that goes against them. In the mortgage industry example, Wall Street focused on what it wanted to believe, as did my industry. It took another two years for the mortgage crisis to happen.
Build Flexibility into Your Business
Since the future is fundamentally unknown, it’s essential to build wiggle room into how your business operates. Look at multiple vendors and supply sources. Operate in more than one location with different labor markets and access to needed materials. Diversify your customer base and maintain financial flexibility.
Last year, I was talking to a friend who is the product manager of a small product line in a very large company. Production had stopped on his products because the company lacked a key ingredient. It was sole sourced to a plant in Texas that had been shut down by the freak winter storm. Apparently, his company purchased $2 – 3 billion a year of this material from just one plant!
Flexibility applies to your choice of customers as well. Yes, having a tight customer focus is helpful, but
customer concentration can be dangerous. The more customers you serve, the less any one of them can negatively impact your business with a sudden surprise. Additionally, the more your customers are spread across different markets, the less vulnerable you are to unforeseen changes in their businesses that may have an impact on yours.
Final Thoughts
Nearly 300 years ago, Voltaire famously observed that, “Doubt is not a pleasant condition, but certainty is absurd.” In that regard, little has changed.
Expect the unexpected. Embrace and respect the uncertainty of the future. Pay close attention to what can be known today so that you can minimize the unknowns of tomorrow. Above all, keep your business model flexible, so that you have space to adjust to the next, inevitable, surprise.
