Strategies for Dealing with Randomness in Business

Annie Oakley was all of five feet tall and so skilled with the pistol that she could shoot a coin tossed high in the air. Around the turn of the century she traveled to Europe where she gave an exhibition of her skills to Queen Victoria and a number of other European heads of state, including Germany’s newly crowned Kaiser Wilhelm II. At one point the Kaiser asked Annie to shoot the cigarette ash off his cigarette while he held it in his mouth. She did.

But think about this: If Oakley had missed her target and perhaps killed the Kaiser, might World War I have been averted?

There’s no way to answer that question, but it does remind us of the importance of randomness in setting the course of history. Chicago may now be ten times the size of St. Louis, for instance, but this wasn't inevitable. Life is a random walk.

In business, it's increasingly important to understand the role that randomness plays. Because of both the accelerating pace of technological innovation and our own rapidly increasing interconnectedness, business events and outcomes are becoming less predictable. Innovations come in networks, while sentiments are spread in social networks – and both these networks are subject to random cascades that are as impossible to anticipate as earthquakes or stock market crashes.

In 2005, for instance, an influential blogger had a bad experience with his Dell computer. Other people who had experienced a similar problem piled on to his blog post, and soon the blogosphere ignited with enough vehemence that Businessweek and other mainstream publications wrote about it. The incident became known as “Dell Hell,” and it was credited with having caused a measurable decline in Dell’s financial results for the period.

But as Paul Gillin documents in his book The New Influencers, an investigation one year later by a UK research firm showed that the anti-Dell sentiment was actually “unjust and unwarranted,” the result of a kind of cascade of negative sentiment among the herd of bloggers. It was simply a random fluctuation in the blogosphere that could easily have put a less trusted brand out of business altogether. (Not that Dell's computers were perfect, but the cascade of sentiment was never inevitable.)

Even the recent financial crisis was a somewhat random event, at least in its timing. The actual event was impossible to predict with any certainty at all. And attributing the crisis to Lehman's bankruptcy or to the AIG meltdown is somewhat like attributing a forest fire to one particular lightning strike. What matters isn't the particular lightning strike, but the excess availability of dry kindling.

If you want your own business to be able to deal more effectively with the increasing randomness and unpredictability of events, from business-model-busting innovations to computer-assisted financial cycles and cascades of social sentiment, then here are a few strategies, from Martha Rogers’ and my book Extreme Trust:

• Use planning techniques that don’t require high accuracy. Yes, it sounds counter-intuitive but a sophisticated model is more likely to fit past data well but fail to predict the future, while a more basic model will be more robust in anticipating possible future scenarios. And extra decimal points in your strategic plan will give you a false sense of confidence.
• Plan for multiple possible outcomes. Try to imagine a range of future scenarios and place small bets on a wider variety of options.
• Find and rely on the predictable elements of the situation. You may not be able to predict when the next cascade of sentiment will occur, but you know there will be one.
• Evaluate actions and initiatives based on the inputs, not just the outputs. Randomness will confound even the best efforts to produce results, so when assessing a project or initiative’s effectiveness (or an employee’s), take into account the quality of the process that went into its planning and execution. Was the decision-making well reasoned?
• Remain agile, and strive to respond quickly. There’s no substitute for awareness, listening, and detecting events as soon as they happen. Empower your people to act quickly and decisively.
• Most importantly, cultivate your reputation for trustability in advance. In the end, you have to be prepared for failure, success, and everything in between. But if others find you trustable, then you’ll never be on your own.

As long as your focus is always on doing the right thing, then your customers, your employees, and other stakeholders will all have an interest in seeing your company succeed. For a real-world illustration of this last point, just consider the different fates of AOL and Apple Computer.

After World War I had commenced and was raging across Europe, by the way, Annie Oakley wrote to the Kaiser and asked for a second shot. He didn't answer.