Future Savvy: Quality in Foresight

Preliminary results of the European banking stress test are to be published by the Committee of European Banking Supervisors tomorrow (July 23.) Although the exact nature of the tests have remained under wraps — not without controversy — the essence is clear. Regulators are simulating various forms of adverse financial conditions (GNP performances, interest rates, currency values and flows, and other money metrics) to see if important banks have the resources to withstand these conditions.

Controversy has resulted from lack of transparency in the tests, leading to speculation that they are designed to have most banks “pass” in order to boost confidence — as clear an example of mixing up judgment and advocacy as one is likely to get.

The key measure for determining which of the 91 banks fail the test — and need to raise capital — is whether their Tier 1 capital ratio would fall below 6% under the “loss assumptions” imposed by the test. This is the same level that was required in the stress tests of U.S. banks in its similar May 2010 test.

Model worlds

Anyhow, what is particularly interesting to this author is that the concept “scenario planning” has not been used through the bank test process, but these tests are fundamentally future scenarios, this is what scenarios are all about: creating model future worlds that express the evolution of important uncertainties towards somewhere at the limits (but not beyond) of plausibility, with the specific intent to use these worlds to stress test current decisions as to what a company is and does — from its business model to its resource base to product line to marketing, and so on.

If the organization’s key decisions would hold up (produce profitability or however success is defined) in different, alternative tests, this tells managers theirs are probably good decisions for the future. If they would flop in any test, this points to what needs to be urgently addressed. In this way an organization explores and becomes robust to its unknowable and unpredictable future.

Notably, it is precisely the stress-test purpose of scenarios that stops this foresight technique becoming (as it does all-too-often in the wrong hands) a “wishing well” for better times. When scenarios cease to be direct stress tests of present decisions, they become floaty indeed.

Full scenarios

Having said all this, the difference between the US and European banking stress tests and full scenario work is the bank tests are considering only economic factors, only adverse (risk) conditions, and only “known unknowns.” Full scenarios would include the full range of important drivers of change — and potential surprises — outside of economics or finance in their construction. In operating as stress tests, they would look at threats to the status quo as the bank tests do, but also provide a testbed for exploring opportunities in change.

Tweet This Post

I’m always looking for ways to explain the role of quality foresight in everyday management, so I liked this little animated gif from managewell.com.

Imagine driving down a country road when a street dog starts chasing your car. The dog attacks the car, but by the time it gets close, the car has moved ahead, so the dog changes direction and attacks the new coordinates. This goes on as the dog adapts, but it never quite catches up, and once it is following behind it is obviously too slow to catch up. Had it thought ahead and run straight it would have had its day with the tires.

The resulting curve looks something like this:

.
In mathematics, this is known as the ‘curve of pursuit. The dog is attacking the problem as it sees it right now, but by the time it reaches it, the problem has moved on a few steps. A ‘problem-solving’ approach like this is going to prolong the time it takes to get to key decisions, and give the initiative to competitors. The better approach in managing moving situations — and all situations are moving — is to anticipate and tackle tomorrow’s position today.

Obviously the devil is in the quality of the anticipation, but for that there is Future Savvy and other key resources that exist for determining quality in foresight work. Industry foresight can never be done perfectly, but it can be done well enough to avoid the “dog chase” future-management style that characterizes much of industry leadership.

Tweet This Post

The strategy world has mourned the sudden passing of C.K. Prahalad, Professor of Business Administration at the Ross School, University of Michigan, this week.

Front page 'Competing for the Future' Hamel & Prahalad, HBR 1994

.
As many have commented, Prahalad made great strides in getting business to see the potential in emerging markets and ‘poor’ consumers, in The Fortune at the Bottom of the Pyramid and allied work.

