Uncertainty — the key to profitability?
Updated: Jan 9, 2021
During this time of business uncertainty, it can be helpful to look back at observations written during the previous economic crisis to see what we might learn.
A Harvard Business Review article, titled Embracing Uncertainty Rather than Whining About It discussed a timely point raised by economist Frank Knight in his classic book, Risk, Uncertainty, and Profit. Knight's thesis was that uncertainty presents ”the only sustainable source of profit in a competitive economy.” More — not less — uncertainty, he argued, leads to greater potential for generating profits.
Translating this concept into practice, however, represents one of today’s great business dilemmas. Why? For most companies, uncertainty causes disruption that produces precisely the opposite result. So most seek to avoid uncertainty because, as author Clayton Christensen stated in his book The Innovator's Dilemma, the methods most organizations use to create value are “intrinsically inimicable to change.”
But some companies have demonstrated over and over again their ability to thrive in uncertainty. Believe it or not, they do so by using many of the tools and practices that have been recognized as "lean"— but implemented with a fundamentally different twist. Rather than taking aim at reducing "wastes" for improving efficiencies during stable conditions, they set their sights on creating dynamic stability. By dampening the effects of uncertainty on their operations, they prevent wastes and their costs from accumulating in the first place.
In crisis after crisis these firms continue to operate just as they had done before. It is not hard to see how this would give them an edge to advance while competitors are hunkering down waiting for stability to return. In doing so, these companies seem to demonstrate precisely the point that Frank Knight made so many decades ago.
Those beginning their lean journeys should ask themselves a simple question. Are their efforts structured in a way that will make the business progressively better at responding to constant change — the new reality for businesses and institutions of all types?