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Is traditional forecasting a thing of the past?

Is traditional forecasting a thing of the past?

22 July 2016

The media picture is dominated by the UK’s unexpected and unpredicted decision to leave the European Union. Analysts, consultants, commentators, and of course politicians, all race to present their Brexit impact analyses. It is a great time for speculations, ideas, theories, predictions, even forecasts, warnings of grave consequences and risks. And that is exactly that – nobody knows what will happen.

Brexit shock and uncertainty surrounding it, is the latest example of growing difficulty in predicting the future. The speed of market changes, volatility surrounding the economy and political processes, the growing number of disruptive technology trends, rapidly changing behaviors and preferences by the subjects of the predictions, makes the traditional economic and social forecasting and predictions mostly irrelevant. 

Somebody said a long time ago that “It’s Difficult to Make Predictions, Especially About the Future”. This saying should be corrected now – the word “difficult” should be replaced by “impossible”. Gone are the days when a 5-year single-point forecast, based on a decent econometric forecast model, provided a good indication of where the markets were going. I remember how confident I was some 20 years ago, when I presented a 5-year trade forecast for the management. Nowadays, preparing a 3-year single-point forecast represents a huge challenge.

If you look at book shelves of the business literature, the titles of most management books contain words of Risk, Uncertainty, Disruption, Chaos - reflecting the current level of management challenges to assess the future direction of the world economy, individual industries, and companies. Understanding the future direction is the most critical factor ever for any company, yet it remains the most challenging task ever. We are drowning in the noise of information tsunami, but we are thirsty for real knowledge. 

So, how can we handle forecasting of this chaotic, rapidly changing world of many facets and contradictions, a world of non-linear development. One of the possible approaches is a scenario planning as opposite to a single-point or a range forecast. Scenario planning is not a new strategic   planning method. It was invented for the military purposes, but it has since been used by large corporations, and it becomes more and more relevant these days.

Scenarios are defined as structurally different stories about how the future might develop.
Scenarios are alternative images of the future, each with a corresponding story-line describing how the scenario emerges in a cause-effect way from the situation today. Scenarios acknowledge that the future is uncertain, impossible to predict. Scenarios ensure proactive attitude to the future, asking a question "What would we do if such and such happen?” rather than leaning back and asking: "What will happen to us?"

Could emergence of mobile phones, digital cameras, smart phones, iPads, Facebook be predicted by simple forecasting?

Who would have predicted in 2010 that Google would have entered the automotive industry with a Google car?

Scenarios require outside-in thinking, not inside-out

Think about it!

 


Teresa Lehovd is the Head of Market Intelligence at Höegh Autoliners. She holds over 30 years of experience in the RoRo shipping industry, whereof 20 years in various market research positions where she is specialised in the research of global automotive and heavy equipment industries. Teresa is also a guest lecturer at the Norwegian School of Management in the area of Competitive Intelligence and Shipping, and frequent speaker at various industry conferences.

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