Uncertainty and risk are often used interchangeably, however, they are different.
Is understanding the difference between risk and uncertainty really that important? Yes, especially when developing a management or project plan. Risk is a known or anticipated event with an unknown outcome. Uncertainty is an event that may not be anticipated. A good plan includes mitigations for anticipated risks.
Uncertainties if possible should be identified and managed. Specific unknown events cannot be identified, but, the impact of an unknown event can be identified. Opinions about what might impact a plan or project can be solicited, ranked according to likelihood, and the potential impact, good or bad, can be identified.
Often a person has an opinion about what might happen in the future. Because it is an opinion about the future and not based upon data or customer surveys, an opinion is not seen as useful, regardless of its insight.
A story may help. For example, manufacturers of portable CD players did not see players that used user recordable media such as digital audio tape (DAT) and minidisks as a threat. They did not anticipate hard disk based music players such as the iPod.
If opinions about future competitive threats to CD players were solicited, flash memory or hard disk based music players (MP3 players) might have been seen as a possibility. Once MP3 players were identified as a threat, a risk analysis could be done to formulate a response including:
- Do nothing. The record companies would never allow a device that could pirate music.
- Wait and see if sales would be impacted;
- Make a MP3 player and with minimal viable features to learn and evaluate the market; or
- Make a MP3 player and use their brand to capture market share.
Even if a CD player manufacture saw MP3 players redefining the market for portable music players, there would be uncertainty without data saying there is a market for MP3 players. Would you want to go before the Executive Committee and ask for funds to start a project that would kill a profitable CD player product line and replace it with an unknown product with no data supporting it? This is the situation, an established market threatened by an emerging, disruptive technology, discussed by Christensen in The Innovator’s Dilemma.
Newspapers did not anticipate the decline in readership due to the Internet’s diversity of high quality, free news sources. The New York Times and most other newspapers have had a decline in advertising and subscription income as its readers migrated to Internet news sources. Until the Internet impacted revenue, it was not seen as a threat. Uncertainty surrounded the Internet’s impact on newspapers. Could the Internet be ignored? If it couldn’t, how would one respond to it? The wrong answers could cost millions of dollars. There was no data to guide the decisions, only opinions on what to do. The tricky part is deciding whose opinion will guide the Internet strategy.
Selecting one of several opinions is a political exercise. If your opinion is chosen, your stature increases, especially if the outcome is successful. It’s risky to have your opinion chosen. You can fail. Those whose opinions were not selected might work against you.
Ideally, a number of ideas and opinions would be solicited from a diverse group and used to converge on the best solution. In our company, Future Envisioned, we use confidential individual interviews to reduce, if not eliminate, peer pressure and self-censorship that prevents the sharing of ideas in group discussions. Once the best solution is identified, experience has shown that it can be improved upon by the interviewees reviewing it as a group.
Newspapers have had competition from many different news sources including radio, TV, magazines and the Internet. In the past a city had multiple newspapers as well as morning and evening editions. Today most cities have one newspaper that is facing disruptive competition from the Internet. However, the difference between then and now is that the need for a printed source of news can disappear.
All disruptive products and services that redefined or created a market started with an idea or insight that solved a real need often in a small, fringe market. The data used to drive decisions rarely, if at all, captured the needs of an underserved, emerging market, or, in the case of the Internet and newspapers, a better way to meet needs. This is the classic damned if you do and damned if you don’t paradox – it’s risky to abandon the existing market for an unproven market and risky if you ignore it.
What’s management to do when faced with uncertainty about the future? Solicit opinions about how possible impacts of the unknown will affect their business model. Those impacts can be evaluated using risk management techniques to make better decisions.
Bio: This article is from the Future Envisioned blog. Future Envisiond helps client invent their future. John did software quality assurance and testing of a variety medical devices until he realized that problems could be foreseen before they were detected. Future Envisioned applies his method of addressing uncertainty in medical device development to products, services and identification of disruptive business opportunities. He can be reached at john@future-envisioned.org.