I want to talk a little bit about predictability, planning, and being prepared for uncertainty, but it’s all about planning for the future, forecasting.
This was partially motivated by the fact that I read something about you can’t predict or you can’t plan for the future, particularly in the long run. Quite frankly, not only is that wrong, it is really, really bad advice. Yes, the world is uncertain, and there are certain times you have to be cautious. I’ll explain and break this down.
First of all, in the economic world, you have the macroeconomist, that’s the one that’s following unemployment, GDP, and all those sorts of things; and the Micro-economist, the one that’s following business, customers, consumers, production, manufacturing, etc. In the macro world, very often and most likely, the person who at the end of the year who is most accurate is very often actually wrong.
How can the person be right and wrong at the same time? Their number may be right, but why was it right? If there was some significant change or what we call an outside force that was not taken into account This could be anything from a treaty, to a major event, terrorist attack, plane down, could be oil shortage, excess oil. We’re talking about now the dumping of a lot of oil in market. The person that started and made the predictions in January, if they’re accurate in December, and this massive amount of oil from Iran is dropped on to the market, are they really right? No. They got the right number, but for the wrong reasons. It is usually the reasoning that’s crucial in business.
When I say the future must be planned for, but yet it’s usually wrong, what do you do? It seems to be a dilemma. Here, the problem is not that you’re wrong, but keep in mind the difference on the microeconomic scale, you’re looking and understanding and wanting to develop and understand the underlying causal relationships as to why your market should turn out a certain way. You’re going into depth about the long-term perspective, but you’re constantly monitoring it every month so that you’re ready for any quick change, anything that happens. All of a sudden, if prices of oil go down, you’re able to adjust to it. Why? Because you’ve already considered what its current price is and other things, and you’re not just following a trend; you’ve actually done some detail analysis so you’re able to adjust to that one change because you’ve already considered all of your known variables, all the contingencies. You’re better off having all of those factors thought of in your prediction for the future.
Sometimes you’re going to be absolutely 100% accurate, but in any case, you have to have gone through the exercise and thoroughly planned it. Basically what you’re doing is you’re taking a look at the demand for your product given the consideration of a dozen other variables. Now, all of a sudden, something you haven’t considered possibly, a 13th or 14th variable, all of a sudden becomes a major factor. This could be when you’re taking a look at analyzing your competitors. Is there all of a sudden a new competitor? A new invention? A new product? The discontinuation of somebody else’s product that actually helps you, or gives you an advantage? Or somebody who introduces a product that complements yours?
By understanding and planning thoroughly, yes, you can plan, adjust, and pivot very quickly. Keep in mind, because everybody’s talking about looking at your niche and following your niche down, etc., your competitors in your niche are very, very key and important. Always keep in mind that no matter what you think, there’s always substitution between whatever you’re doing and what somebody else has.
As an example, a friend of mine was talking about some drink that was for health. There may not be any exact product, but there can be a substitution between that and other health products. The person, within their budget, who was interested in health will spend so much on health. Yes, they might up it or down it a little bit, but they’ll generally be taking something else out of their budget in order to buy that. The idea is you have competition both within your budget, within the consumer’s budget, and within the category, whether it be health, whether it be juice. Keep in mind, juice has substitutions not only between other juices, but also that could be basically you have a storefront that’s selling juice or somebody’s doing it on their own. Those are competitors. It’s also a competitor to the health food store or some organic grocery. Those are all competitions. It’s just the degree to which they exist, and the degree to which they affect your business. You have to be and should be aware of them.
If your product really is affected by the overall economy in some way, such as you’re an airline, such as you’re a vacation resort destination – be careful of macro trends or effects. Right now you have a lot of economists out there making predictions and making statements, looking at the trend in unemployment or the trend in something else. Starting about six years ago, we had a major structural change in the underlying economy. Employment is not the same as it used to be. Labor force participation is not the same as it used to be. All of those have changed, and those have to be accounted for. You can still predict based on what the current conditions are, and plan for that.
If the economy slows down, okay, you make adjustments. If the economy speeds up, you better make adjustments on the positive side, that is, you want to advertise more, you want to spend more on marketing. Why? Because you want to maintain your market share. Never be naïve about your competitors.
One time I gave a speech, this was back before the Japanese came out with the large luxury cars, etc., and I was giving a presentation. It was actually in Detroit, downtown Detroit, and there was a lot of engineers, as well as executives, etc. from all of the big three auto makers. I made the statement: “I quite frankly cannot understand why GM doesn’t realize how heavy the competition was coming from the Japanese.” They’ve made the statement, and GM used to make this statement that the Japanese couldn’t make large cars. What I did is I said: “Quite frankly, I can understand how difficult it is to make a small car, but a large car is kind of like a small car with a lot of empty space put in.” It’s a little more complicated than that, but really, you have a lot more room to work with when you’re going from small to large than the other way around. Sure enough, they proved it. Interesting. I had a bunch of people arguing with me, but I also had a bunch of engineers come up and say: “We’ve been trying to tell them! We’ve been trying to tell them! They just won’t listen.”
Also, don’t take and accept the idea that you cannot predict the future. I’ve done it very successfully many, many times. I used to be paid a lot of money for doing that for different companies for their particular products. Again, you well specify all of your assumptions and all the understanding. Some of that may come directly from the company.
There was one case where I was asked by the board of directors of an automotive company to predict what the sales would be for a certain car model. They told me that they only wanted me to do this research and the statistical analysis in one way. I went on to another way as well; I did something additional. The reason was I wanted to show them the fallacy of the technique they wanted done, which I did statistically show them, and then what it meant. What it really said was their particular brand was extremely competitive where it was, but it was also very, very, let’s say extremely sensitive to price. They had to be really careful not to raise the price. This price sensitivity, elasticity of price in economics, could not be seen in the type of analysis they wanted. This was all carefully shown to them and they agreed and understood.
When they gave me the project, they priced the vehicle out that was going to come out in about a year and a half at $33,000. A few months later, they came and said: “We’ve raised it to $35,000.” Then they raised it to $37,000. In the introduction, they raised it to $43,000 and produced it then. At that point, needless to say, the car model bombed. This was the Board of the Directors of the company I was doing work for. They came back and wanted me to explain to them what happened, what went wrong with this. I told them right away, I said: “It’s obvious. I told you that you had an extreme sensitivity to price. I explained this to you.” They wanted me to redo it anyway. I just gave them the answer for free, but they wanted me to redo it anyway. I redid it for them, and showed them what they had done.
The moral of the story was it wasn’t just the prediction, but also the underlying assumptions that are important. That’s the same thing when you’re doing your forecasting, your planning, your long range planning, etc. Most plans need to be ready for adjustments at any time as necessary. You really want to visit and revisit them on a regular basis. It’ll do two things for you: not only help you with contingency that might happen, but also help you greatly with opportunities because an opportunity that you see from a competitor may be not covering the marketplace just as well as you had assumed or an opportunity that was off slightly to the side that may introduce some additional sales for you.
Good luck. Don’t leave out your long-term planning and your forecasting for your company and product.