Black Swans and the Future
Well a new year has begun and who knows what the future holds… other than higher taxes, but that’s a rant for another day. I worked with a distributor some years back where we analyzed what the future held for them. A generational hand-off was planned and they wanted some outside opinions on various courses of action.
This was a relatively small distributor in a rather remote part of the country. The population had been declining for years and we all agreed, there was nothing on the horizon which was likely to change this. And population has a huge impact on this and many other businesses. With a growing population you’ll look like a hero if you can just maintain market share… growing share AND having a population increase will make you look like the best distributor on the planet. But a shrinking population makes it incredibly difficult… you have to grow share just to remain in the same place. And as we all know, growing share is easier said than done, especially if you’ve already got a pretty high share to begin with.
For these folks although they were profitable, financial projections (under almost any likely scenario) showed that in about a decade or so, things would be looking bleak.
The big question was how would this impact this upcoming generation? Would we simply be setting them up to fail at some point in the not-so-distant future? From a strictly financial perspective the answer was rather obvious… if there was a suitor who would pay a good multiple (and there was)… it made the most sense to sell and to set the next generation up doing something else.
But as I have noted many times, a privately held business (or even a public one, eh Brito?) is much more than simply a financial asset. The owners took the analysis to heart but decided they were going to remain in the business.
The Black Swan Scenario
IF our predictions regarding the future had been even remotely accurate, this distributor would today be facing a tough profit/loss situation. But then something magical happened… and it goes by the name of the Bakken Shale formation. This state is now the second largest oil producer in the country, behind only Texas. And it is only beginning. Talk about boom times and all the growth and good times they bring!
I suppose you could call this a Black Swan event. What’s that you say? A Black Swan is “an event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict. This term was popularized by Nassim Nicholas Taleb, a finance professor and former Wall Street trader. Black swan events are typically random and unexpected”, i.e. they can’t be predicted.
So what does this little feel-good story have to do with all you other beer wholesalers? Don’t ever forget that you do not know (nor does anyone else) what the future holds. I’m assuming if you are a beer distributor on January 1, 2013… then you plan to stay a beer distributor.
Yeah, yeah, I know… consolidation MUST happen. It’s a forgone conclusion and nothing you can do will stop the march of these forces. Don’t ever forget that in the 1960’s – the age of the business conglomerate - business classes taught (and forecast) that sooner or later (generally sooner) there would only be a handful of businesses in the entire country! The efficiencies of conglomerates where simply so great that there was no way to stop their march of consuming all businesses in their path. Think of all those synergies!
Yet where are conglomerates today? Few still exist. What looks like a sure thing on a spreadsheet quite often looks quite another in the real world. Will some of you make the wrong choices in the coming years? Of course. But that is easy to determine when looking in the rearview mirror. I have found that predicting the past is not too difficult. Now the future…. that’s another thing all together.
Fail to Plan; Plan to Fail!
So as the new year begins, sit down with your management team AND consider engaging me or Cook to provide some high value-added objective decision support ;-) Think of what the future holds and what makes sense. Spend some time on the current state of the enterprise (a company profile comparison), possible future(s) scenarios (strategic planning)… and even on some impossible futures (sensitivity analysis). Prepare your company.
For the unexpected aspect, you shouldn’t attempt to predict black swan events… by definition they aren’t predictable. Who knew what horizontal drilling and hydraulic fracking would do to large parts of the country? Rather you need to build your organization with the robustness to deal with the negative ones that occur and the strength and ability to be able to exploit positive ones.
Which reminds me of an old story of a king, a condemned man, and a horse…
A man is sentenced to die by the king. As the verdict is announced, the man says, "Wait! If you spare my life, I promise that in one year, I will teach your horse to talk. If I fail, you can kill me then." The king is intrigued, and figures he has nothing to lose, so he agrees. Afterwards, the man's friend says, "Are you crazy? You'll never teach the king's horse to talk." The man laughs and says, "Think of it this way. I have an extra year to live, and a lot can happen in a year. I might die. The king might die. And who knows, maybe the horse will learn to talk."
So don’t spend too much time listening to others who tell you what you do or don’t have to do; knowing how your options support your vision is key… as I have noted before, grab the future by the throat and make certain the future you want is the one that actually occurs. Who knows… maybe the horse will talk ;-)