business planning

In the wake of the Twin Towers horror - itself an unforeseen catastrophe - all manner of forecasts and expectations have collapsed. More will certainly fold. That, of course, is just a prediction, but one which business planners all over the world have been taking into earnest account. Expansion plans are being put into cold storage, factories shuttered, jobs eliminated, planes mothballed - the full litany of recession.

In some cases (such as airlines) managements are responding to actual events, like the sharp fall in transatlantic and transcontinental travel. In general, however, companies are reacting, not to what has happened, but to what (they think) will happen. Yet the aftermath of September 11th seems to prove, if proof was needed, that even major economic events cannot be predicted. If the future now unfolds as gloomily as business pessimists expect, however, that's partly because the expectation is a self-fulfilling prophecy - by retrenching, companies make everybody's miserable expectations, including their own, come true.

Conferences and exhibitions are a case in much point. If they are cancelled or postponed, because the organisers dear low attendance, then activity in the sector inevitably falls. The need for the event may well be unchanged - and unsatisfied - but even less grave events than those in New York, Washington and Afghanistan can be enough to lower attendance forecasts beyond the breakeven point. Despite the powerful raison d'etre of the event, the risk factor has been tilted against the management - which, of course, makes matters worse by its conservative reactions.

But self-fulfilling prophecies are not the only reliable forecasts. The collapse of the dot.com boom, for a mammoth instance, was a cast-iron, rock-solid certainty. The only uncertain, but most important, question was when the bubble would burst. It was equally clear that a massive conflagration of dot.com paper would cause or intensify setbacks in established high-tech industries. A third certainty was that the long American boom, in any event bound to end one day, would not survive these two dead-sure reversals. The only doubt, again, was timing.

Unfortunately, that issue is vital. High and mighty investment managers lost their jobs by correctly predicting the above triple threat, but acting on their accurate forecasts too soon. Even in high technology, being ahead of your time can be as deadly as missing the future entirely: witness Britain's ill-fated pioneering of the passenger jet, shattered by the Comet crashes. Or you may invest heavily in a project whose time never comes at all: another calamitous airliner is the supersonic Concorde, with its grossly uneconomic output of a mere 16 planes.

Concorde's economic failure was widely predicted by the Cassandras of the day before a penny or franc had been spent on its construction. But doomsayers are often wrong. Every maker of mainframe computers save IBM (and IBM only reacted belatedly and with scant enthusiasm) dismissed the personal computer as a toy. Later, Bill Gates, the archpriest of the microprocessor revolution, originally - and almost disastrously for Microsoft - thought the Internet of minor importance. In both cases, the evidence of the coming seismic shock was thin and unconvincing: but that's nearly always the case.

In his book The Innovator's Dilemma, Clayton M Christensen gives several examples of industries turned upside down by brilliant innovations whose technology was well understood, but whose markets were originally minute - like smaller hard drives for computers, hydraulic earthmoving machines, or discount stores. The established rivals who are eventually steam-rollered by such upstarts are doubly trapped: first, because they cannot foresee a large enough market: second, because they have a vested interest in its non-appearance.

Wishful thinking is the reverse side of the self-fulfilling prophecy. IBM and other makers of big, expensive computers didn't want their futures to be usurped by small, cheap machines. Microsoft didn't want its software to be shouldered aside by programs and information downloaded from the Internet. The disregarded rivals, like Steve Jobs at Apple or Jim Clark at Netscape, weren't interested in forecasts or doubts. They concentrated on 'making it happen', thus demonstrating the eternal wisdom of Alan Kay's observation that the best way to predict the future is to invent it.

Kay was a founding father of the PC era, working at Xerox's Palo Alto research establishment, known as PARC. Nearly all the key PC inventions stemmed from PARC, including the Graphical User Interface, or GUI. Xerox never used PARC's brilliancies, including the GUI - but the visiting Steve Jobs took one look at the now familiar icon-laden screen and believed instantly in its world-beating chances. The Macintosh and later the derivative Windows have proved his prediction millions of times over.

