Three ways to grow a business
The recent death of former US Defence Secretary Donald Rumsfeld inevitably sparked recollections of his infamous “There are known knowns...” speech. Delivered during a 2002 news briefing about Iraq’s alleged possession of weapons of mass destruction, it was widely derided at the time as ineloquent nonsense.
In fact, the framework Rumsfeld referenced is an established cornerstone of risk analysis – one nowadays frequently used in business settings. Arguably the most baffling of the quadrants he struggled to articulate, that of “unknown unknowns”, is especially relevant to the challenge of growth.
In this context, broadly speaking, an “unknown unknown” refers to an instance when we literally don’t know what we don’t know. In other words, it represents a total blank.
We can think of it as an area of marked uncertainty around decisions, their impacts and the overall likelihood of success. This could include choices with regard to where to spend money, which products to develop and which markets to target.
We might also usefully consider the issue in terms of risk. A question we need to ask is essentially this: what can a business do to achieve growth while exposing itself to the lowest risk of failure?
Below are three distinct approaches to this task, each with a different level of risk. Depending on the choice and the execution of a specific method, a business’s capacity to grow both effectively and safely can vary enormously.
- Vision, instinct, and luck
This is one of the approaches routinely highlighted when business schools and scholars showcase a successful case study. An individual takes to the stage and talks about his or her vision and penchant for acting on instinct.
The problem is that there’s also a large element of luck involved. Just being in the right place at the right time can play a huge part in making particular decisions for particular reasons. As a methodology, this doesn’t withstand too much scrutiny.
The reality is, that for every entrepreneur who ascribes success to vision and instinct, there are many more who did exactly the same thing and failed miserably. That’s why this approach entails the highest risk. In the final reckoning, frankly, it’s less a case of mitigating unknown unknowns and more a case of pure chance.
- Market research analysis
This approach is more sophisticated. It’s based on exploring both the market and competitors and lowering the risk of failure by applying analytical techniques and using theoretical frameworks.
These skills are often taught by business schools and in business literature, as well as in SME growth programmes. They represent a more robust methodology, most likely because they draw on many decades of proven business wisdom. They also constitute a lucrative arena for consultants and research companies.
Remember, though, that market research takes you only so far. Sometimes, as illustrated by high-profile commercial catastrophes such as the ‘New Coke’ debacle in the 1980s, the wrong premises can augment rather than diminish risk. It’s worth noting that almost all corporate product launches are based on market research and that ultimately, 80% fail in some way.
- Market experiments
This technique, the latest to emerge, isn’t just different: it’s also perhaps the most potent approach. The basic concept is that you can let the market fill in the blanks for you.
This requires businesses to establish “touch and learn” cycles or to conduct experiments in the market. These can provide fast, low-cost means of allowing market mechanisms to highlight the best choices. Lean Start-up and Design Thinking, both of which came out of Stanford University, are well-known examples.
Today’s business environment, not least given the spread of digitisation, means it has never been easier or cheaper to run ideas past customers. As shown by platforms such as Kickstarter, it’s even possible to gauge market acceptance by carrying out virtual launches of products that don’t yet exist.
A typology of risk management
Larger entities tend to employ a mix of the first and second approaches, using their deep pockets to indulge in vast campaigns and sustained long-term spending. It’s not uncommon for them to come up with an idea and execute it – and keep executing it – until they create a new market. Needless to say, entrepreneurs with limited funds don’t have the same luxury: they have only one shot at getting it right.
Those entrepreneurs who use the first method and enjoy success might be thought of as lucky souls – and there really is no substitute for luck. Here, we would do well to recall the wise words of cosmologist Carl Sagan: “I try not to think with my gut. Thinking with anything besides my brain is likely to get me into trouble.”
Those who use the second method have probably had the benefit of a business education. However, as we’ve seen, market research brings its own potential pitfalls – as memorably summarised by advertising tycoon David Ogilvy, who observed: “Consumers do not behave as they say, they do not say what they think, and they do not think what they feel.”
And what about those who use the third method? They’re likely to be serial entrepreneurs whose repeated successes stem from an ability to reduce the risk of failure through the market dynamic.
Crucially, as the COVID-19 crisis has shown, many will have learnt how to pivot in the face of unexpected developments. The key lesson: recognising the existence of unknown unknowns from the outset builds pivoting into a business’s contingency in a way that relying exclusively on vision, instinct or even market research never could.
Rumsfeld was actually trying to convey a similar message back in 2002. He understood that the US faced unknown unknowns and would have to react to them as they became clearer. Anyone who witnessed his ramble all those years ago might find this hard to accept, but it turns out he knew what he was talking about after all.
David Falzani MBE is a Professor at Nottingham University Business School’s Haydn Green Institute for Innovation and Entrepreneurship (HGIIE) and president of the Sainsbury Management Fellowship. Paul Kirkham is a former researcher in the field of entrepreneurial creativity at HGIIE.