When things go wrong, what’s the cause?

We’re wired to ask that question. The problem is, we’re also wired to arrive at the wrong answer. Why are gas prices so high? Obviously, the oil companies are screwing us. Why is the economy in a down turn? High gas prices and crooked mortgage companies. Why is your business down? The economy is bad right now.

We believe we are using Occams Razor—the simplest explanation is usually the correct one. But that’s not what Occams Razor says. That’s a paraphrase with a slight error. Occams Razor really says an explanation should include as few assumptions as possible, eliminating those that make no difference in the observable prediction.

It’s very difficult for us to let go of our assumptions. Clinging to those assumptions invariably leads to false conclusions and worse, an inadequate plan of correction.

If government leaders believe “big oil” is behind high gas prices, they will hit the oil companies with a punitive act to deprive them of “excess profits”. Is that good for you and me? That action would destroy the incentive to get more gasoline on the market. The profit margin of the oil companies is not inflated. If your normal margin on a product is 10% and the cost of making that product rises ten fold, your price will rise ten fold. If the number of units sold remains the same, you profit dollars will rise ten fold though you are still making 10%. But your sales have increased by a factor of ten.

This is part of the gas price problem. We keep buying gas at nearly the same rate. We almost have to. We still commute, right?

This isn’t a post about gas prices. If your business is off because of the economy, you will tend to cut production and expenses. Maybe that’s not a good idea. Maybe, just maybe that’s the time to go after market share.

The stock market dives in a bad economy because people sell their stocks as prices decline. Fear. When the market recovers, they buy back into the market. People do this because they believe they are reducing risk. They believe it is better to take a small loss now, rather than a big loss later. Why take a loss at all? The wealthy ‘buy in’ during down turns and sell off at peaks. Many are lucky. The wise never sell.

Making business decisions during an economic down turn is dangerous. Be careful you don’t cut your way to disaster. Now is the time to grab market. Sure, business is down. I see it everywhere. But if you have what people need during the bad economic times, your business will be up. Tune your product and service before you slash your expenses. You’ll be better off in the long run. And the short. In other words, let go of the assumption that business is going to decline because of the economy and take action to grow rather than than shrink. Rather than focus on business being down, think of the market as more competitive. You’ll make better decisions about how to respond to conditions.

Chris Reich, Author of TeachU’s Business Talk Blog
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