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Essentially, if you have people following you then you are a leader. You might have staff who report to you, colleagues who look up to you, children who depend on you, or a sibling who shadows you. The same is true for organisations – our staff, our investors, our customers, and sometimes even our suppliers are all groups that we must lead.
They may listen to us for pragmatic reasons, i.e. we pay them, we sell to them, we teach them, but they follow us because we navigate two storms for them: risk and uncertainty.
Risk and uncertainty are not the same things, and we can choose to specialise in one that better matches our capabilities and strengths.
Risk is NOT Uncertainty
In 1921 Frank Knight distinguished risk from uncertainty in his famous work Risk, Uncertainty and Profit. Risks are ‘known unknowns’ – things that can be measured. Think of it like scaling a mountain. The mountain can be measured, a route can be mapped, exact equipment can be prepared.
Uncertainties cannot be measured - they are ‘unknown unknowns’. Imagine building a mountain. Nobody can measure that mountain until after you have built it.
Aldi Faced Uncertainty but Kaufland Faced Risk.
German discount supermarket (similar to Aldi) Kaufland recently tried to enter the Australian market. Interestingly, they pulled out of Australia before opening a single Kaufland supermarket but after purchasing many warehouse and retail locations around the country, including a $459 million distribution centre in Melbourne that was already under construction. Aldi entered Australia in 2001 so there was 19 years of data for Kaufland to analyse and model their market entry on a very similar rival’s (Aldi’s) experience.
After weighing the risks they decided in 2020 that it was wise to cancel the entry, sink the costs and focus instead on their local (German/European) business. This development stunned many because it was a decision seemingly made on no [trading or performance] data but the reality is that Kaufland was bearing risk with their go-to-market plan and could - using Aldi’s history - accurately measure and project market share, penetration rates, sales etc.
Aldi on the other hand was launching into a long-held duopoly (Woolworths vs Coles) with the prediction that Australian consumers would embrace a discount supermarket chain on a national scale. There were localised successes such as Franklin’s but Aldi was facing uncertainty and needed to trade for a number of quarters or years before they had enough data to measure the ‘mountain’ they were creating. Unfortunate for the naysayers in 2000 who predicted Aldi’s failure, today we can measure Aldi’s market share to be a sizeable 12.4%.
Tesla Faced Uncertainty but Legacy Car Manufacturers Face Risk
Tesla created an entirely new segment with the invention of the Model S and the PowerWall. Sure, electric cars and solar energy storage pre-existed Tesla but only in experimental and extremely niched products. No one believed that Tesla was going to succeed:
Bank of America is predicting a massive Tesla collapse (Business Insider 2015)
Why Tesla Won’t Be Able To Scale (Harvard Business Review 2015)
The Future of Electric Vehicles Is Golf Carts, Not Tesla (Harvard Business Review 2015)
"Disruption from electric vehicles is coming, but it won’t announce itself with high-profile product launches or flashy products. Instead, it’ll drive retirees (slowly) to and from bingo."
Tesla’s Not as Disruptive as You Might Think (Harvard Business Review 2015)
Legacy auto manufacturers such as General Motors and Porsche are now entering the electric vehicle market in volume but only after 8 years of Tesla’s success with the Model S (introduced in 2012). Whilst Tesla faced uncertainty that there would be a mass market for EVs, GM and Porsche receive the benefit of Tesla having navigated through that uncertainty.
There is a market for EVs.
Now, GM and Porsche (and soon Volvo) face risks: what will it cost to compete with Tesla? How much will electrifying their range cannibalise petrol vehicle sales? What percentage of EV buyers would purchase a GM-produced EV and what percentage of GM buyers would convert to an electric vehicle?
These are all quantifiable and mostly measurable risks. It seems we have great difficulty forecasting uncertainty but are quite comfortable managing risk.
Projections vs Predictions
You can make projections when dealing with risk. The Latin word proiectus (‘project’ by 1718, ‘projection’ by 1865) means to ‘stretch out and throw forward’. Projections are about measuring the present and the past, and then extrapolating that data forward into the future. Models (climate, economic, etc) are built on projections.
You can only predict around uncertainties. The Latin word praedicere (‘prediction’ by mid-16th Century) means to give notice of something coming, to foretell. Predictions are more about seeing the future and pointing to it. Predictions therefore are much more reliable when in the near future. Beyond that, there is too much uncertainty and predictions unravel – far safer to switch to projections and the models they form.
The Australian Government understands this: in a budget, they give ‘forecasts’ (predictions) for years 1 and 2 but for years 3 and 4 they give mechanical ‘projections’.
This means that uncertainties may be preferable in the short term (but not in the long term) because they involve making judgements and predictions. This allows a more specific and offensive strategy, whereas risk management is essentially the management of probabilities…a more defensive game that can be useful over the long term.
It also means that predictions are often more subjective because they lack the data to be objective - like projections. Most strategic business decisions are predictions, not projections (despite what we might label them) and the lack of data is unavoidable because nearly all business situations are so unique as to be in the realm of uncertainty, not risk. This is why business advice is rarely ubiquitous – there are too many exceptions for each unique business scenario.