In our rush for the new and latest, early work often gets buried. So I would like, as my take on the passing of Prahalad, to go back to his fundamental testimony to the role of and need for foresight in management, which is to be found in his co-authored piece (with Gary Hamel) ‘Competing for the Future,’ Harvard Business Review, 1994, which became a very famous book of the same name. Sixteen years on and now in the wake of the credit crunch, this piece remains as relevant as it ever was:

“Ask yourself: Do senior managers in my company have a clear and shared understanding of how the industry may be different ten years from now? Is my company’ point of view about the future unique among competitors?

“On average managers devote less than 3% of their time building a corporate perspective on the future.

“The painful upheavals in so many companies in recent years reflect the failure of one-time industry leaders to keep up with the accelerating pace of industry change… Those companies were run by managers, not leaders, by maintenance engineers, not architects.

“If the future is not occupying senior managers, what is? Restructuring and reegineering. While both are legitimate and important tasks, they have more to do with shoring up today’s business than with building tomorrow’s industries. Any company that is a bystander on the road to the future will watch its structure, values, and skills become progressively less attuned to industry realities.

(therefore) “Most layoffs at large US companies have been the fault of managers who fell asleep at the wheel and missed the turnoff for the future.

“If senior executives don’t have reasonably detailed answers to the ‘future’ questions, and if the answers they have are not significantly different of the ‘today’ answers, there is little chance that their companies will remain market leaders.

“The Quest for Foresight: Why do we talk of foresight rather than vision? Vision connotes a dream or an apparition, and there is more to industry foresight than a blinding flash of insight. Industry foresight is based on deep insights into trends in technology, demographics, regulations, and lifestyles, which can be harnessed to rewrite industry rules and create new competitive space.”

Footnote: this from the FT: The last time CK spoke to the FT he was buzzing with intellectual energy. “Really, in all my career I have been interested in ‘next practices’, and not merely ‘best practices’,” he said.

Tweet This Post

As of writing, Blockbuster clings to business life, with $1 billion in debt, unprofitable stores and continued losses, and it looks inevitable that it will file for bankruptcy protection. In Q4 ’09 the company posted a loss of $434.9m on revenue of $1.08bn. The stock price has fallen is $0.26 per share, down from lofty levels of over $15 in the early part of the decade. That’s a lot of shareholder value down the drain. *

Reading analysis by John Tamny in Forbes, I lighted on the following paragraph — as perfect an encapsulation of why looking to the future in timely and in a high-quality way is essential, and how quality horizon scanning is integral to it:

“As often happens as companies grow, Blockbuster concentrated on perfecting its existing service while beating competitors offering the same instead of looking into ways that outsiders might destroy its business model altogether… For Blockbuster, the “disrupter” in question was Netflix. Indeed, popular as the Blockbuster brand was, getting to the video store in order to take advantage of its services was a hassle for customers–as was returning videos on time to avoid paying late fees. The rise of Netflix from well outside the traditional retail space meant these problems were solved in one fell swoop.” (my italics)

Change that matters, that is, relatively sudden and acutely disruptive to incumbent business-model success, always comes from outside an industry. Britannica wasn’t beaten by another encyclopedia. Eastman Kodak was beaten by digital photo startups, not by Fuji. And so on, and so on, through industry failure, whether it leads merely to value hemorrhage or all the way to Chapter 11.

Looking vs seeing

Sure there are companies that lose because they are simply outcompeted, that is, are less capable than the competition in doing the same thing. Hertz is currently in this category. But when a clear market leader, with brand and capital and customers galore comes totally unstuck, it is always new technology and/or new business model coming from the outside that has done it. In these cases, as with Blockbuster, companies fall to industry entrants that change ways of doing things, solving pain or trade-offs that buyers suffer, or otherwise provide consumers with more value.

These are always, theoretically, innovations incumbents could have done themselves if they were ready to think ahead (and brave enough, when required, to cannabalize existing products that stood in the way of important future steps) and therein lies a conundrum about looking at new, external competitors. It’s seldom that the incumbent can’t see the intruder, that is, is not looking. Often they are looking intensively. It is that they don’t see the absolute disruption in the new until it is too late. It is a problem of perception. This is why industry horizon scanning is a little about the easy task of looking, and a lot about the much harder job of seeing. And why putting one’s corporate head down and making an existing product or service ‘more perfect’ is part of not seeing.

