Donald Rumsfelt, George W. Bush’s Secretary of Defence during the Iraqi war, is famous for his quote “There are known knowns; these are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know.”
Risk is defined as unknowns that have measurable probabilities, while uncertainty involves unknowns with no measurable probability of outcome. What does this mean for us in business?
In the context of business, we know our company, and the strategic and tactical actions we are taking to meet our primary objectives (“known knowns”). This is the domain of theoretical Certainty.
In theory there is no difference between Theory and Practice. In practice, there is.
In practice, we also know who our competition is but we don’t know what they are planning to do to counteract or pre-empt our plans (“known unknowns”). This is the domain of Risk.
What we don’t know is what competitive challenge is going to burst onto the scene from outside our current industry paradigm (“unknown unknowns”), like Airbnb has done to the hotel industry, Uber has done to the taxi industry, Trivago and Expedia have done to the travel industry. This is the domain of Uncertainty.
It is every leader’s responsibility to acknowledge that the business does not operate in a vacuum, but in a dynamic macro-environment that consists of both known unknowns and unknown unknowns, and to plan accordingly. It should be possible to estimate the probability of many competitive reactions from our known competitors. This is managing Risk. The challenge comes in trying to imagine how technology and other exogenous factors will create unknown unknowns, and what the likelihood is that they will successfully disrupt our current industry paradigm. This is estimating and planning for Uncertainty. To ignore considering both Risk and Uncertainty is a dereliction of responsibility.
Many readers will remember the slide rule, a mechanical device the size and shape of a ruler developed in the 1600’s as a tool for multiplication and division. According to Wikipedia, “the use of slide rules continued to grow through the 1950s and 1960s even as digital computing devices were gradually introduced; but around 1974 the pocket calculator made the slide rule largely obsolete and most suppliers left the business.” If you had been betting your company’s future on manufacturing slicker slide rules, you would be out of business now.
Warren Buffett has said that “In the business world, the rear-view mirror is always clearer than the windshield.” But he also said “Risk (and uncertainty) comes from not knowing what you are doing”.
Make sure you are investing adequate time in Stephen Covey’s “Quadrant II” activities, those Important but Non-Urgent activities like identifying “paradigm-busters”, planning and corporate regeneration. Otherwise you will be left continually dealing with “Quadrant I” activities, those Important and Urgent activities like fire-fighting and crises of survival.
We all need to be asking ourselves (and our leadership teams) questions like:
- Where is the next disruptive technology or discontinuous innovation most likely to occur in our industry, and when?
- What is its likely impact going to be?
- What can we do to prepare for it?
- How can we profit from it?
We owe it to our organizations to ponder these Risks and Uncertainties, and to take action accordingly.