Making predictions into the future can be a tricky business. To help reduce error and make predictions more accurate, businesses have relied on the science of mathematics. Using complex mathematical formulas, even the smallest of historical trends can be projected into a “mathematically plausible” future.
Unfortunately, mathematics can only go so far in creating a plausible future. Back in the 1970s, a mathematician made an observation regarding the rapid growth in Elvis Pressley impersonators. After Elvis had died, a large number of singers started dressing up like Elvis and performing the old Elvis tunes before audiences. This form of entertainment quickly became very popular. Elvis impersonating became a large, successful business. As a result, there was an extremely rapid rise in the number of people becoming Elvis impersonators.
Using sophisticated mathematical formulas, this mathematician took the historically rapid rise in Elvis impersonators that occurred shortly after Elvis’ death in the 1970s and made a projection: If this growth in Elvis impersonators were to continue at the same rate into the future as had occurred in the past, every human being on the planet would eventually become an Elvis impersonator sometime around the year 2025.
Well, here we are, about thirty years later, and the last time I checked, none of the people I know are Elvis impersonators (or at least none of them admit it). The mathematical formulas may have been correct, but the prediction was wrong.
The Analogy
The goal of strategic planning is to proactively create a more desirable future state for your business. To build a winning position in the future, it is useful to understand the type of future environment you are designing a winning position for. Therefore, good strategic planning begins by trying to understand the future.
Many different tools and techniques are used to try to understand what the future environment might look like. Although these techniques may use different mathematical formulas, most of the techniques rely on taking historical trends and projecting some sort of continuation of these trends into the future. This was the technique used by the mathematician mentioned above to predict the future of Elvis impersonization.
Unfortunately, historical trendlines of the past are rarely continued at the same exact pace forever into the future. That is why we are not all Elvis impersonators today. The rate of growth in Elvis impersonators quickly slowed down considerably and eventually started to decline.
The point at which a trendline or curve changes its rate of growth is called an inflection point (see figure below). If you misunderstand the timing and magnitude of inflection points, your predictions of the future will be as inaccurate as the projection that we would all become Elvis impersonators.
The Principle
I have seen many executives make terrible strategic mistakes because they failed to take into account inflection points in their analysis of the future. When times are good, they assume that times will always be good. They project the growth of today into growth forever. Huge investments are made in adding manufacturing capacity for anticipated growth. About the time the new factories start producing products, the growth in demand for the product has already slowed. Huge inventories are built up that cannot be sold. It turns out the product was only a short-term fad and the company goes bankrupt.
There are several forces that cause inflections to occur:
1. Competitive Reactions
2. Natural Limits
3. Cycles and Pendulums
4. Discontinuities
5. Influence
These are briefly discussed below.
1. Competitive Reactions
If you are being successful in the marketplace, assume that competition will respond to blunt your success. Remember, if you are gaining market share, that means that someone else is losing market share. Those who are losing share will do whatever they can to stop the loss. This typically slows down your growth.
Even if your success is based on creating an entirely new market, expect a reaction. After all, there are so few truly new growth businesses out there. When companies see them, they all want to get a piece of the action. So even if the new market continues to grow rapidly, your participation in that growth may slow down due to increased competition in that space. For more information on competitive reactions, see the blog entitled Bombs Start Wars.
2. Natural Limits
Growth cannot go on forever, because there are natural limits to growth. For example, to be a successful Elvis impersonator, you need to have a large enough audience willing to pay to see you perform. If everyone was an Elvis impersonator, there would be nobody in the audience. Hence, Elvis impersonation is limited by the size of the audience willing to pay to hear a performance. So one needs to understand how limited the preference is for your product or service.
There are other natural limits as well, like finances. Customers have only so much money to spend, and you cannot get over 100% of the available money. There are also limits on the availability of natural resources. For example, I heard someone do the math on what would happen if everyone in China started drinking one extra can of beer per day or one extra hamburger per day. There is not enough grain in the world to meet that kind of demand.
Therefore, one of the initial steps in any strategic plan should be an analysis of the potential limits to the size of your market. If you significantly over- or under-estimate the market size, you may end up making the wrong strategic choices.
