smallbusiness.co.uk: Helping your business think big

The uncertainty we all face has been exacerbated in recent years by, among other things, globalisation and the growing interconnectedness of the world. These factors have contributed to the impact of ‘black swans’ as described by Nassim Taleb in his excellent book The Black Swan: The Impact of the Highly Improbable.

The term ‘back swan’ is derived from the previously held assumption that 'all swans were white' until the discovery of black swans in Australia. The concept is not a new one, in economics, such black swan events are known as outliers, in that they sit outside the range of typical occurrences spread around a mean. So what defines a black swan event?

As Taleb describes it, the probability of occurrence of such events is low (based on experience), but when one does come along the impact is significant. Given the rareness of the event, it comes as a complete surprise although after it happens it seems 'inevitable'. While some black swan events are largely positive (the invention of the internet or penicillin), many more are negative (9/11, a Tsunami).

So where does all of this fit into planning? When it comes to running a business, I believe the following measures can be effective for coping with uncertainty:

Minimise downside risk exposure  

All managers should encourage in-depth risk assessments so that risks are managed where possible, be it through the use of insurance products or strategic moves, such as reducing reliance on one key supplier.

Ensure planning processes are in place

Business planning and scenario planning need to happen more frequently within companies. Similarly, strategic analysis using models such as Porter’s Five Forces and SWOT (strengths, weaknesses, opportunities and threats) analysis models need to occur more frequently than has traditionally been the case.

Build up a cash buffer

In uncertain times, it is best to convert stock and debtors into cash as quickly as possible. Increased defaults and growing numbers of companies becoming insolvent mean that all companies are increasingly vulnerable to bad debts. The old adage ‘cash is king’ is particularly important in uncertain times.

Encourage long-term planning

Businesses typically focus on a one to two year planning horizon. However, some emergent trends take time to diffuse throughout a market niche, so it is important to assess the likely impact of current trends on future consumer behaviour. For example, companies creating digital products will be affected over the medium term in various ways by the growth of mobile devices; the price collapse of CDs as music and video users migrate to DRM-free MP3 downloads, etc.

Knowledge is power

Businesses need to adapt quickly in such fluid environments. Smaller, more nimble companies will benefit, provided they are able to take advantage of obvious emergent trends in their sectors before larger incumbents have time to react. Given the speed with which information disseminates in the internet era, management need to be aware of developments which will impact their business.

Flexible pursuit of emergent opportunities

Black swan events trigger winners and losers. For example, in the case of the recent swine flu outbreak, there were a number of beneficiaries. As Jacqueline Berry, spokeswoman for 3M (who make face masks), claimed, 'We have increased our production, which includes adding shifts and increasing the number of manufacturing lines to meet demand.' Similarly, Roche, maker of Tamiflu, have seen a huge increase in demand for its flu drug. Companies need to remember that changing environmental conditions also bring opportunity and hence, businesses need to ensure that they are adaptable to meet these changing conditions.

Encourage innovation

Entrepreneurship and innovation should be encouraged; provided the downside risk is managed, the learning alone will be highly beneficial. Similarly the disciplining effects of a downturn help ensure that resources are not squandered as easily as in boom times.

Any entrepreneur worth their salt knows that risk is any inherent part of running a business – you can’t plan for everything. By definition, black swan events are difficult to predict; however, business owners should at least prepare for as much as they can so that when the next black swan event does occur –  good or bad – they are better placed than the competition to deal with it.
 

Alan Gleeson is the General Manager of Palo Alto Software, Ltd, creators of Business Plan Pro® 11.0. He holds an MBA from Oxford University and an MSc from University College, Cork, Ireland. For further information on business planning visit www.bplans.co.uk  and www.paloalto.co.uk 

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