Optimism in the face of uncertainty
How can proactive risk management strategies help businesses navigate regulatory and economic uncertainties?
Typically, crisis planning involves the management of many sorts of risks. No matter what industry, you should have risk plans in place that are relevant to your industry. Whilst it may not be possible to plan for every eventuality, a risk plan ought to be in place for the challenges you can predict, also called known unknowns.
Firstly, having a risk management strategy is important, even if it is costly to establish because being prepared minimises risk. Secondly, if you operate effectively then changes in economic policy are less likely to drastically affect you. When designing your risk management strategies, commonly, the following steps are useful:
Assess the impact of the uncertain regulatory issue on your firm, then assess your degree of regulatory
uncertainty. Next you should identify your current coping strategies, including a review of their breadth and consistency. Finally, using this knowledge you can devise an appropriate strategic posture. Further potential strategies include:
• Investigation: Collect additional information; draw on professional expertise to be applied in decision making.
• Influencing: Manipulate determining circumstances or actors that constitute uncertainty.
• Stabilisation: Implement standard procedures or establish long-term contracts.
• Integration: Restructure business portfolios through divestitures, acquisitions, and mergers.
• Internal design: Change organisational design by establishing modular structures, low degree of formalisation, or decentralisation.
• Postponement: Defer decisions and wait for more certainty.
• No-regret moves: Execute activities that are advantageous regardless of how uncertainty resolves.
• Substitution: Replace uncertain decision criteria with assumptions derived from comprehensive consideration or detailed analysis.
• Cooperation: Collaborate with suppliers, customers, or competitors, e.g. in research or production; engage in trade associations.
• Imitation: Examine and copy the strategy of your competitors.
• Withdrawal: Exit the business in uncertain markets and focus on predictable environments.
In times of economic distress and change, how can professional services firms assist in maximising value while minimising disruptions?
Typically, the size or structure of a business will dictate how to minimise disruptions. In a large firm, there are greater resources, whereas in a smaller firm, there is greater scope to react quicker to change. The ability to modify an organisation’s business model as a consequence of a crisis is called antifragility.
The issues to consider include being flexible enough to enable change where necessary. As an example, smaller businesses tend to be able to address change promptly because they can make faster decisions, with potentially better results. Larger businesses have a larger bureaucracy but may have greater resources to enable experienced person to make prompt decisions. To make the best decision, it is important to have strong and decisive leaders.
Also, embracing technology is key in any business, large or small. During COVID-19, shifting quickly to online + digital services was vital to survival.
How can clients approach the risk of uncertainty and turn it into opportunity?
In general, risk and uncertainty are different concepts. On the one hand, risks are generally known unknowns,
whereas uncertainty deals with unknown unknowns. Being flexible and optimistic enables one to have the best mindset, which involves thinking “how can maximise this opportunity?”, rather than “how do I minimise this risk?”. In this respect:
Firstly, human resource management is critical, you should make sure the person who can create the most value is on the project/task.
Secondly, it is critical to make sure that your business is generally aligned with customer needs.
Thirdly, knowledge is always key and therefore overconfidence needs to be avoided.
Fourthly, it is wise to underestimate the value of any kind of knowledge gained from previous experience.
Fifth, having a proactive risk management strategy is also an effective way to know how a situation should be handled.
The real issue is failing to embrace uncertainty and subsequently failing to innovate, which can lead to failure. History is littered with examples of businesses failing to take risks and thereby missing out on opportunities – for example, Kodak missed the opportunity to invest in Instagram when available, while Yahoo passed up the opportunity to buy Google for $1 million in 2002.
Key Takeaways
- Developing a comprehensive risk management strategy helps businesses navigate uncertainties by minimising risks, adapting to economic changes, and leveraging tools like AI. Effective strategies include assessing regulatory impacts, adopting flexible structures, and employing techniques like stabilising operations or diversifying portfolios.
- Flexibility, decisive leadership, and embracing technology are vital for mitigating disruptions, especially during crises. Smaller firms can quickly adapt due to agility, while larger firms benefit from extensive resources. Antifragility—modifying business models during crises—ensures resilience and growth.
- Viewing uncertainty as an opportunity fosters innovation and growth. Aligning with customer needs, leveraging human resources effectively, and learning from past experiences can uncover new opportunities. Failure to embrace uncertainty risks missed innovations, as seen in Kodak and Yahoo’s missed investments.
This is James Conomos' submission to IR Global's 'The Visionaries'. Read the full publication here.
