Strategic Thinking and Dependence on Forecasts

15 Nov 2010 Sandeep Mehta

An interesting article in McKinsey Quarterly with significant implications or R&D strategy: Applying global trends: A look at China’s auto industry.  The overall idea is that forecasts are important and can drive strategic plans and R&D plans. However, forecasts are often wrong and R&D organizations need to be careful not to be tied to strongly to one particular forecast.  In fact, strategy / R&D plans need to be flexible enough to support multiple outcomes.

Strategists can challenge conventional wisdom and better prepare for uncertainty by analyzing the complex and not-so-obvious ways global trends interact in their industries.

Here is a good example of how forecasts were wrong in adoption of mobile phones in Africa:

Only a dozen years ago, for example, authoritative predictions for the coming decade envisioned no more than a few million mobile-phone users throughout Africa. Local income, consumption, technology, infrastructure, and regulatory conditions seemed to hold little promise for significant growth. Less than ten years later, though, Nigeria alone had 42 million mobile subscribers—80 times more than initial forecasts predicted—as growth skyrocketed, largely as a result of the interaction between just two trends: improved income levels and cheaper handsets.

Scenario analysis is an effective approach to address such vast mismatches between expectations and reality:  The article proposes a four step approach that might facilitate better scenario analysis:

1. Establish the reference frame: Scenarios are difficult to construct.  Sometimes, it is possible to find published scenarios that might form the foundation for analysis (For example, CIA  global economic/political scenarios).  However, in absence of such background material, it helps to have a frame of reference.  For example, as the article points out, if one is worried about Chinese automotive entry in USA, it might be worth thinking through Korean market entry back in the 80s.  Or may be, Japanese entry even before.  It might also be worth looking at other industries and see what has happened in them.

The right frame of reference—a specific problem statement and a clear sense of the industry context for long-term shifts—is a critical starting point.

2. Expand the solution space: Now it is time to modify/update the reference frame based on current geopolitical scenarios, technology and industry specific environment:

Having carefully defined the problem and the industry context surrounding it, the challenge for strategists is to broaden the potential solution space by challenging conventional wisdom through the lens of global trends. Most companies have a broad range of experts who can help, yet these people are often tucked away in organizational silos that make it difficult for them to connect the dots.

3. Define scenarios
4: Quantify Industry Impact (under different scenarios).
The article also had a great listing of the Delphi tool that is helpful.

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