* Interestingly, the Blockbuster demise was called exactly right in November 2007 by Don Reisinger on CNET.

Tweet This Post

Charlie Munger, Vice-Chairman of Berkshire Hathaway Corporation, the diversified investment firm chaired by Warren Buffett, has a piece titled: ‘Basically, it’s Over‘ in Slate this week.

Charles Munger

First, let me say, what I like about investors (and managers and entrepreneurs) with long-term track records of success, is it means — it must mean, by definition — they have a high quality view of the future. Not only a high-quality view, but a high quality view that renews itself. There is no doubt that Berkshire Hathaway has consistently over time had a better view of the future than most expert forecasters, policy pundits, and futurists. The record is clear.

Anyway, Munger this week offers a parable about Basicland, a C18 Pacific island colonized by Europeans where: “Property rights were greatly respected and strongly enforced. The banking system was simple… Almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property…  Speculation in Basicland’s security and commodity markets was always rigorously discouraged and remained small…

“(But) as their affluence and leisure time grew, Basicland’s citizens more and more whiled away their time in the excitement of casino gambling… Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called “financial derivatives.”

And so it goes on, telling the history of America and the route to the Credit Crunch, and potential for new misery going forward, via this parable. He uses the parable as parables have always been used, to say something in ‘make-believe-land’ that cannot be said (or will not be heard) in reality. The folly of Basicland’s citizens and government is much easier to acknowledge than our own. Scenarios of the future are similar in function, similarly allowing mental and institutional ‘permission’ to think the unthinkable and ‘say the unsayable.

The worst investor in America

Munger wouldn’t be the first to say: “Change yer ways or ye be doomed.” Isaiah and many before and since have said that. Nor would he be the first old white guy to espouse traditional ways of doing things. We factor that in. But he does look to basics and basics are important in having a high-quality view of the future. They signal the limits of the excess and reversion-to-the-mean imperatives.

I remember in the 1990s, when I was living in Washington DC, and Warren Buffet was “the worst investor in America” for missing out on the dot.com boom and Nasdaq bonanza. He just stuck to his guns saying, time after time, ‘there are no fundamentals behind these valuations (aka, this is just a casino) and fundamentals will prevail, which of course they did.

Now the brains at Berkshire Hathaway are saying that forums where risk, debt, currencies, etc., are up for speculation are ‘casinos,’ and their players therefore gamblers (rather than, as they would have it, ‘investors), and that they produce little fundamental value and fundamentals will prevail.

Tweet This Post

Two running business stories with foresight importance this week, both I realize brought to me by smartbrief.com (Smartbrief on Leadership) which I find a very credible news aggregation service. The first is a WSJ piece ‘How Lean Manufacturing Can Backfire.’

Toyota President Akio Toyoda, Feb 11, 2010. Pic: AP

Lean manufacturing creates efficiencies and shaves production costs by creating just-in-time — no inventory — systems, using common parts and designs across product lines, and generally squeezing materials, processes, and (inevitably) quality controls. This may or may not include pressing suppliers to lower prices, and therefore squeeze their own materials, processes, and quality controls. ‘Lean’ has been very much a core process and operations mantra for about two decades. To misquote a favorite saying, manufacturing companies have been adamant: ‘one can never be too rich or too lean.’

But now Toyota has had a slew of embarrassing recalls — the 2010 Highlander; 2008 – 2010 Sequoia SUVs; and 2009 – 2010 RAV4′s due to gas pedal problems. It has just recalled 437,000 Prius and other hybrid vehicles worldwide to fix brake problems. In 2009 it recalled Corolla, Camry, Vios and Yaris sedans due to faulty electric window-control systems.

