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Business uncertainty: Definition
Uncertainty refers to situations in which you don't know the outcome in advance.
In business, uncertainty occurs when there is a lack of information, making the future hard to predict.
Uncertainty should be distinguished from risk, which is the possibility of something going wrong. Unlike uncertainty, the outcome of risks can be measured. A good example of risk is rolling dice. You may not know which number the die will land on, but there is ⅙ chance that it will be any number from 1 to 6.
On the other hand, there is uncertainty when starting a business. You can make plans and forecast sales, but the reality may be a far cry from your predictions. A lot of factors can influence the outcome, such as new technology, changes in consumer attitudes, natural disasters, and economic crises. As a result, the future is largely unknown.
Brexit is a case of uncertainty. When Brexit was announced, a lot of forecasts were made:
- The national income would fall by 3.6% within 2 years.
- 100,000 jobs in financial services would be lost.
- The cost of living would increase while exports would be more difficult.
However, before the official terms were signed between the UK and EU, nothing was certain. This uncertainty means that businesses lacked information to make important decisions. Should they set up a new subsidiary? Import or export more goods? Hire more workers from another European country?
Four levels of business uncertainty
Depending on how much information is known about a situation, business uncertainty can be classified into four levels:
Fig. 1 - Levels of business uncertainty
Business Uncertainty: Predictable future
Here, nearly-precise predictions can be made about the situation. For example, when a company decides to enter a similar market to the host country, it will have more information to predict potential sales, consumer demands, and product trends. These predictions reduce uncertainty and allow businesses to make better decisions. Some tools for businesses to make forecasts about the market include: market segmentation, competition analysis, value chain analysis, and Porter’s Five Forces.
Business Uncertainty: Alternative futures
In this case, a business is presented with a limited number of future outcomes. It remains unknown which outcome it will turn out to be, but the business can make a rough prediction based on the known data. For example, when faced with a number of investment options, a firm can calculate the potential return-on-investment (ROI) of each investment and choose the one with the highest ROI.
Business Uncertainty: Range of futures
Here, future outcomes are determined by a set of variables. There is a broad range of future alternatives instead of just a few alternatives as in Level 2. For example, when a company enters a new market, the customer base can be of very high or very low levels, or anywhere in between. It's hard to predict the outcome of each scenario.
Business Uncertainty: True uncertainty
In this case, nothing is known about the future. As a result, uncertainty is at its highest level and no predictions can be made. For example, the introduction of touch-screen technology by Apple in 2007 created a lot of uncertainty in the tech industry since most companies at the time were unfamiliar with this technology.
Causes of business uncertainty
Business uncertainty might arise from a country's economy, competition level, and social changes.
Fig. 2 - Causes of business uncertainty
Business Uncertainty: Economy
An economy is where all the production, consumption, and trading activities take place in a country or state. The development of an economy is determined by many factors, and any change in it can create uncertainty for businesses. An economic crisis is one example that can make the future outcome of a business unpredictable.
The Great Recession of 2008 was an economic crisis with unpredictable outcomes. It started with the housing bubble in the US, then spread to the rest of the world. Few people were able to predict the extent and impact of the recession on the global economy since there were so many factors involved.
The UK is one of the countries that were hit the most by the recession:
- The GDP shrunk by 6% between 2008 and 2009 and took five years to recover.
- The unemployment rate reached its highest since 1995, with as many as 2.7 million people losing their jobs in 2011.
- Between 2015 and 2016, the pound fell by 20% in value, resulting in more expensive imports. Meanwhile, wages rose slowly and were unable to keep up with inflation.
During the crisis, most businesses were faced with uncertainty. It remained unclear how long the crisis would last and what steps would be taken by the government to remedy the situation. They had to make do with what they had and contemplate different scenarios to ensure survival.
Business Uncertainty: Competition
While competitor analysis can be performed to analyse competitors' strengths and weaknesses, it's unlikely that a company can predict what its competitor might do in the future. This poses a challenge in predicting future outcomes and creates uncertainty.
A good example of how uncertainty can affect businesses is Nokia's failure to innovate and keep up with new technologies that competitors were using. In 2007, Nokia made up half of all the phones sold worldwide and Apple was only a newly founded firm. Six years later, the market value of Nokia fell by 90% while Apple made its way to global market domination.
While Nokia was a highly profitable firm in the late 1990s and early 2000s, the introduction of Apple and touch-screen iPhones completely changed the game of the mobile phone industry. Due to the lack of vision and underestimation of the competition, Nokia suffered from falling sales and the company eventually reached its demise in a short time.
Business Uncertainty: Social changes
Society does not remain static and is subject to change. A lot of changes can happen in a society over time. For example, consumer trends, habits, preferences, and working styles. Social changes are not always easy to predict, thus giving rise to uncertainty in the business landscape.
The covid-19 Pandemic triggered a change in the way people work. Instead of going to an office 5 days a week for 8 hours per day, most people work from home and only show up at the office at certain times. This causes a lot of uncertainty for businesses, especially those that tend to have many workers in a physical location. For example, it might be challenging to find out how e-working will affect employees' motivation, productivity, and emotional well-being.
How to deal with business uncertainty?
Business uncertainty is unpreventable and can take many forms. However, by learning about uncertainty and making plans for it, businesses can adapt to change and stand a better chance of survival.
Here are some ways for businesses to handle uncertainty:
Develop worst-case scenarios and come up with a risk management plan. This way, the company can be prepared to deal with the disruption that might arise.
Invest in human capital. Hire staff with the right experience and expertise to handle the uncertain experience.
Adopt a flexible business structure. This allows the company to adapt to change effectively while fostering innovation to avoid being driven out of business by new technology.
Look for gaps and opportunities. An unforeseen crisis can be a chance for the company to think outside the box and come up with an innovative solution.
Uncertainty is unavoidable in business and can take many different forms. To survive and make sustainable profits, companies need to stay alert and make plans for uncertain situations. One way to deal with business uncertainty effectively is to develop worst-case scenarios with a risk management plan. An experienced workforce and flexible business structure also increase a business's chance of overcoming uncertainty.
Uncertainty in business - Key takeaways
- Business uncertainty refers to situations where there is a lack of information, thus posing a challenge in predicting future outcomes.
- Uncertainty is different from the risk in that risk can be measured based on the probability of something going wrong.
- There are four levels of uncertainty: predictable futures, alternative futures, range of futures, and true uncertainty.
- Business uncertainty can be derived from changes in the economy, competition, and society.
- An example of business uncertainty due to the economy can be observed in the financial crisis of 2008.
- Some ways to handle uncertainty are: developing a worst-case scenario analysis, investing in human capital, adopting a flexible business structure, and having a risk management plan.
Sources:
1. Joe Mayes and Andrew Atkinson, 'How accurate were Brexit predictions?', Business Day, 2021.
2. Staff, 'The 2008 recession 10 years on', GOV.UK, 2018
3. Brand Minds, 'Why did Nokia fail and what can you learn from it?', Medium, 2018.
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