‘We failed to heed warnings from our previous mistakes and an earthquake ensued’
No man is an island, a famous line from Devotions upon Emergent Occasions, a 1624 prose work by English poet John Donne. At the time of writing he could not have foreseen he was forecasting the future of social innovation. If no man is an island and we all impact upon one another should businesses consider how the butterfly effect can impact them and others?
In the chaos theory the butterfly effect, in essence, is “the sensitive dependence on initial conditions in which a small change in one state of a deterministic nonlinear system can result in large differences in a later state”. Wikipedia.
Therefore, a change of conditions in one sector can have a direct impact on another. The chaos theory can clearly be illustrated in the financial sector and construction. What often appears to be random incidents within the financial sectors soon tend to have a greater impact than first envisaged. Examples are: 1929, 1987 and more recently 2017. In the example of 1987, also known as Black Monday, the Dow Jones Industrial Average (DJIA) lost around 22 per cent in one trading day, the largest percentage drop ever for that market for no real apparent reason.
There are still only theories as to why there was a panic in selling, but the most common belief is “that the speculative boom leading up to October was caused by programme trading, and that the crash was merely a return to normalcy”.
What we were supposed to learn from that was that we should monitor all financial markets to try and avoid this happening again. We failed to heed the warnings from our previous mistakes and an earthquake ensued with the fall of the Lehman Brothers. When did the butterfly flap its wings on this occasion? We can trace it back to a small incident in France. BNP Paribas announced it was freezing the assets of three hedge funds, 12 months later the run on Northern Rock, followed by a bailout of
Bear Stearns in the US, and then the tornado with the Lehman Brothers.
I find it interesting that we in the UK are often accurately aware of some sectors such as the housing market and construction. A lot of businesses took note when Carillon collapsed and were concerned if the collapse was the bellwether ringing for the economy? It was not in this particular case.
However, I think it is to a business’s detriment if it fails to look at some sectors and not others. How many of us have considered the impact of changes in the retail sector and the high street? What we are seeing in this sector is a change affecting all sectors, namely the impact of business data, technologies and digital transformation.
Technology and data are reshaping the existing operating models as well as the value proposition in most of the major industries. The retail industry is also yelling to us that the consumer has changed its habits and for the very first time in history I feel businesses are behind the curve in not understanding the new behaviour that will affect all industries.
It is therefore change that is an issue. We can see it happening at a fast rate in other sectors in terms of the digital transformation journey. Most sectors are tied into a way of doing business and make small changes but learning new skills and implementing new business models takes time and money. This is not the only issue.
There is also a lack of clarity from other sectors in how to respond to changes – not only in consumer behaviour but in all product driven industries. We need to learn while we have time which is in short supply.
As small medium businesses what can we do to ensure we are protected from the butterfly effect given we also have Brexit on our doorstep?
Listen to the rumblings and woes of the other sectors and be sure that you understand how this will impact your business and your survival.
1. Make a list of the potential risks to your business
2. Consider what preventions can be put in place
3. What sectors impact your business? a. What sectors impact theirs? b. Repeat – you get the picture – no business is an island!
Given the changes mounting up in the business world, I think it is a good time to review our business models and consider how to best protect against a possible tornado.
MARKET FORCES:What often appears to be random incidents within the financial sectors soon tend to have a greater impact than first envisaged.