The point of the WSJ piece is to implicate lean manufacturing in this. (It’s unclear whether it’s too much lean or too little quality control, but they are clearly connected.) Now, lean as an idea is not going to go away. Nobody is suddenly going to advocate ‘bloat manufacturing,’ but looking at the damage in reputation and bottom line that Toyota has soaked up, the company and others like it will obviously looking across their lines and saying to themselves ‘a bit of redundancy (fat, if you like) in the system will be cheaper than this.’ Thus the pendulum swings back from lean extreme to somewhere a bit more durable. A happy medium.

Maharaj Mac

In the other story, the Times reports how McDonalds is seeing benefits from localization of it’s menu, for example, offering the McItaly in Italy, the (non-beef) Maharaja Mac in India, the McLobster in Canada and the Ebi Filit-O (shrimp burger) in Japan. The pendulum effect here is that McDo became the mega-corporation it is based on global standardization and a ‘one-menu’ mantra from Cleveland to Taipei. It wasn’t just one menu, but each item had to be produced from the same stock, and in the same way. McDo fries were identical everywhere, that was the guarantee (and they were always called ‘fries’ no matter what locals called them.)

It is now become common cause among the global food companies (notably Starbucks and KFC) to work local options into their offering. One may think this is merely ‘think global, act local.’ The point is, it is an about-turn indeed from the ‘think American, act global’ that went before. What works best is in fact a happy medium.

What does this have to do with better future-thinking? Expect a recall sooner or later on forecasts that don’t see change resolving itself around a happy medium.

Tweet This Post

I’m pleased to have been invited to be one of a dozen or so regular contributors to the blog ‘Risk Matters,’ because, well, risk matters. It’s a key part of the reason why anyone or any group would look to the future… which of course also conditions how we look, what we look for, and what we find or miss.

So this stimulates me to put down a few thoughts about risk assessment and its relationship with industry and strategic foresight as a whole. This is a big topic of course, but seeing as the categories are confused a lot, it’s worth tackling even if just in summary terms.

When I reach the topic of Risk Assessment in my ‘Industry Foresight and Business Future Strategy’ MBA elective, I use the ‘Adidas-Salomon: Incorporating Risk into Corporate Strategy’ mini-case [Ref: ICFAI 304-141-1; sourced via Cranfield’s Case Clearing house.]

The case is a useful baseline in risk assessment because it describes the various risks a multinational company typically faces: marketing risks (market change, brand image); operations risks (quality; reliability of processes and suppliers); social & environmental risks (workforce & natural resources compliance); legal (liability, regulation, patent); information technology (compromise or disruption); and financial risks (currency, interest rate, credit).

Business disruptors
In sum these are the things that could damage or disrupt the business. Isolating such factors, keeping vigilance over them, and having thought through or enacted counter-measures in advance, allows the organization to better control or reduce the impact should risk become reality.

All risks are future events, so a risk assessment is undoubtedly a future study, but assuming a company looks diligently across all these categories for potential and emerging hazards, how prepared is it for a changing world? What kind of industry foresight does this give managers? Is a risk assessment a futures assessment?

The obvious first answer is that a risk assessment is only half the equation. It’s oriented to the downside potential of changes not the upside; looking for threats not opportunities. Obviously that means that opportunities are less likely to be identified.

The second thing is that a standard risk assessment operates in the realm of known risks, in known categories, that may cause disruption and damage in a known way. It doesn’t have the mechanism to expand conceptions of what could go wrong, or how it could go wrong, or what the full knock-on effects will be. The types of mental-model-expanding techniques that fuller foresight offers are not built into a typical risk assessment.

Strategy questions
Third, risk assessments never really broach the question: is the business idea or business model good and will it keep on being good? That is, what products or services will be appropriate going forward, or how will models of supply or manufacture or marketing or fulfillment need to change, due to technology change or shifting consumer preferences.

