How do businesses deal with uncertainty effectively?

Man in suit displaying business uncertainty

Any entrepreneur will be able to tell you that managing a business of any size comes with a sizable amount of uncertainty. Even with substantial planning and risk management, sometimes issues arise that are seemingly out of our control. This uncertainty is a natural part of any entrepreneur’s journey, but how businesses deal with this uncertainty is often what separates a good entrepreneur from an average one. Plus, with the current issues of both Brexit and COVID-19 proving to be perhaps some of the biggest examples of business uncertainty the UK has seen, understanding how to navigate it has become more important than ever.

What is business uncertainty?

In its simplest form, business uncertainty is any event that a business is unable to predict or directly influence which may lead to negative outcomes as a result. While similar, it is not to be confused with risk, as the two concepts do differ.

These differences highlight that while risk can be difficult to navigate for an entrepreneur, navigating business uncertainty is even more challenging. Risk can be measured and analysed, allowing you to make an informed decision before acting. Business uncertainty, as we define it, provides no such luxury, as no entrepreneur can prepare for an event they do not foresee. 

Furthermore, risk comes with the freedom to decide whether to act upon them or not. An entrepreneur of a tech company has an option to begin investing in a new piece of technology that could make their product more efficient. When business uncertainty presents itself, such as we have seen with COVID-19, the tech company entrepreneur has no control over whether or not they have to face the many challenges it poses.

Understanding the types of uncertainty in business

There are plenty of examples of business uncertainty we have been able to identify over the years, yet what has become clear is that despite their unpredictability, there are certain factors present in them that can help us better group and understand the types of business uncertainty that can occur:

Extreme uncertainty

Much like the name suggests, extreme uncertainty occurs when an event poses significant challenges for a business where numerous factors are uncertain and particularly difficult to effectively measure. An event that is difficult to measure in terms of its length, magnitude rate of change is therefore often referred to as extreme uncertainty due to the multiple layers of uncertainty it poses. 

Extreme uncertainty is also defined as an event that results in businesses unable to return to their standard ‘business as usual’ for a sustainable amount of time. Perhaps as no surprise then, COVID-19 has proven itself to be one of the biggest examples of extreme uncertainty businesses have faced in modern times. 

Generated uncertainty

Generated uncertainty can best be understood as uncertainty that emerges as a direct result of an external action taken by an individual or group of people. In the vast majority of cases, these actions are largely the results of decisions made by leading parties or administrations of a particular country. 

One of the most recent examples of generated uncertainty is that of sanctions imposed on certain firms (such as Huawei), specific industries (such as the oil and gas in the case of Russia), or even entire countries, with the United States’ sanctions on Iran under the Trump administration in 2018 being one of the most recent examples. The sanctions, which largely reduced the ability of Iran to export oil to other countries, naturally created a degree of uncertainty for the oil and gas sector, with spillovers to all sectors and businesses as a direct result of the sanctions imposed and the reduction in the government finances and household incomes.

Political uncertainty

The inability to consistently predict how government policy may change and potentially impact your business as a result is at the centre of what is known as political uncertainty. A particular change in policy could have unforeseen consequences for business, leading them to need to adapt as a result of the unforeseen change.

America’s government shutdown, such as the one seen in December 2018 is a prime example of political uncertainty which led to all non-essential businesses unable to operate for 35 days. Here in the UK, the continued changes to Brexit and the uncertainty surrounding it has long proven itself as a consistent example of political uncertainty.

Another source of uncertainty experienced between January 2017 and January 2021 was President Trump and not just through traditional policymaking and diplomacy, but also through tweeting! As expected his tweets were scrutinised very closely by the markets. 

In fact, when it comes to global oil markets he was the new “swing factor”. Although his oil tweets (see graph below) were typically written early in the morning, they tended to have temporary effects on oil prices but potentially lasting impacts on relations with major oil producers, most of which are very close trading partners.

