“It is a great piece of skill to know how to guide your luck even while waiting for it.” — Baltasar Gracián (1601–1658)
In 1984, The Economist asked sixteen people — four finance ministers, four chairman of multinational companies, four Oxford University economics students, and four London dustmen (or garbage collectors) — to generate ten-year forecasts. They were the kinds of forecasts that underpin many long-term, strategic plans: the average growth rate in Organization for Economic Cooperation and Development countries over ten years, the average inflation rate in OECD countries, the exchange rate between pound sterling and the U.S. dollar, the price of oil, and the year when Singapore’s GDP per capita would overtake Australia’s (double Singapore’s at the time). In 1994, The Economist checked the sixteen people’s forecasts against what had actually happened.
On average, the forecasts were more than 60 percent too high or too low. The average forecasted price of oil, for example, was $40 compared with an actual price of just $17. All the respondents said Singapore’s GDP per capita would never overtake Australia’s, but that had actually happened in 1993. The most accurate forecasters were the London dustmen and the chairmen of multinational companies (a tie for first place); the finance ministers came in last. But the performance of every group was quite abysmal. The unpalatable fact is that no one can predict the long-term economic and market environment with any real accuracy.
Yet many strategic plans are meticulously constructed on these foundations of sand, perched on top of forecasts that, in all probability, will prove to be hopelessly off the mark. Consider how many companies approach strategic planning: The numbers in the long-term plan are dominated by a sales forecast that is produced by product and customer type or region (often a projection of around five years); the companies then allocate the investment to business units consistent with achieving the long-term sales forecast. Then they compute the implied costs and profits, and the process iterates until they produce an acceptable “long-term plan.” The plans often include erudite SWOT analysis (strengths, weaknesses, opportunities, and threats) or other market and trend analyses, but the decisions are made on the basis of forecast sales, investments, and costs.1 The forecasts are often heavily influenced by straight-line projections with forecasts of sales growth of existing products in existing markets.