Expect the unexpected

Like so many small business owners and managers, do you concentrate on the job on hand, week in, week out, confident that the year ahead will be a simple repeat of last year?

So many business owner and managers never look beyond the next job.  Sure, they might look at the profitability of each job but not at what was happening outside their business in the economy and their marketplace that might impact on their bottom line.

This is a fundamental error based on an erroneous assumption!   

The error is was in not thinking about what factors in their business environment over the next year are going to impact on their business, and therefore on their profits.

The erroneous assumption that "allows" people to make that error is to expect this year is just going to be more of the same as last year.  Why think about the future if it is going to be no different than the immediate past.  What could possibly change it?

But our market is very rarely the same year after year.  When looking at the year ahead the big question is: how, and by how much, will this year differ from the past year?  Perpetual boom, or even steady growth, is the least likely of all possible outcomes.

Factor X is the key influence that comes out of the woodwork, as it were, to have a powerful influence on the business environment and markets that was not predicted, or perhaps even mentioned, when the year began.

The concept of the X Factor was developed by Don Stammer, formerly Chief Economist of Deutsche Bank Australia.  The key is that, although each has had a major impact on the overall Australian economy, none were predicted beforehand.

Sometimes Factor X can be positive (for example the Australian economy has proven to be remarkably resilient in recent years despite some major international downturns) or horrible (September 11). 

Factor X can be uniquely Australian (do you remember the impact of Paul Keating's comment on national radio in 1986 that Australia risked becoming a banana republic unless it reformed).  It can also be global (the collapse of communism in 1989, or the Asian melt-down a few years ago).

Acknowledging Factor X is not a cop-out from trying to predict the future.  Rather, you need to see it is a necessary reminder each year is not a copy of the previous year, and that you need to watch for unexpected news (good or bad) that will change the likely course of your marketplace, and to manage the unexpected.

So what was Factor X for 2007?

Now Don Stammer's list of the finalists, in no particular order, includes: the crisis in sub-prime debt that hit the US and world markets over the second half of the year; the tripling in China's share market; the sustained boom in commodity prices (funny thing, but everyone now wants to be invested in the "old economy" that was so derided in the late 1990s); the decoupling from the US economy of the economies of the western Pacific, including Australia; the Reserve Bank's increase in interest rates 17 days before the federal election; and Kevin Rudd's proposing fewer tax and spending giveaways than John Howard during the election campaign in November.

In Don's view, the award of Factor X for 2007 goes to the increase in interest rates announced by the Reserve Bank two and a half weeks before election day.  And he reckons this is a significant move with longer-term consequences, as it is saying to the government of the day at a very sensitive time, "the Reserve Bank is independent, and its job is to restrain inflation", however unpopular its moves are with the Government.  There is no doubt that is important.

But I beg to disagree with this nomination, and others do too.  The US sub-prime does it for me.  The wreckage from this crisis is strewn all over the place.  Amongst other things it is affecting the willingness and ability of our banks to provide credit here in Australia, and it is making people nervous. 

And that might have an impact on business, particularly if, as many are predicting, the US economy goes into recession.  After all, as the old saying goes, "When America sneezes, the rest of the world catches cold".  So for many, for 2008, the prospects may be that we will see a significant slowing in economic growth in the US and Australia.

So how will the your business get through in 2008?

Let's go back to one of the runner's up for the Factor-X in 2007.  And that is the "the decoupling from the US economy of the economies of the western Pacific, including Australia". 

The boom in China, and increasingly in India, is providing an increasingly important independent engine for global economic growth.  This has kept the demand for commodities very strong, despite the deepening recession in the US housing sector, as growth in China is extremely commodity intensive.

Wise small business owners and managers will keep a weather eye cocked on what might be happening outside their doors, and not just the job in hand. 

They will also allow that this year will have its Factor X, the unexpected -- and build some sensible risk management into their businesses.

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© Adam Gordon, Profits Leak Detective