Here are some examples of the competing policy objectives of the Trump administration on the oil market:

  1. Geopolitical agenda: sanctions on Iran, with the intention of reducing Iran’s oil exports to zero barrels, and therefore removing around two percent of global oil production from the market and putting upward pressure on prices. But it has not always been clear when the administration would impose the sanctions and a number of times the administration has in fact reversed policy (by, for instance, issuing sanctions waivers, which the market did not expect), thereby exacerbating uncertainty; 
  1. Domestic political agenda: having low American petrol prices (for election purposes, especially the 2018 U.S. elections) but at the same time ensuring the success of the U.S. oil and gas sector, in particular shale oil (and gas), which currently requires a breakeven price of around $46-$52 (see Figure 4); and
  1. Trade wars with China and the EU, see how other G7 leaders react to Trump’s policies during the 44th G7 Summit in June 2018 in Figure 5. The trade wars create general uncertainty, potentially putting upward pressure on commodity prices (and other goods too). 

While we have focused on the oil market here, President Trump’s competing policies objectives in almost all policy areas generated enormous uncertainty, with serious implications for all economies, potentially depressing investment opportunities and domestic demand.

Financial uncertainty 

While business uncertainty by design makes it more difficult for a business to turn a profit, financial uncertainty involves uncertainty that is explicitly tied to unforeseen changes in the financial sphere.

The biggest example of financial uncertainty in recent times is that of the global financial crisis of 2008. With a shrinking economy,  many businesses were forced to shut down due to an inability to successfully navigate financial uncertainty, resulting in wages falling in real terms and mass unemployment.

Business uncertainty & COVID-19

Of course, it is impossible to talk about business uncertainty without discussing the lingering business uncertainty the UK and the rest of the world currently faces as a result of COVID-19. While it is undoubtedly the biggest example of business uncertainty in recent history, looking at its impact can help us understand why and how some businesses have dealt with the uncertainty it has brought.

The first thing to understand is that while COVID-19 has undoubtedly impacted every industry and business to some degree, it has become clear that many have fared far better than others. One only has to look at the manufacturing sector to see how it has continued to grow despite COVID-19, with China in particular seeing massive growth, with its output in robots, computer equipment and integrated circuits up 22.2%, 10.1% and 15.9% respectively.

While this increase is partly fueled by an increase in demand for these sorts of goods in a world where most people are confined to their homes, it’s also important not to underestimate how the manufacturing industry was more easily able to adapt than others. Social distancing for those in manufacturing was a challenge, but not such an impossible one it had a negative effect on output. Compare this to the service industry, where social distancing in most cases proved almost impossible, and it becomes clear that a large part of why some businesses are able to deal with uncertainty is that they are simply in a more advantageous position to deal with the challenges posed.

Of course not everything is entirely down to luck. Even on a seemingly even playing field, businesses during COVID-19 have proven ways of dealing with uncertainty well have led to huge successes.

Perhaps the biggest example is that of video communication program Zoom, which rose to become the video platform of choice for millions of users around the world. Prior to the pandemic in December 2019, the platform had at most 10 million daily users. Fast forward to today, and the platform boasts more than 300 million. How did it become the platform of choice in the face of big competitors such as Microsoft and Google?

While there is much debate on the matter, many people agree it was down to Zoom quickly positioning itself as the simplest platform of choice. While Microsoft’s Skype was continuing to offer new features such as bitmojis alongside a new redesign, Zoom still proved to be the more reliable platform when it came to actually wanting to set up a good quality video call quickly and easily. Google didn’t fare much better with the need to create a Google account to access it’s services. Meanwhile, Zoom was allowing users to join meetings simply by clicking a provided link.

What does this tell us about how businesses deal with uncertainty during COVID-19? Ultimately, it comes down to the most fundamental need of a business – to identify a problem your customers face and provide the simplest solution to that problem. Businesses that could already solve the new problems people faced as a result of COVID-19 have shown to fare far better. Those that were unable to pivot to meet these needs, end up losing out, much like Skype did.

The uncertainty brought about by COVID-19 has forced many businesses to pivot, and those that were able to spot the opportunity to do so were quick to reap the rewards. 

The biggest example of this is how many businesses pivoted to creating hand sanitizer, such as those in the alcohol industry. Brewdog and many others used their access to distilleries to help create the product that has continued to be in high demand since the beginning of the pandemic. 