But there's an enormous difference between the various types of forecast discussed here. At the intellectual apex is futurology, in which savants like the late Herman Kahn or John Naisbitt take long-range stabs at the future of society. Economic trend forecasts are a close relation, generally shorter in term, but also taking a global view, usually with the help of computer models, of how a particular economy or industry will develop over time. Technological forecasting is related to both the above, but is even trickier - given that the exploitation of the new is so unpredictable.

The conferences and exhibitions industry, of course, is deeply involved in the above kinds of forecasting. People don't attend major high-tech trade fairs to learn what has happened; they want to know what's going to happen. So does the industry itself. What are going to be the next hot subjects? Will the episodes of terror create a greater appetite for exchanges of information on security, for example? It's tempting to jump to conclusions. But an industry which relies so heavily on direct mail is better equipped than most to test new product concepts and to establish what inputs firms require to feed their own planning.

Down at the level of the firm, there's strategic planning, which usually looks three to five years ahead, draws on the global forecasting mentioned above, but extrapolates from the company's own recent past. The first year of the strategic plan, which companies may or may not have, equates with the budget, which virtually all companies possess. This great range has only one thing in common: whatever the type of forecast, it's generally mistaken, often by a country mile. Even governments' forecasts of their own spending - which you would think are under total control - are notoriously inaccurate.

You might wonder, given all this, why companies bother to forecast at all. Wonder would be misplaced, though. Managers have to decide on actions and policies whose wisdom and outcome depend on what the unknown and unknowable future happens to hold. In other words, forecasts are a guide to deeds. That simple statement offers a way out of the maze. The key question is 'What If?'. If such-and-such is going to happen, what actions must you take now and in the months or years ahead?

What If? is an invaluable question, even if you harbour an apparent dead certainty, like the 19-year-old Bill Gates's conviction that one day every desk would boast a personal computer. What if his consequent plan, to build a PC software company, had been falsified by the future? Gates actually asked himself this question, and concluded that his 'skills set' would make him highly employable. That is a relatively simple situation. But you can apply similar questioning to a complex multinational colossus - like Shell Petroleum.

Once upon a time, the Shell planners used to provide managers with a single central forecast. That had two drawbacks: (a) it was, of course, usually wrong (b) it took managers off the hook - they could always blame their mistakes on the erroneous forecast. So instead Shell turned to 'scenario planning', drawing up three different scenarios that were all logically feasible - given certain alternative assumptions.

For example, today you could forecast oil prices on the basis of war in the Middle East, or on the familiar uneasy, death-dotted stalemate, or on peace. Naturally, you would have to couple these alternatives with assumptions about world economic growth. But the general pattern will still emerge as a Worst Case (Scenario A, say), a Best Case (Scenario C) and an in-between (Scenario B). Note that the middle forecast is neither the safest nor the likeliest. You're interested in the whole range of possibilities.

The same principle can, and should, be applied to budgets, Robert Bittlestone, managing director of the Metapraxis consultancy, suggests three scenarios: (1) Possibly Over-Optimistic (2) Likely, and (3) Possibly Over-Pessimistic.

Budgets notoriously tend towards the first alternative. Sales are extrapolated from the previous year's figures, pushed as high as unit management dares to project; costs are also extrapolated from the past year, but pressed down as low as top management insists.

If the top brass still doesn't like the numbers, they are forced even higher. Then, if actuals by some miracle come out on forecast, everybody preens themselves; if, by some greater wonder, they are above budget, self-congratulation reaches an even higher pitch. If, on the other hand, the budgeted profit fails to materialise, castigation and possible cutbacks are likely to follow.

The triple scenario approach is far more sensible. Management's responsibility is to weigh its responses to each of the three eventualities. Scenario planning shifts the onus from the forecaster getting it right (impossible, save by accident) to the manager getting it right (very possible) by thinking hard (What If?) about the different courses of action that should follow in different circumstances. Many companies, though, not only fail to countenance the probability of events diverging from the single forecast, but compound the sin by stubborn refusal to change plans when overtaken by events.

Making it happen, in short, is even more important that making a plan. In the dreadful wake of the Twin Tower, General Motors slashed its customers' financing costs to zero; October duly became set a record for new car sales. Working to rebuild the top line - revenues - is tougher by far than cutting jobs and costs. But it's the only way to turn unplanned disaster into planned opportunity.