When Venus Williams famously once said: “You can never get complacent because a loss is always around the corner,” this statement resonated not only on the tennis court but right into the world of business and no one felt this more than telecommunications company Nokia.
In 1981 Nokia was responsible for launching the world’s first international cellular network. For the next few decades the company dominated the global mobile phone market. However, their control of the market led them to become complacent and neglect the pace of change in their industry. By 2007 it was estimated Nokia’s share of the global mobile phone market had been reduced to 50% and by 2013 they had more or less exited the market altogether.
Nokia’s complacency meant that they had failed to recognise Apple and Google as major emerging disrupters during a time of critical technological advancements.
As a CFO you don’t want your business to be caught out by unexpected risks or problems. Given the choice, you would much prefer that your business was antifragile, meaning that there is “more upside than downside” from exposure to risks and stressors.
The concept of antifragility was coined by Nassim Nicholas Taleb in his book: “Antifragile: Things That Gain From Disorder” and suggests CFOs need to be constantly alert to key operational, market and strategic risks that have the potential to impact their businesses. In particular, they should be aware of a number of critical business issues we frequently observe when speaking to clients:
Affective forecasting. There is a natural tendency for people to be overly optimistic when forecasting. They overestimate revenues and underestimate costs, which can lead to poor decisions being made. A common reason for businesses getting into financial trouble is that they are too positive about how quickly they can grow their business. A very public example of this was Woolworths’ belief that they would be able to successfully create 150 new greenfield Masters hardware sites within only a five year period. Woolworths’ reported significant losses from operating the Masters’ business, as well as a $1.9 billion impairment loss when they decided to exit the business in 2016.
- Too much focus on historical results as a basis for forecasting. This can result in the business failing to identify “Black Swan” events. Black Swan events are events that have an extreme impact, were not initially foreseeable based on historical occurrences and which hindsight suggests were predictable. The Global Financial Crisis is a classic example of a Black Swan event – there were warning signs which people may have recognised had they been alert to them.
- Top down management approach. Risk assessments are often made by senior executives who may not have a full understanding of all the risks. For example, in a mining company, senior management may assess there is a low probability of a serious event occurring, given the safety controls that are in place. However, they might not be aware that mine operators frequently override these safety controls.
- Lack of focus on changing market conditions. Many businesses take too long to identify and respond to changes in market conditions. For example, Myer’s financial performance declined when they lost market share to global competitors such as Zara who were providing dynamic new product offerings. In fact, Australia has seen an influx in the number of foreign retailers entering the market in the last three years.
- Failure to identify the opportunity in a problem. Many great business ideas start because businesses identify and respond to a problem that exists in a market. Australia’s most successful IT Company, Atlassian was started because they identified that employees in an organisation often did not like the software programs selected for them by their senior management teams.
In every business, fragility can be detected, measured and ultimately transformed to benefit and enhance a company’s market position and overall financial performance. In our next edition of The Real CFO, we will look further into some of the systems and processes a CFO can use to protect and create value for a business by making it more antifragile.