The law of ‘unintended consequences’

25 September 2016
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Like chess, the name of the game in business is not only seeing the immediate outcomes of an action we take, but being able to envision two, three, even four moves ahead.

We in business can learn valuable lessons from other walks of life. We can learn from sports. From the military. From the arts. There are many facets of this wild and unpredictable thing called “life” from which the business community can glean applicable learnings.

One of the best lessons comes from the game of chess — because nothing better prepares us to understand the concept of “unintended consequences” in every move we make.

Chess forces a player to think ahead; to see beyond the move in question. Should the player leap at the chance to capture their opponent’s bishop; or do they see that, in doing so, the unintended consequence just may be opening themselves up to checkmate?

The name of the game in business, and in fact in many facets of our lives, is not only seeing the immediate outcomes of an act we take, but in being able to envision two, three, even four moves ahead, and anticipating the eventual outcomes of each.

Those are unintended consequences.

Every single decision or action we take, in our businesses and in our lives, has unintended consequences. Outcomes we did not anticipate nor see fully. The best in business count among their skills the ability to anticipate and “see” these possible outcomes.

No matter how clear a decision is, how much of a “no-brainer” it is, there are always unintended consequences. Doesn’t mean we should not take the action. But it does mean we should be thorough in consciously understanding and projecting possible unintended consequences. Sometimes the easy, no-brainer decision is suddenly not so easy when one understands all the possible scenarios and outcomes.

Let’s talk some real examples, to see how the law of unintended consequences works.

•A company decides in a given country to close down an old factory and build a new one. A group of engineers is assigned to manage the project, which includes destroying the old site, selling the land, and building a new plant a distance away. This project would make the company more competitive. During the course of the project, one of the engineers came up with what seemed a grand idea: rather than just dispose of the old machinery, why not try to sell it on the secondary market and at least “make a little money”? Everyone thought it was a great idea, having assumed the old equipment had little value beyond scrap. So they tried and found a buyer, a local entrepreneur, who paid a measly few thousand dollars for the machines — which still were operational. The engineer was congratulated for the entrepreneurial thinking and everyone was happy to have brought some added income for the project. The unintended consequence? Well, that little entrepreneur bought a factory he could never have funded in a normal situation. He put up his own site and opened a competitive factory! He made good quality products and, enjoying little to no depreciation costs, he was able to undercut the market and take huge market share from the very company he had purchased the equipment from! Today this little entrepreneur is a multi-millionaire and the biggest thorn in the side of the big multinational. And ironically, the big multinational put him into business by selling him a factory for a few thousand dollars! So, the intended consequence was to make some quick money off old “junk” machines. The unintended consequence was “financing” the entry of a new competitor who has since cost the company tens of millions of dollars in lost revenues.

•A company is struggling to meet its targets and the marketing team decides that to boost sales they should look at aggressive promotional offers to drive consumer purchases at shelf. So they look at various scenarios, test them, and come up with an offer consumers seem to love! They do all their financial projections and decide it is a great offer to build market share and that the increase in sales will far offset the investment, so the deal will pay out quickly. So they go to market and the business starts to accelerate. However, two key competitors also take note and decide they cannot let someone else “buy share” through such deals; so they not only match, but go a step farther in promotional spending. Suddenly the market spirals into a price war and each of the three companies engages in tit-for-tat promotions and deals to one-up the others. Within three months there is no profitability in the entire category, and nobody has built share. The end result? The whole industry is now worse off.

•A government wants to revise the tax code on a product category and decides to be thorough by engaging the industry leaders in the discussion. The major industry leader, in a glaring display of arrogance, decides to fight every single argument of the government, showing a complete unwillingness to find a “win-win” common ground. The government, as a result, becomes hardened in its position and in the end forces through an even more draconian tax code — far worse than what could have been achieved had the industry leader shown a reasonable and open-minded willingness to meet it halfway. In their zeal to “protect it all,” they ended up far worse off in the end.

There are, of course, many such examples in business, where the unintended consequences skew considerably the final outcome. No matter what actions we take in business, or in life for that matter, there will always be unintended consequences. It’s not a question of having them or not. The real question is, are the unintended consequences dramatic enough to shift your course of action? In the cases above, the answer is yes. The actions should have been different.

Assessing possible unintended consequences is as tricky as a good game of chess. But with practice and discipline, anyone can improve their ability to see around the corners and assess what the possible consequences are. On any major decision, these are the questions a shrewd businessperson should be asking themselves, and brainstorming with their teams:

•Who will be directly impacted by this decision? What other parties out there will be impacted by the action?

•From here, what would be the likely reactions of other parties? What will they do, knowing that nobody in business will simply “sit still”?

•What will be the “whiplash” effect upon you and your business from these reactions?

Had the team in Example One done this simple exercise, they would have easily envisioned the outcome. They would have foreseen that they were enabling a new competitor, with a debt-free cost structure, to enter the market. And they would have surmised there was no return for gaining a few thousand dollars by selling the machinery off.

Fools take action without any reflection on consequences. Average people take actions understanding the predictable outcomes. The wisest of all take time to reflect on the potential unintended consequences of the actions they take.

May you always be wise.

 

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