How to Anticipate the Future

 

Charlie Nelson
Managing Director, Foreseechange
May 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.

George S. Day and Paul J.H. Schoemaker,
“Scanning the Periphery”, Harvard Business Review, November 2005

It is possible to anticipate threats and opportunities, although there will always be uncertainty.  Techniques that should be used include scanning the business environment for factors which could disrupt trends; scenario development; and consumer surveys.  Above all, however, is the need to be curious, open minded, and to seek a diverse range of views.

The once mighty General Motors emerged from bankruptcy in 2009 as a much diminished company which owes its existence to a multi-billion dollar taxpayer lifeline.  The reasons for this downfall are manifold but the rise in oil prices during the noughties exposed its product portfolio as too dependent on gas-guzzling big cars.

When General Motors killed its electric car, in 1999, the price of oil was just over $US10 a barrel in a long-term decline from $US40 in 1980.  The executives at GM must have been perplexed when their competitor Toyota launched its hybrid petrol-electric Prius in 1997.

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.

This case study illustrates the importance of studying trends but also looking for factors, like peak oil, which could disrupt past trends.

The legendary chairman of the Federal Reserve, Alan Greenspan, presided over the gestation of the global financial crisis.  He ignored warnings of impending doom but, after the event, he was forced to admit that he got it wrong. 

“I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and equity in the firms”

Alan Greenspan, former US Federal Reserve chairman, before the US House Committee on Oversight and Government Reform, October 2008.

“In other words, you found that your view of the world, your ideology, was not right, it was not working”

Committee Chairman

“Absolutely, precisely”

Greenspan, in reply

Greenspan is the perfect example of “confirmation bias”.  He rejected information that did not confirm his underlying beliefs.  The cost of the consequences has been estimated by the IMF and others at over $US4 trillion!

Australia’s economy escaped a recession during the Global Financial Crisis but the slowdown in late 2008 and early 2009 was quite severe.  Economic commentators, Treasury, and the Reserve Bank (who raised interest rates in February and March 2008!) did not predict the slowdown.

But in Mid-2007, I developed a scenario for clients which showed that it was likely that economic growth would slow significantly in late 2008.  This scenario was based on three factors:

 

·        Australia’s domestic economy was almost certain to slow due to the record high interest payment burden shouldered by consumers – much higher as a proportion of disposable income than before the 1990’s recession.  Each interest rate rise after then increased this burden.

·        China’s rate of construction was almost certain to slow significantly by mid-2008 as the huge makeover of Beijing and other areas for the olympic games shuddered to a halt.  This would tend to reduce Australia’s commodity exports to China  

·        The impact of the emerging  sub-prime crisis in America was uncertain, but any reduction in spending by US consumers would slow China’s exports and in turn further reduce Australia’s exports to China.

I calculated that there was a reasonable chance (about a 40% chance) that these events could coincide in late 2008.

Developing contingency plans on the basis of this scenario was mentioned by Harold Mitchell, Chairman of Mitchell Communication Group in The Age and The Sydney Morning Herald on 30 April 2009.  In that article, he also said that I had told him earlier that week that the worst of the economic slowdown was over.  This was two months before the economic commentators began to express surprise that things were improving faster than they expected.

My prediction that the worst was over was based on tracking surveys of consumers (nationally representative telephone survey of 500 adults).  In late 2008, willingness to spend was the lowest in at least five years and ability to spend had fallen.  But by April 2009, spurred by the government stimulus spending, much lower interest rates, and lower petrol prices, consumers had become much more willing to spend and their ability to spend had improved too.

Another example of using consumer surveys to predict the future is the Wisdom of the Masses surveys that we have conducted since 2005.  In his book “The Wisdom of Crowds”, James Surowiecki makes a case that if you want to make a correct decision then large numbers of ordinary people can provide better advice than a small number of experts.

Surowiecki suggests that if you ask a large enough sample of diverse, independent people to make a prediction or estimate a probability, and then average those estimates, the errors each individual makes in coming up with an answer will cancel themselves out.  Each persons guess has two components: information and error (or signal and noise).  The process of averaging tends to cancel out the errors, leaving the information.  On the other hand, small groups of experts tend not to have a diversity of opinion and nor have they necessarily come to their opinions independently.

The opinions of the masses are important in another way, not mentioned by Surowiecki.  They provide insight into what consumers are expecting to happen.  These expectations will be a factor influencing their behaviour.

Our first Wisdom of the Masses survey in November 2005 asked respondents to estimate the likelihood that particular events would occur in 2006.  The average likelihoods are shown in Chart 1.

Chart 1

 

There was a strong expectation that petrol prices would rise in 2006 and that there would be  clear signs of global warming.  On the basis of the former especially, I predicted a “train change” as commuters sought to use less petrol.  Since then there has been a 10% pa increase in train patronage in Victoria – a trend reversal that the operators described as “unpredictable”.  I also predicted declines in sales of large passenger vehicles.  Since 2005, sales of new large passenger vehicles have declined by 41% while the total market has grown by 5%.  Sales of new bicycles have outstripped sales of new motor vehicles.

The Wisdom of the Masses likelihood estimates over the period 2005 to 2010 have not been sufficiently accurate to be useful in their own right.  The main value in this data is to be able to make predictions about consumer behaviour on the basis of consumer expectations.  As an example, the likelihood attached to clear signs of global warming in the next year has slipped from 65.2% in 2005 to 47.8% in 2010.  Little wonder that only a minority support the government’s proposed carbon tax in 2011!

The information needed to anticipate the future already exists.  We must be curious enough to seek it out; we should look for it in a diverse range of sources; and avoid confirmation bias.  The information sources include tuning in to the Wisdom of the Masses, an important contribution of the market and social research industry.  The information obtained should then be used to construct scenarios – plausible futures – which can be used as a basis for robust contingency plans.

William A Sherden, in his book “The Fortune Sellers”, reviewed the track record of forecasters in 16 fields including economics and weather.  He concluded that the future is fundamentally unpredictable – that chaos reigns.  It may be true that forecasters have a bad track record, but I hope that I have demonstrated in this article that it is possible to anticipate the future.   

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