Monday, March 3, 2014

The Halo Effect and uncertainty in Business

Just finishing up The Halo Effect by Phil Rosenzweig this morning and now will pass on a point he made. 

The point I want to talk about is one that I think a lot of folks do not consider and it is the fundamental uncertainty that is the world of business. As Rosenzweig states “People want the world to make sense, to be predictable, and to follow clear rules of cause and effect.” 

As my old daddy use to say “Ain't goin' happen son.”

Business owners and managers want to believe the world in which they operate is predictable and that an action on their part will lead to a known outcome. This is human nature. The problem is that all decisions are made in an uncertain world and in an uncertain world many things conspire to change the outcome of a decision. In the economic world nothing is more uncertain than the customer. Will the customer embrace or reject a new product? Who would have ever thought that people would buy Pet Rocks? Now if a business owner can anticipate what the customer wants or needs you would think a business will make money and not have to make many new decisions about production. This would be true if the business owner does not have to contend with the actions of new and old producers in the market place. Stability in the market place means that new producers will enter the market when there is a profit to be made and this will drive the price of the product down until the utility margin is reached.

Another source of uncertainty in the market place is technological change. Now some businesses are relatively stable, meaning that the business owner/manager does not have to change the product much (how much can you change toilet paper? Producers leave it to the ad folks to convince consumers that their toilet paper is better than the others, yuck, how would you like to have that job?) and that customer demand remains relatively steady. Technological innovations can make a shambles of the decisions that a manager has made. (What happened to those businesses that built and serviced tube type radios and TVs?)

All this leads us to the conclusion that making decisions in the business world is a gamble. The manager must gather accurate information, carefully analyze that information, and make decisions on what he or she knows. This will improve the odds of success but will not guarantee success. This is just a bet that the owner/manager is making and if the bet pays off then the owner/manager wins (and pulls in the "big bucks") and if it does not pay off then those same folks will be looking for a new job.

As Robert E. Rubin wrote in his memoirs, “Once you’ve internalized the concept that you can’t prove anything in absolute terms, life becomes all the more about odds, chances, and trade-offs. In a world without provable truths, the only way to refine the probabilities that remain is through greater knowledge and understanding.”

And as Phil Rosenzweig points out “Wise managers know that business is about finding ways to improve the odds of success—but never imagine that it is a certainty.”


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