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Innovation

Everyone can be a good forecaster, here’s what you need to know 

Published 15 September 2021 in Innovation • 9 min read

The trick is to make predictions with maximum conviction but, paradoxically, you must be ready to change your mind fast.

At the risk of making myself obsolete, in this column I am going to teach you how to forecast. Read up on a future trend and it influences the way you see the world. Within a company, that collective viewpoint is what shapes the corporate strategy. But positioning your viewpoint for maximum success is notoriously difficult.

Consider this: there was a time when the growth of China’s economy consistently caught the world by surprise. Or another example: because of the insatiable demand for energy, it was thought the world’s oil reserves would soon run out. How could it not be so? The price of a barrel of oil had crept up from $20 in 2001 to $138 by 2008. Exxon, Shell, and Chevron dominated the group of the world’s most valuable companies. They were money-printing machines.

What happened next? The market capitalization of the oil majors kept sliding, long before people demanded non-fossil fuel. It was not the renewables that caused the headaches. Not back then. It was the surge in the supply of crude oil. The high price spurred innovations that no one had thought possible: fracking and horizontal drilling. What people thought was a physical limitation had just been a business assumption. The assumption was that companies would pull oil from the ground in the way they always had. But at over $100 a barrel, each one is gold. Innovation soared, drilling went crazy and the US became a net energy exporter.

What’s the takeaway? It’s certainly not defeatism, nor helplessness. Like most things in life, you can predict all you want, but the way the future eventually unfolds will be full of surprises. It is important to hold two versions of the future in our minds. This lets us have the mental flexibility to adapt as new information comes along, lessening our tendency to seek confirmation and then dismiss all the counterevidence, which is where people and businesses get stuck.

This is how effective forecasters behave. The people who can forecast with greater accuracy than experts and pundits don’t have more access to insider information, nor are they more intelligent; but they are flexible enough to absorb new datapoints and then update their models.

With that in mind, let’s take a hard look at one headline and expand two opposing views. This exercise will illustrate the importance of not only having a strong belief, but also having a paradoxical willingness to overturn your own belief system.

Here’s the question: China is cracking down on its tech giants. Is it stifling innovation or leveling the playing field?

Smart companies always create options, not just to hedge but to capture the outsized upswings

Beijing’s regulatory crackdown on tech giants has so far triggered a $1 trillion selloff of Chinese tech stocks. The government has repeatedly fined tech giants, including Alibaba, Baidu, and Tencent for violating antitrust laws. It forestalled the IPO of Ant Group and derailed Didi’s expansion plan, and it has put new restrictions on overseas listings by Chinese companies.

The reasons for the sudden crackdown are unclear, though the media – from the state-run Global Times to the New York Times – is rife with speculation about the prospects of China’s economy or, more precisely, its entrepreneurial scene.

Some suggest that the regulations are all about power. The central government is reminding people who drives the country’s agenda. From this viewpoint, for example, the crackdown on ride-hailing firm Didi over supposed data security concerns was a mere pretext. It is a prelude to tighter control over China’s thriving tech sector. This has triggered resignations among tech CEOs these billionaires are seeking to avoid Beijing’s gaze.

Because the government cannot innovate by order and innovation is a game of chance, the theory goes, in its fervent clampdown, China is “killing its tech golden goose”. That’s a dim view. But then, you could take a completely different perspective.

One could argue very differently that a country’s long-term economic strength lies in its ability to rejuvenate—that is, in the ability to cultivate new players to disrupt the old. Precisely because innovation cannot be predicted, an economy cannot rely on a handful of large companies. Japan once had a cluster of vibrant industrial bases. But because it lacks a vibrant venture capital (VC) scene to match, the country was capable of being disruptive only once. The moment companies such as Toshiba, Hitachi, Sumitomo, Mitsubishi, and Fujitsu ran out of steam, Japan entered a long slump.

 

Business as usual
The total number and value of VC investments in china startups has been steady lately

In the US, the early wave of Silicon Valley disruptors — Intel, HP, Compaq — rose just when their East Coast counterparts — DEC, NCR, IBM — declined. And then you have Google and Facebook and others that have become the darlings of today’s internet world.

From this view, commentors argue that the crackdown on China’s tech giants is a good thing. First, the funding for early-stage Chinese start-ups has not slowed. Consider the graph below showing the total number and value of VC investment among Chinese start-ups, as reported by The Information. In recent months, some $9.3 billion poured into 470 China-based start-ups.

The policy implication is that VC money is moving away from e-commerce, ride-hailing and online entertainment. Instead, deal flows are going into semiconductors, biotechnology, and industrial robots, where commercial risks are higher and require “patient”, or long-term, capital. The net result of the crackdown is the resetting of China’s VC industry. Venture capitalists will channel more funding toward sectors that the late-stage private equity or stock market can’t serve.

The unintended consequence of the crackdown on tech giants therefore, is funneling new growth to the underdogs. It’s leveling the playing field. Twenty years ago, when Alibaba and Tencent were still in their infancy, software and internet companies were a high-risk, high-reward endeavor. Today, software investment is mainstream. Without some external shocks, money will always go into the more predictable, high-payback projects and thus deprive new areas that are ready to take off once supplied with capital.

