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Forecasting Market Evolution and Demand Volume

 

How far ahead must businesses forecast markets and plan their actions? This question is far from an intellectual curiosity; event certainties, the value of money, and many other factors diminish over time.

Conversely, the cash flow your business will generate in the near term accounts for only a fraction of its business value. An unscientific, experientially based survey (a guesstimate based on past client work) indicates most businesses look at, and manage to, three-year time horizons. This might extend to five years in exceptional circumstances or markets. This is shockingly shortsighted! Just 15 percent of the value of the business (typically) is covered by the next three years’ cash flow. Figure sets out a simple and easily calculated phenomenon: the proportion of business value captured in the next few years of cash flow. It shouldn’t be controversial to assert that the key to maximizing business value is to manage to a time horizon where most of the value is! And that, in a typical business, means 15 to 20 years ahead. In this range, both the majority of value is captured and the accuracy of forecasts and predictable behaviors can be readily managed. Contrary to popular myth, it is not true that everything beyond three years is unpredictable and there should be no attempt to forecast it. As we will see, much is known today that will help deliver robust estimates (perhaps more for some industries than others). To the extent there is uncertainty, simple probability- based tools readily help with decision making.

 

Long-range forecasting should be looked at in terms of executive responsibility: What are business leaders doing now as they make decisions that impact the long term? Are they really managing to a three- year time horizon, and trusting luck for the remaining 85 percent of their business’s value?

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We start by studying historical events and characterizing how the market has responded in the past. From there, expected events are scanned to identify those that will shape the future; these are put together with estimates of current demand and used to project out a quantitative volume forecast.

The best place to start to plot a market’s future demand is to understand current and past demand behavior. Given the preceding discussion on scope, this understanding is needed for all markets of interest—beyond existing markets and including the second and third levels of strategic opportunity.
Moreover, a true understanding of demand is in terms of customer need and not supplier output. This directly contradicts the traditional understanding of what constitutes a strategic view, which often addresses only the existing market and is based on the supplier’s perspective of demand.
As an example case of  printers sold, while from the customer’s perspective it’s about printed matter; only an understanding of the underlying demand, in that case printed matter in the office and elsewhere, will give useful insights into the demand for printers themselves.
The key to understanding market behavior is to see what happens to market demand following a relevant event of some kind, an  Market inflexion events (MIE). These can be sudden, such as an introduction of a substitute product, or they can be a slow change that evolves over time, such as a change in consumer tastes. Either way, they substantively alter the market’s long-term momenum, primarily in terms of quantity demanded but also competitive intensity, profitability, and other factors.
Market inflexion events of varying types and impact magnitudes hit every market regularly. Turning to our U.S. printing press industry illustration, and focusing on newspaper presses, we see that two MIEs had a profound impact over the years.

Often, MIEs do not have a sudden, massive impact when they first occur. Usually there is a series of related events that unlock the impact to various applications. In the example, it wasn’t the development of the litho itself that drove the switch in newspaper presses—it was the new press plate technology; and it wasn’t the development of the TV that drove circulation declines, but its wide adoption as TV prices lowered. Interestingly, both root and unlocking MIEs were very visible to market observers for decades. Indeed, it is clear that business leaders watched the initial MIE pass without much impact and developed an inappropriate sense of security.

So understanding past market behavior is a fundamental part of forecasting—painting a picture of past MIEs and market responses, and profiling current market conditions. This is where third-party research firms have a key role to play: providing the facts and data that directly limit room for qualitative misinterpretations and are independent of internal agendas.
Firms such as  —IDC and PRIMIR/NPES in the technology and printing industries, respectively—independently deliver extensive and accurate baseline facts that are directly applicable to characterizing historical market behavior.

Furthermore, notice that these forecasts are expected demand estimates going forward in time. As these forecasts are made, it is important that forecasters also make an assessment of upper and lower limits within which they believe demand will lie, capturing what they believe is 95 percent of most likely outcomes.

 

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