According to Professor Victor Newman, University of Greenwich, there is a technique based on a simple law of success in the business jungle: think ahead of your competitors, anticipate their arrival as well as their strategy to protect yourself from danger and maybe even change the rules of the game before they do.
The value of thinking in scenarios
It is not unusual to hear a company’s management speak about forecasts: “Our sales did not meet the forecasted numbers”, or “we feel confident in the forecasted economic growth and expect to exceed our targets”. In the end, all financial forecasts, whether about the specifics of a business, like sales growth, or predictions about the economy as a whole, are informed guesses.
Forecasting can be a dangerous art, because the forecasts become a focus for companies and governments, mentally limiting their range of actions, by presenting the short to long-term future as already being determined. Also, when forecasters extrapolate given patterns, they often end up confronted with ‘surprising’ outcomes.
Research has demonstrated that thinking in scenarios can improve a company’s forecasting. Many forecasters typically focus on predicting only one outcome going with the most likely case based on what they have seen before. For example, most didn’t expect Brexit or Donald Trump becoming President, nor even Bob Dylan winning the Nobel Prize in Literature.
By asking forecasters to explore the possible outcomes they otherwise would not have thought about, putting multiple scenarios on the table, they will be able to take more factors into account. The fact of the matter is that once the prospect of a President Trump and a Brexit is out on the table, they become potential outcomes and even strong possibilities for a company to consider.
PROVIDE THREE SCENARIO-BASED FORECASTS, TAKING INTO ACCOUNT DIFFERENT POSSIBLE OUTCOMES:| THINK ABOUT | THE BULL CASE:
Overly positive | THE BASE CASE:
Actual expectations | THE BEAR CASE:
Overly negative |
| Competition | | | |
| New product launches | | | |
| Regulatory changes | | | |
| Changes in market demand | | | |
| Macroeconomic conditions | | | |
| Industry specifics | | | |
Sources: Joos, P. (2017) Thinking in Scenarios Improves Forecasts, IK, Jan 19; Joos, P., Piotroski, J.D., and Srinivasan, S. (2017) Can analysts assess fundamental risk and valuation uncertainty? An empirical analysis of scenario-based value estimates. Journal of Financial Economics, [Online]. Volume 121, Issue 3, 645-663. Available at: http://www.sciencedirect.com/science/article/pii/S0304405X16300836 [Accessed 10 July 2017]; Forbes (2017) Scenario Planning and Strategic Forecasting. [ONLINE] Available at: https://www.forbes.com/sites/stratfor/2015/01/08/scenario-planning-and-strategic-forecasting. [Accessed 10 July 2017]. Investopedia (2017) The Basics of Business Forecasting. [ONLINE] Available at: http://www.investopedia.com/articles/financial-theory/11/basics-business-forcasting.asp. [Accessed 10 July 2017]
Action Point
Using the table, provide three scenario-based forecasts, taking into account different possible outcomes.