So, there you have it: two completely opposing viewpoints that are equally compelling. What this exercise highlights is the impossibility of predicting the exact outcome of key events. For investors, that’s when they diversify and don’t make one single bet. That’s also why smart companies always create options, not just to hedge but to capture the outsized upswings.

Why a strong viewpoint is needed even when it’s inaccurate

To create options, you need a strong viewpoint. Without a viewpoint, you can’t allocate resources. You can’t build new capabilities. Allocating resources requires substantial logic and rationale. But then again, your mental models need to be continuously updated. For a company, what’s needed when making a strategic choice is this: have a viewpoint widely shared, but fully acknowledge the inherent uncertainty.

So, it doesn’t matter which scenario you believe will play out in China’s start-up scene. But you must be willing to adjust your beliefs. Troubles plague those who are either proudly pro-Beijing or China hawks.

This sounds absurdly commonsensical, but most companies actually do the opposite. Managers go through the most excruciating data analytics based on history, declare a bold move, align the entire organization for its implementation, and then never look back.

This idea of corporate beliefs can also be observed at the industry level. You can observe such dynamics on a two-by-two grid and compare that across sectors. It speaks volumes.

At IMD’s Center for Future Readiness, we like to analyze company behaviors using large amounts of data. For instance, if we try to understand the attitude of a company, we stay away from self-report surveys. They are too easily influenced by any one-off event with too few datapoints. Instead, we use years of publications from the New York Times, the Financial Times, the Wall Street Journal, and other standard bearers for business publications, together with the company’s own press releases. We feed them all into an algorithm which then matches with keywords to understand the dominant sentiments on, or concepts about, how the public has come to understand a company.

Tech is the fruit fly of industries, its lifecycle is short...those who survive are the ones that make bets and pivot fast

This method may not perfect. But it’s an analytical approach with more datapoints than a single annual survey filled out by a small panel of people.  There are industries that have historically been stable and slow moving. Then there are sectors that are fast moving and unpredictable. IT or tech is the fruit fly of industries — its lifecycle is short, and companies are displaced all the time. As a result, those who survive are the ones that make bets and pivot fast.

To do so, successful IT companies — think about the tech giants — possess a strong viewpoint with a strong sense of certainty about how that future will play out. But at the same time, they are eager to learn. They are keen to take in new datapoints and to revise their belief systems.

It is exactly this kind of paradoxical thinking that drives success where change is constant. That’s why “only the paranoid survive” in the IT industry, as so vividly stated by late Intel CEO Andy Grove. Survival takes an inner insecurity that propels a CEO to become forever vigilant. Being vigilant means doing everything to prevent disasters, despite having a strong viewpoint on how the future will look based on your best educated guess.

What’s more interesting, of course, is to drill down into an industry and compare companies that are facing new disruptions. Disney and HBO come to mind.

When conviction meets mental flexibility

More than other traditional entertainment companies, Disney has made growth in streaming a top priority. Its flagship streaming service, Disney+, has quickly become one of the main challengers to market leader Netflix. As of March 2021, Disney+ had 103.6 million global subscribers, around half the number of Netflix, which has been in operation for more than a decade.

Disney also owns Hulu. Its subscribers are paying more than twice the Disney+ subscription fee for the service. Most impressive perhaps is that the latest quarter shows Hulu turning profitable. That helps halve the operating loss for Disney’s streaming division. For the streaming market, that’s a major achievement. Remember, Netflix took on $16 billion in debt in less than a decade to build up its content library.

Meanwhile, other big entertainment companies have also jumped into the streaming market. AT&T’s WarnerMedia launched HBO Max, and Comcast’s NBCUniversal launched Peacock. The difference here, taking HBO as an example, is that most companies couldn’t achieve a sense of clarity even internally.

HBO, of course, is a nearly 50-year-old pay service that was only available via cable or satellite until about 10 years ago. Then it built HBO Go, which was a streaming, on-demand version of HBO for anyone who received HBO through cable but wanted to watch via streaming. HBO Now, another streaming version of HBO, was introduced in 2015 for cord cutters who wanted HBO but not a cable subscription.

Subscriber HBO now

 

Then, HBO Max came, which was “HBO and much more”. Except no one knows what that means. All the while, consumers already have HBO Go, HBO Now, and HBO as existing choices. When that confusion finally ended, the company had already missed out on the subscriber surge during the COVID-19 lockdown. The total number of people who have signed up directly for HBO Max is about 12 million, around a 10th of Disney’s numbers. Perhaps in desperation, it’s offering a discount package called HBO Max with ads. Talk about nonstop confusion.

What’s the takeaway? To commit to building a new capability, you need a conviction about the world that informs what you need to learn. But once you start learning more, it’s imperative to let go of pre-existing beliefs. The Danish philosopher Søren Kierkegaard said: “Life can only be understood backwards, but it must be lived forwards.” The best forecasters don’t just forecast. They revise.

Authors

Howard Yu - IMD Professor

Howard Yu

LEGO® Professor of Management and Innovation at IMD

Howard Yu is the LEGO® Professor of Management and Innovation as well as the director of IMD’s signature program, Advanced Management Program (AMP). He is the author of the award-winning book LEAP: How to Thrive in a World Where Everything Can Be Copied.

Howard Yu is the Strategic Resilience in a Disrupted World program director.

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