Charlie Nelson, August 2011
The biggest dangers to a company are the ones you
don’t see coming. Understanding these threats – and anticipating
opportunities – requires strong peripheral vision.
The pessimist complains about the wind
The winner anticipates the wind change
As a case study of how distilling the analysis of several trends from different environments can yield confident predictions, we analyse the trends in new vehicle sales by size of vehicle.
We have grouped together four larger “Family” size segments: medium passenger, large passenger, upper large passenger, and medium SUV. Annual sales data for these segments is shown in Chart 1.1.
We have also grouped together three smaller “Personal” size segments: light passenger, small passenger, and compact SUV. Annual sales data is shown in Chart 1.2.
Chart 1.3 shows the total sales for each of these broad segments.
Since the mid-1990’s “Personal” sales have been growing more quickly than “Family” sales and since 2005 “Family sales have declined while “Personal sales have continued to grow. Was this predictable? And, if so, when?
It was clear by the time the 1996 census was released that the proportion of the population living in the traditional couple plus children household was in decline (Chart 1.4). The large Baby Boomer generation was moving into the empty nest life stage and so growing the population in couple only households and reducing the population in couple plus children households. This meant that a large generation no longer needed the large family vehicle and would probably move to one or two more personal vehicles. In addition, Generation X was deferring family formation which further reduced demand for a family vehicle.
This was enough to predict that growth in the family vehicle was ending and this prediction was published in Drive (http://www.drive.com.au/editorial/ArticleDetail.aspx?ArticleID=3035):
Charlie Nelson, a consumer forecaster at Foreseechange, says this is because young people are putting off having children until later - therefore they don't have a need for a "family" car - while there is a similar lack of need for this form of transport among the increasing number of "baby boomer" buyers whose children are off their hands.
Another Baby Boomer phenomenon was a trend towards females returning to the workforce after having their children, unlike previous generations (Chart 1.5). The big increases in women aged over 45 in the workforce meant that these females had both the need and the means to have their own vehicle – a more personal vehicle for commuting.
One factor which supported demand for large vehicles throughout the 1980’s and much of the 1990’s was a fall in the price of oil – not just in real terms but in nominal dollar terms (Chart 1.6). Cheap motor fuel encouraged a preference for larger vehicles and by the late 1990’s, General Motors cancelled its electric car program and must have sniggered at Toyota launching the Prius, a hybrid petrol-electric car at much the same time.
But trends can be misleading! In 1998, Scientific American published an article titled “The End of Cheap Oil” by Campbell and Laherrere. How prescient that article was. The authors described the peak oil hypothesis and calculated that it was imminent. The chiefs at GM should have managed the peak oil risk better than they did – they either ignored it or did not even know about it.
By the early noughties, it was clear that the downward trend in the price of oil was ending. Since at least 2005, consumers have consistently been expecting petrol prices to rise (Chart 1.7). In surveys conducted by foreseechange they have attached a very high likelihood to higher petrol prices in the next year. Note that the wording was changed in 2010 to measure the perceived likelihood of a large price increase. Since at least 2005 new car buyers would have this expectation in mind when choosing a vehicle.
A smaller, but important factor, was a high expectation that there would be clear signs of global warming (Chart 1.8) so that it would be a responsible decision to buy a more fuel-efficient vehicle. The perceived likelihood that there will be clear signs of global warming in the year ahead has waned since 2008 and this is discussed in more detail in Chapter 6. But consumers are polarized on this issue and 44% of consumers still attaché a high likelihood to clear signs of global warming and so will have additional motivation to buy a vehicle with high fuel efficiency.
Despite the signs, increasingly clear since the late 1990’s, that sales of the large passenger vehicle had peaked and were likely to decline each of Australia’s four vehicle manufacturers developed and launched a large passenger vehicle in the mid-2000’s. None moved to manufacturing small vehicles.
One of these was the Mitsubishi 380 which was approved in 2002 and produced between 2005 and 2008. Mitsubishi ceased production because sales were so poor. The company spent $600 million developing this predictable failure and spent nothing on a smaller vehicle which may have been a success. There are question marks against at least one of the remaining three manufacturers.
This case study illustrates the importance of scanning trends: if there are several trends in different categories which reinforce each other then we can be more confident about the implications of those trends. But equally it is important to assess the reliability of trends. As the price of oil illustrates, trends can change abruptly and so it is important to look for factors which can disrupt trends.
One common way of organizing the scanning of trends, to ensure broad coverage, is to divide the search into discrete fields. STEEP (Social, Technological, Economic, Environmental, and Political) is one way of such organization.
In analyzing trends, it is necessary to actively seek out information which might disconfirm your current assumptions because these could be causing a blind spot.
A good example of a costly blind spot is the recent Global Financial Crisis. The precursor to this was the US sub-prime mortgage crisis.
The International Herald Tribune of December 18 2007 identified warnings to U.S. banking officials which went unheeded. Several warnings, some as long ago as seven years earlier, went unheeded by the Federal Reserve and the Bush administration. Instead, the unregulated financial innovation was praised as the basis for growing an ownership society. Several major U.S. banks have lost billions of dollars and the resulting reluctance to lend has had an impact as far away as Australia (RAMS and Centro for example). Over one million Americans have lost their house and America plunged into recession.
The financial wizards believed that their innovations had obviated the need for basic credit risk assessments. Having drunk so much of their own bathwater, they were as blind to the warning signs as the government.
Given the potential uncertainty of some trends it is important to construct scenarios – plausible futures – based on trends which have high impact but low certainty. Developing contingency plans for several scenarios means increased ability to cope with shocks such as peak oil and the global financial crisis.