And that’s the point – it doesn’t have to be guesswork, there are solid techniques for understanding a business’ future prospects.
Today, most businesses are managed using a three, perhaps five, year horizon. The implication is that only about twenty percent of their value is being managed; the rest is being left, more-or-less, to chance. Now, clearly someone believes cash flow is there longer-term or they wouldn’t be including it in the business’ valuation. All we’re advocating is that business leaders look thoughtfully into that five to fifteen year timeframe, and set their plans according to what they see. In our experience, there is both a lot that can be predicted in that period, and there is a lot to be decided about where the business will go, and how much cash flow and business value will be captured.
For example, back in 1999 one marketing executive scoffed at the idea that market profitability could be planned for up to 2010. We were looking at the printer market, and the unknowns included the prospect that technology would substitute printing out almost completely – something akin to the paperless office. After only an hour or so, we were able to sketch out a reasonably solid forecast for the market together with several contingencies – enough to place some very serious bets.
How could that be done? The answer is by using a system of constraints. What are the Market Inflexion Events? We knew, for example, that eBooks would be technically feasible in the next few years, and that to commercialize the idea – that is, to get them at a price that approached that of paper books – would take at least another five years. From there, the contents of books would have to become available is a way that protected copyrights (using Digital Rights Management systems) – another likely delay to a large market opportunity. The book printing market, it became clear, was largely protected for at least a decade. After that, however, it was also clear that eBooks would likely be an attractive proposition for customers – though not as a stand-alone device, but as a add-on to cell phones and PDAs. In that one afternoon, we sketched out a high-value strategy of exploiting the book printing market in the next decade, while positioning the business to take advantage of an upcoming electronic book market – books locked in a memory stick.
Its not worth dwelling on eBooks, except to say that it is often surprising how much can be forecast, and how much future market Profit Pools can be found and sought after. Those businesses that are not using this sort of approach are simply not drawing a robust picture of what the future offers, and are missing vast amounts of business value.
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