Monday, 23 July 2012

Coconuts and subways

Running a business in times of uncertainty can have its benefits

Businesses need to plan for uncertainty; however they shouldn’t be so concerned with predictions. Large firms have scores of economists and statisticians analysing data, busily trying to forecast events. It seems that the more uncertainty is created, the more experts seek to predict. Yet one struggles to see a positive correlation between proliferation and prescience.

A benign coconut event for its founders

Indeed, it is during times of uncertainty that experts begin to get things quite wrong. Public statements from the IMF back in April 2007 reckoned, “not withstanding the recent bout of financial volatility, the world economy still looks well set for continued robust growth in 2007 and 2008”.  By October 2008 this had changed to, “The world economy is entering a major downturn in the face of the most dangerous financial shock since the 1930s”

The IMF is not alone in their flimsy forecasting; individual businesses are equally shoddy. Google for instance tried to sell itself for $1.6m in the late 90s. This would have been a shame, the firm’s now worth around $230 billion.

The credit crunch and the rise of Google are what Insead’s Makridakis calls ‘coconut events’, rather than ‘subway events’. We are terribly good at predicating the latter and hopeless at the former. The analogy comes from a man who predicts how long it will take him to get to work via the subway. The times follow a normal distribution and hence the average journey on any given day can be estimated.

Coconut events by contrast are unpredictable. The same man whilst on vacation is struck by a coconut; such an event is unpredictable like the rise of Google or a major economic downturn.

Humans struggle with this type of event. It prevents key decisions from being made; it can scupper even the most reasonable investment decisions. Hence, we see businesses sitting on piles of cash, factories running at maximum capacity and workers taking on overtime all while the unemployment rate rises and the purchase of new equipment remains shelved.

Yet this is making firms more efficient whilst opening up opportunities for the brave. Since 2008 businesses have been doing more with less and corporate profits have been up at firms like Volkswagen and Pirelli. These companies are supposed to be struggling with Eurozone uncertainty, but instead have used a weak euro to their advantage.

Businesses should get used to it. Rather than trying to predict the future, they should become adaptable. This will happen anyway as those companies which make the investment in spite of uncertainty reap the benefits over timid competitors.

The Eurocrisis can no longer be blamed, it has become the norm; those operating within the zone should look to Germany’s Mittelstand or France’s luxury consumer firms. Sections of the Eurozone economy are prospering.

Forecasting is a mugs game, planning for uncertainty is not. Predicting the next event is fortunately impossible, it is the wonder of free enterprise that it adapts to such uncertainty while the central planned economy flounders. Firms should be flexible and ready to move, rather than trying to anticipate which coconut will fall. 

No comments:

Post a Comment