Economics

Forecasting in an emerging industry

Emerging Industries can is defined as the establishment of technologically innovation, an entirely new industrial value chain or the radical reconfiguration of an existing industry by creating unique products or service. Below are some tools and techniques for forecasting an emerging industry which is filled with significant uncertainty.

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Key discussion:

“Strategy cannot be formulated without an explicit or implicit forecast of how the structure of the industry will evolve,” wrote Michael Porter in his Competitive Strategy Techniques for Analyzing Industries and Competitors book. He developed a tool or device for reducing the complexity of the forecasting process.

He extracted that “the device of scenarios is a particularly useful tool in emerging industries.” Developing scenarios about how an industry will evolve provides a way to forecast how an industry will change. “Scenarios can be used for forecasting in emerging industries as shown in the following Figure:

The analyst begins by estimating the future technology, costs, product variety, and performance in the industry, and selects a small number of scenarios that include a range of outcomes. “Each scenario includes the markets that will open up, the size of the markets, and other key characteristics of the industry.”

The next step involves determining how each scenario will affect the various competitors in the industry. As products, technology, markets, and competitors change, “the analyst builds this feedback into the scenarios.” The firm can use this information to examine its position in the industry, by developing a strategy for each scenario.

Finally, “The firm may choose to try to cause the most advantageous scenario to occur if it has resources; or it may be forced by limited resources or great uncertainty to maintain flexibility.” In any case, the firm will benefit by identifying the Key Events” which will signal whether the scenario is perfect or not.

Conclusion:

Porter believes that despite the uncertainty of the emerging industries, through the scenario tools, the firm will identify the valuable benefit to create an agenda for its strategic planning and technological monitoring.

More from the book here