Competitive Intelligence

Tactical, Operational & Strategic Analysis of Markets, Competitors & Industries

Economist: Articles on Forecasting and Prediction Markets

In this week's Economist there are two interesting articles. One is on the complexity of forecasting in the current economic environment and the second has to do with prediction markets and their uncertain future as a mechanism for forecasting inside the enterprise.

The topics are more finance-oriented than most of the frameworks and discussions that take place in this forum. They are relevant, however, because one of the recommendations that is put forward in the article on the challenges of forecasting is to incorporate scenarios into forecasts and budgets. This recommendation is attributed to Professor Hugh Courtney of the University of Maryland Smith School of Business (GO TERPS!).

Considering the experience and expertise CI professionals have in developing and testing valid scenarios as well as creating and tracking early warning systems (critical to knowing which scenario or hybrid scenario is more likely to come to fruition based on near real-time events) this leads me to a broader question about our profession: is the CFO and finance function an under-served customer of CI? This is a thought I have been working around in my head since Gary Maag and David Kalinowski's excellent session at the Frost & Sullivan MindXChange where they made the case that one of the reasons the CI practitioner is seen as disposable in down times is because the CFO does not see or cannot quantify or qualify the value delivered by CI.

On the question of prediction markets, I confess that I have no experience implementing such a market but do have a sense that markets would provide considerable insight for sales and product forecasts, profitability, etc. They could also be used to track or predict industry events, so there are potential applications both tactical and (near term) strategic. Is anybody in this forum operating (and willing to talk about their experience) in prediction markets?

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August, I remember these. Cracking and epitomised everything that CI is on a broader scale and acope than forecasting, one description of an end state, typically based on a linear extension of hoistory's trends. Bring on the sceanrios, August, bring on the scenarios
Forecasting was part of CI when I worked at Northwest Airlines many moons ago. It was all numbers and there are pros and cons to that. We didn't have a lot of surprises, and were looking into scenarios both short-term predictable and unpredictable ones. For example, who can predict world events which are devastating to the airline industry like war, airline crashes, hurricanes and terrorism? However, you can apply economic variables to your quarterly and annual numbers--as compared to your competitors and make some pretty nifty predictions. We also used things like regression analysis, all that stuff you study in MBA school to develop our forecasts.

The airline industry is very quantitative, and market researchers were frustrated since the qualitative was not respected at that time and I understand it hasn't changed that much. You also need the qualitative in CI. I think one reason why many airlines have poor customer service is their lack of attention to the qualitative.

Also in response to your remarks about CFOs valuing CI. I think it depends on the company and its culture as to who should be supporting CI. I know at a number of companies that it is finance who pays and budgets for CI. At NWA it was marketing, but we worked closely with scheduling and finance to get our forecasts together. We had to work together to make it work.

I have had this discussion with others over years, and many don't include forecasting as part of CI, which I think it dangerous! HTH.

ATB,

Ellen

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