HBR On Strategy: Episode Summary - "How to Get Forecasting Right"

Release Date: October 2, 2024

Introduction

In the episode titled "How to Get Forecasting Right," Harvard Business Review's HBR On Strategy delves into the intricate art of forecasting in the business landscape. Hosted by Kathy Oleson, the episode features an enlightening conversation with Paul Saffo, a seasoned Silicon Valley technology forecaster and author of the article "Six Rules for Effective Forecasting" published in the July-August issue of Harvard Business Review. The discussion underscores the distinction between accurate and effective forecasting, emphasizing the latter as a more attainable and pragmatic approach in the face of uncertainty.

Effective vs. Accurate Forecasting

Kathy Oleson initiates the conversation by addressing a fundamental concept from Saffo's article:

Kathy Oleson [02:32]: "So in the article you say that executives should aim for effective forecasting, not necessarily accurate forecasting. I would have thought they were the same thing."

Paul Saffo [02:41]: "If you're very lucky, they can be the same thing. But it is possible to be effective even when you're not accurate. Accurate is very, very difficult and at times impossible just because of the uncertainty of whatever situation it is that you're facing. And if you head straight towards accurate forecasting, you may end up in a much worse situation by overlooking things that eventually come to pass."

Saffo elucidates that effective forecasting involves considering a broad spectrum of possibilities without fixating on pinpoint accuracy, which is often unattainable due to inherent uncertainties.

Six Rules for Effective Forecasting

Paul Saffo outlines six pivotal rules that form the cornerstone of effective forecasting. Each rule provides a strategic framework to navigate the complexities of predicting future business landscapes.

1. Define a Cone of Uncertainty [03:37 - 04:17]

Saffo introduces the concept of the "cone of uncertainty":

Paul Saffo: "It's a common sense way of visualizing the uncertainty that lies ahead as you're standing at a given moment in time. If someone says, well, what happens in two minutes? You can probably define a pretty narrow cone of uncertainty. As time goes outwards, the uncertainty becomes larger. You end up with a cone shaped space."

This visualization helps executives encompass all reasonable future possibilities within a gradually expanding cone, acknowledging that uncertainty magnifies over longer horizons.

2. Look for the S Curve [04:21 - 05:24]

Saffo emphasizes the prevalence of S-shaped curves in the evolution of ideas and technologies:

Paul Saffo: "Everything interesting is shaped like an S curve. Very few things unfold in a linear way. They instead unfold very, very slowly at the start. And then eventually a critical point is reached and everything starts changing rapidly and it eventually settles down."

He cites Moore's Law as a quintessential example, illustrating how exponential growth phases culminate in transformative changes that define entire industries.

3. Embrace the Things That Don't Fit [06:38 - 08:40]

Acknowledging anomalies is crucial for forecasters:

Paul Saffo: "What I've developed is a finely honed instinct for things that are strange. They don't fit, they seem a little weird, or they're intriguing, but you don't know why they matter."

Saffo refers to these outliers as "little Doppler whistles coming in from the future," suggesting that embracing and investigating these irregularities can signal impending significant changes.

A pertinent example discussed is the trajectory of Second Life, which, despite initial skepticism, became a mainstream phenomenon nearly two decades after its inception.

4. Hold Strong Opinions Weekly [09:08 - 09:41]

Saffo advocates for decisive thinking tempered with critical evaluation:

Paul Saffo: "I try to come to a conclusion as quickly as I can based on the information that's available. And then I systematically attempt to dismantle my own conclusion."

He highlights the importance of forming opinions swiftly but remaining vigilant in challenging them to prevent confirmation bias and ensure robustness in forecasts.

5. Look Back Twice as Far as You Look Forward [09:46 - 12:13]

Historical perspective is invaluable:

Paul Saffo: "You should look back twice as far as you're looking forward in order to perceive the patterns that underlie the change."

By examining extended historical timelines, forecasters can identify cyclical patterns and enduring human needs that inform present and future trends. Saffo warns against the erroneous use of history as mere support for preconceived notions, advocating instead for its role in illuminating underlying constants amidst apparent novelties.

He references the AOL-Time Warner merger as a cautionary tale of selectively interpreting historical data to fit contemporary business strategies, leading to unforeseen irrelevancies.

6. Know When Not to Make a Forecast [12:13 - 15:30]

Recognizing the limits of forecasting is as vital as the process itself:

Paul Saffo: "There are some times when uncertainty becomes so great, you just have to pause and say, I'm going to wait a little bit until things settle down."

He cites the fall of the Berlin Wall as an instance where the volatility necessitated a temporary cessation of forecasting until a clearer picture emerged. Additionally, Saffo discusses how the iPhone was a predictable innovation in its general concept but underscores the unpredictability of its specific features and market impact, which underscores the importance of not only what to forecast but also when to hold back.

Insights and Conclusions

Throughout the conversation, Paul Saffo imparts critical insights into the art of forecasting:

• Holistic Vision: Maintaining a broad and peripheral vision allows forecasters to capture cross-impact among multiple trends, mitigating the illusion of rapid change by acknowledging the complexity of intersecting S curves.

• Intuitive Vigilance: Developing an instinct for detecting subtle indicators of significant change enables forecasters to anticipate transformative shifts that may not be immediately apparent.

• Adaptive Mindset: Embracing uncertainty and being willing to revise or abandon forecasts in light of new information fortifies the forecasting process against rigidity and unforeseen developments.

In closing, Saffo remarks on the ease of effective forecasting when one remains inclusive of uncertainties and open to revising assumptions, positioning forecasting as a dynamic and iterative practice rather than a quest for definitive answers.

Paul Saffo [14:41]: "You do those things and it's an easy business to be in."

This encapsulates the essence of effective forecasting: a balance between decisive analysis and adaptive flexibility, fostering strategic resilience in an ever-evolving business environment.

By adhering to these six rules, executives and business leaders can enhance their forecasting acumen, enabling more informed decision-making and strategic planning amidst the uncertainties that characterize the modern marketplace.