How do most business owners make decisions?
If you answered, a) by reading the tea leaves; b) by the seat of their pants; c) through instinct and innuendo; or d) by flipping a coin, you may want to make an appointment with a good psychiatrist – and perhaps consider another line of work.
In all seriousness, when I ask business owners about the foundation for their optimism about the economy, the answers often include sources such as cable news, blogs, websites, the Wall Street Journal, and sometimes even Google searches about the “state of the economy.”
Though far less random than my opening examples, these sources are also dangerous. That’s because the prevailing winds of partisanship propel bias-based ideas. In fact, a Pew Research study found, predictably, that 75 percent of Republicans feel the U.S. economy is good, contrasted with just 41 percent of Democrats.
That’s quite a difference -- and yet we’re all experiencing the same economy!
Indeed, opinions, as we know, are like the posterior – everyone has one, and today’s media outlets give pretty much anyone bold enough to offer commentary a chance to lead with the rear. But relying on skewed information can cause more than disagreements at the local watering hole. For CEOs, it can lead to haphazard decision making!
Folks, every day I work with business owners and CEOs and in my current view, a big dose of validation bias is running rampant. CEOs most often gravitate to information that supports their economic world view, while discarding everything else read and heard.
This is called “confirmation bias” and, in the world of business execution, it is not your friend.
So what can you do about it? How can you avoid being influenced by unreliable information?
In this blog, and others that will follow, my aim is to help you understand how best to gauge prevailing economic conditions, apply them to your business, and reap the rewards.
At Chief Outsiders, we espouse a model of business progression called the “Growth Gears” – a three-pronged approach – insights, strategy, and execution -- to accelerate go-to-market performance.
You’ll notice that “insights” is the very first gear – and for a good reason. If you don’t invest the time to first gather sound and scientific insights, you can’t truly make solid strategic decisions – and the results will be visible in less-than-effective execution.
So where you do gather your insights?
For the reasons I highlighted above, it’s not a great idea to consider biased viewpoints. It’s better to focus on the leading economic indicators that impact the markets where you compete.
But where to get that trusted, broader view on the economy?
In our firm we utilize an outstanding resource in ITR Economics, a financial research organization led by Allen and Brian Beaulieu that crunches the kind of scientifically-based economic data that power the insights gear. The Beaulieus have also written an excellent book, “Make Your Move,” which I’ll discuss in greater detail later.
ITR issues its findings in monthly economic trend reports parsed by industry verticals and market segments – giving a business leader laser focused information on how economic developments are affecting his or her specific marketplace.
With an external view in hand, now it’s time to focus on your company’s performance. Though it’s helpful to look at your CFO’s P&L and balance sheet, I recommend a much more valuable measurement.
In their book, the Beaulieus introduce the 3/12 and 12/12 rate of change – a way of computing a rolling average of your business’s performance that smooths out the spikes that come from one-off impacts.
As an example, let’s say our company, Widget Brothers, Inc., recognized $1 million in revenue in December of 2018 and a year later in December 2019, logged $1.2 million in revenues.
That’s a 20% increase, right? Yay us!
While this feels accurate, all is not as it seems. The fact is, we may not be accounting for that one month in which our largest customer placed a big order, while, during the rest of the year, overall business remained flat. Snapshots won’t chronicle that trend in any way.
With the 3/12 and 12/12, you will have an accurate picture of growth trends in your business that filter out the anomalies and tell a much clearer, and more compelling, story!
The 3/12 will allow you to look at the trailing three months’ performance, compared against the same three months of the previous year, on a rolling basis; the 12/12 measure does the same for year-over-year performance. Overlaying one on top of the other will indicate if your business is growing, slowing, booming or receding.
With this trend data and the broader world economic view, you can confidently make a plan and adjust your strategy accordingly. You’ll understand better whether a measure in the marketplace represents a real growth opportunity, or if it’s time to conserve and plan your next move.
So, how do you dig deeper in order to become a market insights master and a confident business growth execution guru?
Stand by – in a series of blogs, I’ll provide some beefy details about fine-tuning your external insights as well as planning during the various economic phases you’ll sooner or later encounter, and the best management objectives to undertake in each.