What is important to note is that in most cases, the hand sanitiser created was not sold for profit, instead being given to hospitals, charities and others in need. The decision to focus on positive publicity over profit could be seen as a risky one but one that is likely to pay off. Consumer confidence in Brewdog is seemingly up at the time of writing, with the company currently raising almost £18 million as part of it’s new investment programme.

Businesses able to spot these opportunities are naturally able to fare far better when faced with uncertainty, but it’s important to note that even with the leadership of an experienced entrepreneur who is able to spot opportunity, some businesses, like those in the service industry, are extremely limited in their options. Some pubs and bars are able to operate with a strict takeaway policy to allow for some business, while others such as hairdressers are almost entirely reliant on government grants to stay afloat. 

How do businesses deal with uncertainty?

With that said, the success of a business during times of uncertainty is not solely down to being in the right business at the right time. While it is true that business uncertainty by its very nature is unpredictable, that’s not to say entrepreneurs cannot spot long term trends that can allow them to better position themselves when uncertainty does arrive. 

In regards to COVID-19, the UK entered lockdown on 23 March 2020. For many businesses, that was ultimately the start of their journey to dealing with the uncertainty it would bring. Yet a lockdown could have been seen in Wuhan two months prior on 23 January. Businesses who were able to begin designing processes and solutions should a lockdown happen in the UK were ultimately far better off when it did occur compared to those who did not. 

Another important aspect of how businesses deal with uncertainty is understanding that failure is part of the process. Many businesses fail to realise this and instead of seeing it as a learning opportunity to help create something even better next time, see it only as a setback.

Many businesses are also apprehensive to share their failures, with many still even more so when it comes to sharing how they have made their successes. Only by sharing ideas with others can innovation occur and with innovation comes greater ways of combating uncertainty. 

What’s next for business uncertainty?

COVID-19 and Brexit are undoubtedly our most current examples of business uncertainty, this hasn’t stopped entrepreneurs looking to the future to try and predict and plan for what the next case of extreme uncertainty might be.

While we have taken great strides in taking a more environmentally friendly approach and sustainable way of living, the issue of climate change continues to be a pressing one, with many predicting that it will be the next global extreme uncertainty entrepreneurs and businesses around the world will have to face.

At least 7% of global GDP is likely to vanish by the end of the century unless action is taken. United States, Japan, India and New Zealand lose 10% of their income. Switzerland is likely to have an economy that is 12% smaller by 2100. Russia would be shorn of 9% of its GDP, with the UK down by 4%. 

In 2020 the UK had its hottest day on record (recorded here in Cambridge). Train tracks buckled, roads melted, and thousands were stranded because it was out of the norm. Such events take an economic toll, and will only become more frequent and severe without policies to address the threats of climate change.  With the risk of droughts, floods and far colder winters, climate change poses a real issue for supply chains which face mass disruption as a result of the changing climate. In recent years we have experienced very cold winters and large amounts of snow, with severe implications for the economy and almost all sectors. Consumer spending falls (households may delay shopping or even cut from spending owing to higher heating costs or home-repair expenses); supply chains are interrupted; and construction projects are delayed. In a survey conducted by AT&T, only 38% of businesses surveyed said they had taken steps to help then tackle climate change events that could impact their business, highlighting that while some are prepared, many may still repeat past mistakes and wait until it’s too late to act.

Business uncertainty has shown us we can’t always predict what the future might bring. But that doesn’t mean we can’t take steps to be better prepared for when uncertainty does undoubtedly arrive.

About Kamiar Mohaddes

Kamiar Mohaddes is an Economic Research Forum Fellow and serves as its Thematic Co-Leader for the macroeconomics theme. He is also an Associate Researcher at the Energy Policy Research Group at the University of Cambridge, an Associate Fellow of the USC Dornsife Institute for New Economic Thinking, a Research Associate at the Globalization and Monetary Policy Institute at the Federal Reserve Bank of Dallas, and a Research Associate at the Centre for Applied Macroeconomic Analysis at ANU in Australia.

Kamiar teaches Managing and Assessing External Constraints in the MSt in Entrepreneurship programme.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.