In other words, risk assessment doesn’t ask strategic questions of managers. It is part of the day-to-day management vigilance necessary with reference to the future – the hygiene factors in running an organization. It is about keeping the business going as is, not about changing it for a changing word.

There’s nothing wrong with this. The point is, it’s just ‘first base’ in building a quality view of the future, and therein a robust point-of-view about what to do next. Although no doubt companies such as Google or Apple or Virgin, etc., assess and mitigate their risks, they didn’t become successful in their future by doing risk assessment and saying ‘That’s it, were done. We’re ready for the future.”

Tweet This Post

Peter Bernstein, the author of “Against the Gods: The Remarkable Story of Risk,” died recently at the age of 90. In memoriam McKinsey Quarterly reposted this recent Bernstein interview. I put it up here because it’s a timely and timeless lesson in thinking about uncertainty and threats, and avoiding simplistic (quantitative) approaches to managing them – one of core themes of “Future Savvy.” Bernstein offers and endorsement of real options and explains why sophisticated Long Term Capital Management (LTCM) mathematical models to control risk created “a math dependency” that was blind to, among other things, unexpected systemic feedback to its own emergence:

One of the first things Bernstein says is that risk implies that we don’t know what will happen, which could be good things happening too. Risk management, as it is currently understood, gets executives to look at what could go wrong in the uncertain future of the enterprise. (Somehow threats are easier than opportunties to get departmental budget for.) The standard approach is to break risks down into commonly understood threat categories: a typical analysis would illuminated risks posed by technology failure, communications failure, security failure, natural disasters, accidents, or market/reputation risk, liability risk, financial/credit risk, and so on. This negative-outcome identification is typically followed by strategies to monitor, minimize, or control the risk event or its impact.

Doing all this is great, BUT it is just a narrow part of enterprise and industry foresight. Why? First, industry foresight or futures studies for business is focused as much on the opportunities change offers as on threats. Second, foresight tools (when correctly applied) set themselves the task of enlarging perspectives or mental maps so that we can see more things, or more possibilities than the generally expected set (whether good or bad). Set against this, risk management is little more than the catalog of known threats. The unknown or poorly understood threat, or unseen opportunity missed (and grabbed by others) is likely to be more damaging to the enterprise.

Tweet This Post

Normally I make a point of not reposting anything put up elsewhere, but this small list of foresight lessons deserves broader attention than just Electronics Weekly. According to EW blogger David Manners, Tsuyoshi Kawanishi, former CEO of Toshiba Semiconductors in his book Chip Management quotes 10 wisdoms of forecasting, see below.

They have a bit of the fashionable “SunTzu Art of War” feel to them, and some of the quotes may be apocryphal. But no matter. What’s really interesting in this very savvy list is how customer-focused the lessons are. As said in Future Savvy, and one can’t say it too many times, what customers (users, the public) want and the cost-benefit tradeoffs they will make is a MUCH more reliable guide to the future than any techno-fantasy.

The wisdoms also reflect a foresight industry insider truism and paradox: you seldom get to the future by asking the customer directly (e.g. in a focus group) what they would like to have. You have to leap for the customer (and use focus groups only to refine new offerings.)

The list:

“1. St Augustine said that it is a blessing from God that we can’t predict the future. If we predict prosperity, we will become complacent. If we predict evil, we will lose the ability to discriminate.

2 Sharp President Haruo Tsuji: ‘You cannot find out what the consumer wants only by doing market research. You need to pull the ideas out of your brain. Manufacturers of the future should not simply respond to market demands, they must create market demands.’

3. Konosuke Matsushita said: ‘Don’t try to fit your business to a forecast. Fit it to the needs of your customers.’

4. Toshiba President Sugiichio Watari: ‘Money doesn’t come falling into the headquarters of Toshiba. If you want money you need to go to the customers.’

5. President Yoshio Tateishi of Omron: ‘Learn from your customers. If you learn from internal resources you will become self-satisfied. If you learn from your competitors you will fall far behind.’

