Risky Business - The Most & Least 'Uncertain' Industries In America

Day after day, the status-quo hugging, momentum-chasing talking heads that infest the world of investing will pile their clients' money into 'what is working' with little regard for 'value', risk (as defined by Howard Marks), or business uncertainty. Precious metals are sliding so 'sell' anything related to the precious metals industry. Biotech and software are surging so buy it all with both hands and feet... However, as the following two charts from Harvard Business Review suggest that strategy is in fact the absolute 'riskiest' approach to managing money as they break down the most (and least) uncertain industries in America.

Although uncertainty is accelerating, it isn’t affecting all industries the same way. That’s because there are two primary types of uncertainty - demand uncertainty (will customers buy your product?) and technological uncertainty (can we make a desirable solution?) - and how much uncertainty your industry faces depends on the interaction of the two.

Demand uncertainty arises from the unknowns associated with solving any problem, such as hidden customer preferences. The more unknowns there are about customer preferences, the greater the demand uncertainty. For example, when Rent the Runway founder Jenn Hyman came up with the idea to rent designer dresses over the internet, demand uncertainty was high because no one else was offering this type of service.  In contrast, when Samsung and Sony were deciding whether to launch LED TVs, which offered better picture quality than plasma TVs at a slightly higher price, there was lower uncertainty about demand because customers were already buying TVs.

Technological uncertainty results from unknowns regarding the technologies that might emerge or be combined to create a new solution. For example, a wide variety of clean technologies (including wind, solar, and hydrogen) are vying to power vehicles and cities at the same time that a wide variety of medical technologies (chemical, biotechnological, genomic, and robotic) are being developed to treat diseases. As the overall rate of invention across industries increases, so does technological uncertainty.

If your industry is in the lower left quadrant, or in the bottom 10 in the above table, you face relatively low baseline uncertainty for both demand and technology.

If you’re in the upper right quadrant - or in the top 10 most uncertain industries as shown in the Table - you require greater innovation management skills than industries in the other quadrants or in the bottom 10. In fact, among the top 10 companies of the Forbes Most Innovative Companies list (since 2011 when we started the list), more than 80% of the most innovative companies compete in industries in the top right quadrant.  In other words, if you are in a high uncertainty industry, you must excel at innovation... or die.

Source: Harvard Business Review