The past two years have been eye-opening for business owners, to say the least. Some businesses had to close, some survived and some thrived. Even more, the business environment changed so quickly that businesses that were thriving during one period may be struggling just a few months later.
One thing is for sure — every business was impacted by the pandemic, supply chain issues, staffing shortages, ongoing threat of a recession, and more. The business community is resilient, and as long as leaders are keen to adapt and learn, they can benefit from applying the lessons learned in the pandemic era to emerge as an even stronger business for the remainder of the decade.
We will discuss four of those lessons in a four-post series. This post covers the fourth lesson of avoiding over-conservatism and how to take risk without exposing your organization to ruin.
Lesson 4 – Take Calculated Risks, Avoid Overly Conservative Approaches
In the pandemic era, we all recognize that the business environment changed drastically. The conditions forced many organizations to adapt to changing needs, changing demographics, and new trends. Clearly, organizations who took on risk were rewarded, but we need to recognize that this could have very easily gone the other way had we not seen unprecedented government support for the economy. Be mindful of “lessons” learned from one-off events as they often assume that future events will all turn out in the same manner.
Balancing Caution and Risk-Taking
In order to adapt to change, organizations need to take risks, but those risks should be tempered with expectations based on reality and caution. What can organizations do avoid getting stuck into an overly conservative or risky mindset?
- Avoid Over-Extrapolation of the Current Environment: One of the age-old problems of business and economic forecasting is a tendency to extrapolate current trends into a distant future. At GREENCREST, we have seen some massive swings in marketing data from clients in the pandemic era. While it’s very difficult to form any type of long-term forecast about the future, there is a strong tendency of extremes to mean-revert. It’s at these extremes that organizations often get caught either being too conservative or too aggressive. Extremes can always get more extreme, and often last longer than people expect, but this often just results in even stronger mean-reversion effects once those trends fall back to historical averages. In short, if pessimism or risk taking is becoming extreme, that may be a good sign to start taking a contrary approach.
- Avoid Toe-Dipping When Taking Risk: This is an issue I have seen on a consistent basis working in digital marketing throughout my entire career. Organizations want to get on-board with a new technology, but they’re uncertain whether it will or won’t succeed. As a result, they invest a small amount to test the waters, and use the resulting data to form an opinion on the efficacy of said technology.The problem here is that by not fully committing to the new endeavor out of fear of failure, a self-fulfilling prophecy emerges, leading to eventual abandonment of the venture and a lot of wasted budget in the process. The lesson here is that if you’re going to take on a risk, make sure you are 100% committed to doing everything necessary to make that venture a success. Partial commitments typically guarantee complete failure.
- Learn From Peers and Competitors: For organizations that find it hard to commit budget up front for big risks, the best suggestion is to do full diligence on the investment required for a full commitment to said risk, and then compare that to other options. There is no shame in looking at other similar organizations to see what they have had success with in their risk taking. While there can be a first-mover advantage in certain situations, for most private businesses, there are often outsized benefits in letting other organizations take on risks and learning from their failures and successes without having to take on the risk of loss. Odds are, if something has been wildly successful for those organizations, it will have a high chance of success for your own organization if it’s properly implemented. You don’t want to be too slow however to make a move, so it’s a good practice to keep tabs on what competitors are doing and then making a quick decision based on observed results from those competitors.In many instances, you can even one-up competition by observing their successful ventures, and then committing to outdoing them in those ventures. In the SEO world, there is a link-building strategy known as the skyscraper method that follows similar logic to one-up popular content pieces online for the purpose of growing website authority.
- Avoid Any Risk That Can Lead to Complete Ruin: This is related to the first topic in this article discussing resilience – try to avoid being overly dependent on any single source of success. The same is true for risk-taking. Never bet the farm on a single big risk, even if the expected success rate is fairly high. From the perspective of a small business with limited budget, it’s critical to understand the costs of failure for any risk before committing to the venture. Only bet what you can afford to lose, and make sure those bets are placed on items with reasonably positive expected returns.
- Taking Risks That Put Others First Can Be Highly Rewarding: In business, it’s easy to lose sight of the human side of things. There are obvious incentives to maximize profit, keep costs low, and to ensure financial stability. But getting caught up in the numbers is a good way to be blind to the fact that all organizations are dependent on how others perceive the organization in order to succeed. A famous example of this type of behavior was REI’s decision to close their stores on black Friday. If looking just at the numbers, most business owners would see a massive missed opportunity to generate sales on the largest shopping day of the year. But what’s missing is that this decision generated an outsized effect on how people view their organization, which was massively beneficial in the long run. From their perspective, employees were empowered and more positive about their work relationship. Customers wanted to reward companies that treat their employees well. Then on top of everything else, the bold nature of the announcement generated a massive amount of positive press, which was a huge win from a PR and SEO perspective. The takeaway here is that visible good-will that may appear to cut into profits may actually be a large investment opportunity.
- Inaction Is a Slow Yet Powerful Threat: All the above bullet points discuss how to take better risks, yet one of the biggest risks is that of taking no risk at all. Inaction and avoiding all-risk taking often acts as a slow, yet powerful decay. Once an organization has fallen so far behind due to not adapting to change, it’s very difficult to catch back up to speed. There is nothing wrong with being conservative in one’s approach, but being aware of this tendency can help to recognize a need to be more adaptive and receptive of risk-taking.
Summary – Expect Change, Stay Anchored to Reality
If there is any important lesson from all the points mentioned in this article, it’s that we live in a dynamic world that can change in a heartbeat. The more that we are set up to be able to adapt and take advantage of change, the more effective we can be throughout the remainder of the decade. To do this, it’s important to stay anchored to reality. This means expecting mean reversion, paying attention to competitors, and investing in your own data collection to be able to understand what is truly going on.
We don’t know what surprises will occur in the future, but so far, we’ve experienced much more rapid change in the 2020’s when compared against the 2010’s. Given the shifting and transitioning political, international, environmental and technological environments, there is reason to believe that more change is in store throughout the remainder of the decade. How each organization adapts will dictate its success.