6. Professor Yoshiya Teramoto of Meiji Gakuin University: ‘When companies start a big market research project, it is one sign of the ‘big company’ disease.’

7. Tsuyoshi Kawanishi: ‘The way to predict the weather is to look at the sky. And, every once in a while, you can make your prediction by simply thinking.’

8. President Haruo Tsuji of Sharp says: ‘Don’t be a spider, be a honey bee.’

9. Takeshi Kaneda, a management critic, says: ‘After elaborate research to find out what the consumer wants, Ford produced the Edsel. It was a complete failure. Ford mistook what the customer wanted for what they would really buy. They ignored their insight and relied on consensus. Japanese tend to emphasize harmony and consensus. But insight and decisiveness can be more important.’

10. Someone says: ‘Figures do not lie. But liars often use figures.’”

Tweet This Post

I’ve been quite careful not to use this blog as a “brag wall” for Future Savvy. I can say reviewers have all been glowing, without exception. But this review, below, which recently appeared in the St Andrews Management Institute’s Vector Magazine, I felt was worth reposting here because – more than just saying nice things – it also captures the essence of what the book is trying to do. Here it is:

Book reviews by SAMI fellows and associates
“Future Savvy” by Adam Gordon (American Management Association, 2009)

“Forecasts and predictions are ubiquitous. We are bombarded with views of the future on a plethora of subjects from myriad sources, with a diverse set of motivations and self-interests. Adam Gordon seeks to provide a practical users guide to the assessment and interpretation of all things about the future, with special emphasis on the cautions and ‘health warnings’ that need to be applied, so as not to be misled by forecasts. However, the author is careful not to veer towards over-cynical dismissal of all future projections; rather, he seeks to provide guidance to the reader on how to apply the necessary caveats, and in the author’s words “profit from change”.

The book covers a very broad field, from the basic issues of the misuse of data and statistics, covering the quality and validity of data as well as their misinterpretation, through technology forecasting, trend and horizon scanning to quantitative modelling and scenarios. The one theme common to all these activities is the need to be alert to bias, whether it be a deliberate motive to influence behaviour through a dire prediction; or a bias inherent in futurologists needing to see rapid and pervasive change in all areas of society – if it exists or not – and evangelising it.

The track record of much futurology is mixed. Well-known examples are quoted: television did not lead to the end of the cinema industry. Nor has space exploration led to people taking foreign holidays on other planets – yet! Bias may also lie in the beholder. The ‘Zeitgeist’ tendency, whereby we are all influenced by contemporary perceptions, affects not only how “experts” and professionals see the world, but also how the audience receives the views of the future – often with unprepared minds. The internal “official future” of an organisation can pose a real blind spot to its progress.

The weaknesses of much quantitative modelling are highlighted, with such forecasts only being as good as the assumptions on which they are based, but which are often not overtly stated. In contrast to the conceptual and practical errors inherent in much futures output, the role and advantages of scenario planning are emphasised as a tool for challenging assumptions and developing alternative futures: “It’s better to be vaguely right than precisely wrong”.

The penultimate chapter takes examples of relatively recent forecasts from a range of organisations, whose subjects range from US agricultural production to UK dementia sufferers. These are subjected to a form of ‘retro wind-tunnelling’ to illustrate the deficiencies in their construction and how they would have benefited from the application of methodologies described earlier in the book. The final chapter provides a summary checklist, or framework, to apply in evaluating forecasts and future predictions.

Adam Gordon has written a shrewd and perceptive book that deserves a wide readership, especially among managers in both the private and public sectors, as well as the familiar ‘general reader’. Those wishing a more detailed technical guide to the various forecasting and futurist methodologies will need to consult other standard works. Professionals in the fields of management and strategy consulting and scenario practitioners might well be familiar with many of the points made in the book. However, those with some savvy might do well to recommend the book to their clients.

Michael Owen, 20 April 2009

Tweet This Post