Converting Uncertainties to Risks
The advent of big data has made everything more measurable. Take a simple example: a CBD café is deciding whether to open on weekends. You could analyse weekday traffic and extrapolate into the weekend but that wouldn’t make sense when most city workers stay home on weekends. This is a question framed in uncertainty and you could only predict an outcome before committing to the first weekend.
Thanks to Google we now have real-time and historical visitation data that shows wait times, visit duration and business for businesses.
The café could check every business (café or other) in the surrounding blocks and see what kind of traffic they experience on weekends. Is it 50% of weekday traffic? Does traffic peak later in the day because people sleep in on weekends? This data transforms the decision from an uncertainty to a measurable risk that can include projections.
When large news corporations like the BBC decide how much to invest in social media, it would have been nothing but uncertainty and predictions back in 2010. But in 2020 we have data that shows publishers receive about 15% of their traffic from social media, most of that Facebook, and the trend is flat or declining from 2015-2020. Suddenly, it’s a calculable risk.
Insurance companies convert uncertainty to risk all the time by aggregating uncertainties (many individual policies) into a statistical probability derived from a large sample size. A life insurance company may never receive an accidental death claim from me so what is the probability of profit or loss on my policy? It’s uncertain. But aggregate 10,000 policies and suddenly patterns emerge and perhaps there’s a 0.5% risk of a claim in any policy.
We usually call these conversions ‘de-risking’ but in reality, we are swapping uncertainty for risk which is more manageable in traditional business thinking.
Do Risks Ever Become Uncertainties?
Projections and models assume constants or averages over long time periods to make reliable forecasts, but those projections must be revised periodically because the world we live in does not like constants.
Even cyclical phenomena have random variability and that has accelerated since the industrial age. Technology now disrupts our world constantly, shipwrecking even the most historical of projection models. Many a product manager has come undone by shifting market sentiment or technological leaps by competitors.
We no longer live in a world of risks; it is a world of uncertainties and so:
the best way to predict the future is to create it.
Instead of seeking to convert uncertainty to risk and then manage it, it might be better to manage uncertainties directly.
In Intellectual Capitalism, Dale Halling argues that creation and invention are now the only ways of growth, and populations that do not create, decline. So, discovering opportunities (managing risk) might present valuable occasions for profit, but the trend overall is toward creating opportunities (managing uncertainty) despite the advent of big data pushing in the opposite direction.
What are you more suited to?
Still, some businesses and leaders are simply better at risk-management than uncertainty-management. It is after all, the goal of every good business leader to apprehend, minimise and overcome risk. On the other hand, the archetype entrepreneur who dives from opportunity to opportunity is probably more comfortable with uncertainty (hello Elon Musk!).
Some business opportunities are inherently risky (discovered opportunities) and some are inherently uncertain (created opportunities). Neither opportunity source is preferable, except that which suits you/your organisation’s personality, capability and strengths.
This table compares the profiles of Risk vs Uncertainty in business management:
Business opportunities only come in two forms: those that are discovered and those that are created. Discovered opportunities require a business to carry risk (left column). Created opportunities require a business to carry uncertainty (right column). Which matches your resources?
People gravitate toward one type or another because of their natural skillset, or organisational resources/culture. For a deep dive on how to find ‘discovered’ and ‘created’ opportunities see discernable.io/opportunities.
Aligning the type of opportunity pursued to resources available prevents failures such as the Facebook phone: Facebook is much better at creating opportunities (managing uncertainty) than discovering opportunities (managing risk) and making a copycat ‘me too!’ phone was not a good strategy firmly in the realm of risk management in an established market.
Leading in Uncertainty vs Risk
Do you like unknown markets and are you comfortable with ambiguity? Or do you get a thrill from finding and unlocking value that other people don’t see?
Are you analytical and thoughtful in your approach? Or are you charismatic and persuasive?
Instead of trying to be:
more analytical and thorough for a risk-management leadership role; or
more persuasive for an uncertainty-management leadership role,
try to select positions, careers, markets, and niches that come logically and naturally to you and your organisation. Looking at the table above, it is likely that one column excites you more than the other.
A Personal Comparison
My wife and I have started, run, sold or closed many businesses over the years. There has been:
a medical clinic;
a graphic design agency;
a migration law firm;
a food import/manufacture businesses;
an online teaching business;
a horticulture business;
a homewares retailer;
a rental car business;
a buy/sell arbitrage business; and
a music school.
The businesses I start invariably focus on uncertainty-management, like a medical clinic that launches DNA testing in the early days when nobody knew if it would be popular, or a niche food manufacturer that sells special nuts at 5 times the normal price. The jobs I’ve had are also focused around uncertainty – new market entries, innovations in robotics, A.I. and clean energy.
My wife’s businesses, however, are always about finding arbitrage opportunities where profit can be made: building supply chains where there is a lack of product availability or simply providing products and services in environments where they are traditionally too expensive. Her businesses were always easier to model and project risks vs rewards.
The end result is my ‘uncertain’ businesses have been more successful but my success rate has been far lower (I have many failures). Her ‘risky’ businesses might not strike it big but they are nearly all profitable.
Which is better?
Neither. The problem only arises when we try to act contrary to our strengths and resources. For example, I’d be better at early ALDI than early Kaufland. Do what comes naturally!