3. Cycles and Pendulums
Life tends to operate in cycles. For a while, something may be in fashion. Then it goes out of fashion. Later, it comes back into fashion. This applies to more than just high fashion apparel. Take automobiles, for example. Sometimes, economy cars are more in fashion, sometimes luxury cars are more in fashion. Sometimes trucks, minivans or sport utility vehicles are more in fashion. This is why many companies have a strategy that includes a portfolio of products and services. That way, they can more easily shift with the changing cycles and fashions.
Other times, patterns look more like a pendulum. For example, opinions may grow increasingly more liberal until people see the flaws in liberal extremism, so they start swinging the pendulum back towards conservatism. Then, when they see the flaws in conservative extremism, the pendulum moves towards liberalism, and so on.
Some cycles can be very long and their patterns cannot be detected if you only look at trends from the last couple of years. For example, in economics, there are some who believe in the Kondratiev long wave economic cycle, which takes approximately 50 years to complete. In human behavior, there has been some research around a pattern that repeats itself every four generations. This cycle has been traced back to the late 1500s, with the same pattern of four successive generational types happening over and over again (For more on this subject, see the writings of William Strauss and Neil Howe, including their books “The Fourth Turning” and “Generations” or visit the webpage www.timepage.org/time.html). If you understand these cycles, you can do a better job of predicting what might happen next, even if it is not a direct continuation of the trends of the recent past.
4. Discontinuities
Sometimes, dramatic changes just happen which have little to do with the past. Some are discontinuities we can create by ignoring conventional wisdom and trying something radically different. For example, conventional wisdom for almost 100 years said that to sell photographic cameras, you needed to emphasize durability, reliability and quality. Then, all of the sudden, disposable one-use cameras came on the market that never talked about durability, but instead stressed convenience. These disposable cameras are now a significant portion of the photography business. Another discontinuity was getting North Americans, who were used to getting drinking water for virtually free, to start paying for it by the bottle.
Other discontinuities are caused by unusual outside circumstances. For example, an event like the terrorist attack on the United States on September 11, 2001 suddenly changed a number of businesses, such as the airlines industry. Although these types of discontinuities may be difficult to predict, it is sometimes useful in strategy to look at a variety of potential scenarios, so that if one of the scenarios were to suddenly occur, you would be ready to react quickly.
5. Influence
Businesses do not have to just sit back idly and wait for the future to come. Often times, a company has the opportunity to influence how the future will evolve. You may be able to help determine the next fashion cycle. You may be able to influence factors that affect natural limits. You may be able to prepare yourself to optimize in the next phase in a longer cycle and maybe even hasten the advance to the next phase. You can create the next great discontinuity in your business. You can create scenarios to anticipate a variety of potential futures, so that you are prepared in advance for a number of potential outcomes.
As you can see, strategic planning can be very useful in helping you cope with an uncertain future by:
- Helping you to know in which direction to use influence to modify the future to your advantage.
- Helping you to see a larger cycle, so that you can anticipate the next phase and find the path get there ahead of the competition.
- Helping you to envision many potential futures, so that whatever happens in the future, you will have a well thought out strategy for that situation. Strategies thought out patiently in advance tend to be better than hasty reactions when discontinuities first appear.
Summary
One of the main goals of strategic planning is to proactively create a more desirable future state for your business. To do this properly, one must have a reasonable expectation of what that future will look like. Although it is impossible to achieve complete accuracy about what the future will be, it is a safe bet to assume that the future will not be just an identical continuation of the trends of the past. Trends change, due to a number of factors, like:
1. Competitive Reactions
2. Natural Limits
3. Cycles and Pendulums
4. Discontinuities
5. Influence
It is important to include these factors in your predictions of the future. Otherwise, you will end up with predictions as ridiculous as the one that claims we will all become Elvis impersonators.
Final Thoughts
Some people say that because the future is unknown and that recent trends cannot predict what will happen next, planning for the future is a waste of time. Just live for maximizing today and worry about tomorrow when it comes.
I say just the opposite. Because the future is unknown and unpredictable, you have an opportunity to alter the course of how the future unfolds. The beauty of the future is that it is far enough away that you have time to influence in part how it will look. If you take the time to plan properly, you can create a much better position for your business. It is precisely because of the uncertainty that one needs to plan. If the future were entirely knowable, you could not influence the outcome and planning would be meaningless.
Because the future is not obvious, you can obtain a competitive edge if you spend more time trying to understand and influence it than your competition. Uncertainty makes the value of planning increase, not decrease.
