How do you forecast what will impact on your business this year?

Joe is a small business owner with about 15 employees operating in a medium sized town.  His is a second generation business and he has recently taken over control of the business from his father, having worked under him in the business all his working life. 

Father emigrated from ‘the old country' about 50 years ago and has built up a respected business.  Both father and son have reputations for hard work, honesty and the ability to think of innovative solutions to difficult problems for their clients.  They also have the reputation of being direct, if somewhat excitable, as befits their heritage. 

When asked where his business would be in the next three years Joe relied "I dunno, haven't thought about it yet".

Joe was making a fundamental error based on an erroneous assumption!   

The error he was making was in not think about what factors in his business environment were going to impact on his business over the next few years, and therefore on his profits.

The erroneous assumption that "allowed" Joe to make that error was to expect the years ahead to be a simple repeat of the recent past.  Why think about the future if it is just going to be more of the same?

But our business environment, and our market place, is not likely to be a repeat of the past.  The market is very rarely the same year after year.  When looking at the year ahead the big question is: how, and by how much, will the next year differ from the past one?  Perpetual steady growth is the least likely of all possible outcomes.

How do you see it?

Identify the "turning points"

There may be a turning point coming up in your market which can be identified.  Even though you might be running a small business you are still likely to be affected by the economy.  And economies move in cycles.

These cycles sometimes start globally (think of the various oil shocks), certainly nationally (because of the policies our governments adopt) and also locally.

Now it's a funny thing, but your local cycle may be moving out of sync with the national cycle.  A good example is the building cycle.  Australia for example went through a building boom a few years ago and has now quietened down.  But the boom didn't happen in all parts of the country, only in the major capital cities.  Now building activity has slowed right down in the major capital cities, other regional capitals such as Perth and Darwin and booming.  Same cycle, different timing.

And your regional cycle may be impacted by local developments - a new mine, a new tourist resort, new infrastructure or something else that only impacts your area.

Forewarned is forearmed.  The smart small business owner identifies the tipping points, and prepares for them. 

But what about the X Factor?

Our small business owner, Joe, can be excused for "not thinking about it yet" in one area only.  And that is the X Factor.

Factor X is the key influence that comes out of the woodwork, as it were, to have a powerful influence on the business environment and markets that was not predicted, or perhaps even mentioned, when the year began,

Sometimes Factor X can be positive (for example the Australian economy has proven to be remarkably resilient despite some major international downturns) or horrible (September 11).  It can be global (the collapse of communism in 1989) or distinctly national (think of your own specific examples).

The concept of the X Factor was developed by Don Stammer, formerly Chief Economist of Deutsche Bank Australia.  He has identified the annual X Factor (from an Australia perspective) in reviewing the year every year going back to 1982.  Some X Factors in his list are distinctly global, others purely Australian, but none were predicted beforehand.

Does identifying the X Factor make a difference?  

We may excuse Joe for not identifying the X Factor.  After all, by definition, if he could identify it then it wouldn't be an X Factor.  Even so, the attitude makes a difference.  If he was alert to potential variations in his market place, to cycles and turning points then he would be in a much better position to handle the X Factor when it appears.

And that is just what has happened with Joe.  He may not be able to see the X Factor for 2007, but he can see a turning point coming up in his market place.  Having identified a turning point, Joe has developed a strategy to take advantage of it, one that will guide him over the next three years.

And that's a turning point for Joe, and for his business.

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© Adam Gordon, Profits Leak Detective

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