How to turn uncertainty into advantage in the manufacturing industry?
The world is changing at an increasingly rapid pace and uncertainty about the future development of the manufacturing industry is higher than ever. In this world where the speed of change is constantly increasing, how can companies plan for the future and create competitive advantage?
What is strategic foresight?
The manufacturing industry is facing more uncertainty than ever before. Global raw material and component shortages, supply chain disruptions, shifting market dynamics, data-sharing roadblocks, political agendas, geo-political tensions, cybersecurity threats, war-on-talent and employee well-being are some of the huge challenges the industry is currently facing. At the same time, the industry is going through massive changes, as sustainability has become a priority in many areas, giving rise to e.g. circular economy solutions. National resilience is a key focus area for many countries after the Russian attack in Ukraine. Automatisation is changing the work life and some companies are utilising a global expert pool remotely. Customer demands are changing, giving challenges to product design, and novel technologies and business models are disrupting the industry.
Strategic foresight aims to create well-argumented views on the future and take advantage of the momentum before others. Since the information is accessible for all, general trends or industry reports do not create a competitive advantage. Instead, foresight is about creating tailored insight to foresee and act upon changes, such as emerging consumer needs, legislation changes and new market entrants, that still remain invisible to others. The tailored insight focuses on the most relevant and most critical uncertainties for a given company and the unique insights are not universally applicable. Strategic foresight is not a task of a separate innovation or business intelligence function, but should be located at the core of business management, providing strategic insights as a basis of shared situational view across all divisions and functions. [1]
Strategic foresight aims to understand, foresee and shape a company’s business environment. It provides a rigorous, structured methodology that helps organisations to identify plausible and possible events at an early stage and create an advantage by acting before competitors by turning the foresight into new initiatives and business models. Unlike forecasting that focuses on the future through a specific and narrow lense, with a linear perspective on the projected future, strategic foresight helps companies to create a broad view on what could happen and prepare accordingly. Based on multiple sources of academic research, strategic foresight has enabled companies to obtain significant competitive advantage. [2]
“Companies that commit to systematic strategic foresight and long-term planning grow +200% faster and are +33% more profitable than average.” - Rohrbeck & Kum [3]
The challenges with forecasting
Forecasts are developed based on data, which in and of itself is always a documentation about the past, or what has happened. The challenge with the use of data to forecast further into the future is that there might not be any correlation between the past and the future. Therefore forecasting models at their best simply describe what may happen in the future if development continues similarly to the past. Forecasts also often reflect the cognitive biases of the model's developer.
Forecasting can be a valuable tool when combined with strategic foresight tools like scenario planning. While forecasting looks forward from today, strategic foresight takes a future-back approach. Many top executives, such as Jeff Bezos and Elon Musk, actively use strategic foresight to shape the future. They systematically look far ahead, long enough to make change apparent for key decision-makers. Based on these insights, they make deliberate choices on where they want to be and systematically influence the market to ensure the future they desire will materialise. Strategic foresight creates the framework for discussions that would not be had while only using traditional forecasting. [2]
Scenario Planning at Rolls-Royce
A good example of a company using scenario planning to bring structure to future planning and to update the current strategy into a more robust one is the Rolls Royce scenario planning process in 2016. Rolls-Royce was founded in 1906 to produce quality cars in the UK. Although Rolls-Royce Holdings plc is no longer in the auto business it is currently involved in the design, manufacturing, and distribution of power systems for aviation and other industries. Instead of just selling the equipment, they generate much of the revenue in the aftermarket service business. Despite this, in early 2014 the company ran into difficulties. These involved a cyclical decline in orders, the slowdown of the Chinese economy, oil price fluctuations and the end of a commodities boom. The company’s civil nuclear power business also suffered in the wake of the accident at a nuclear power plant in Fukushima, Japan, in 2011. While these events were mostly unrelated, they affected every aspect of Rolls-Royce’s business. During 2014 and 2015, management issued five profit warnings, and the share price fell more than 50%.
That summer, the company’s top managers participated in an executive education course at Oxford University on scenario planning. After the course, Rolls-Royce started a company-wide scenario planning process to discuss significant factors that might affect Rolls-Royce and to develop a set of strategic questions. The participants created scenarios for Rolls-Royce that had to be plausible and relevant to Rolls-Royce’s circumstances, and challenge assumptions underlying the current strategies. Participants focused on three draft scenarios, reviewed and critiqued the scenarios, and considered the most important strategic questions.
The questions that arise in a scenario planning process are very relevant in strategy work, since they are based on the most critical uncertainties from the perspective of the company. The scenarios are unique for each company and they provide tailored insight for the company that conducts scenario planning. Rolls-Royce management endorsed the scenarios as a basis for the 2016 strategic planning process. Any investment proposal had to take into account how it would be affected by the scenarios and what should be done to mitigate risks or exploit the scenarios; investments that didn’t meet this qualification were rejected. The scenarios became a determining factor in the selection of the investment initiatives that emerged from the strategy process. According to Rolls-Royce, the scenarios also provided the backdrop for the company’s 2017 strategy development process. [4]
How to create advantage with strategic foresight?
So, what does this all mean for manufacturing companies that want to create competitive advantage? Investors manage risks by diversifying their portfolios. Similarly, more companies have shifted from forecast-based fixed strategies to managing multiple futures and adaptive strategies. To hedge against big losses, companies must prepare for alternative developments. But to win big, companies must try to shape their own future. The Rolls-Royce scenario planning process is just one of many examples of manufacturing companies utilising strategic foresight to prepare for the future and identify new opportunities. The value of the scenarios for manufacturing companies is created in the discussions that the scenarios provoke, when testing the current strategy against the scenarios and when planning how to mitigate risks and capitalise on new opportunities that arise in the scenarios. The end goal is to create a robust strategy that performs well in all of the scenarios, regardless what developments the future takes. [2]
Scenario-planning has become a popular tool to identify how different uncertainties may shift the markets and turn the insights into new business opportunities and better future-preparedness. With the use of scenario-planning, manufacturing companies can commit to developing a competitive advantage in the long-term, while maintaining strategic flexibility in the present. This flexibility is created through choices that are robust and predefined options for scenario-specific circumstances that help the companies act quickly in case of sudden changes. A good way to assess this strategic flexibility and its value in a structured manner is by using real-option -thinking.
In the case of Rolls-Royce, the company needed new viewpoints to their strategic planning and foresight to increase preparedness for the future, but manufacturing companies can benefit from strategic foresight in many different ways. They can increase the resilience of their supply chain, gain foresight on future preferences of consumers to help with product design, identify potential new business development opportunities and new business models, focus their R&D efforts on the most critical themes and identify the biggest risks that they should mitigate.
Even a single uncertainty can have a significant impact on companies performance. For example the material and component shortage has limited the range of strategic choices for many companies. Producing semiconductors is especially problematic, since the required production scale for profitability is huge and the process is often not safe and sustainable enough for EU standards, so manufacturing companies must buy them from outside the EU. If the supply is disrupted, there would not be required capabilities to produce them in the EU and manufacturing companies could be forced to move their production outside the EU countries.
Different future market circumstances require different actions and to be able to make deliberate choices we have to have an understanding of them. Utilising scenario planning to identify alternative market conditions helps to identify the set of alternative choices a company can make. Strategic foresight helps companies prepare for different futures and identify the alternative choices in advance. All in all, strategic foresight helps manufacturing companies place the right bets in an environment of increasing uncertainty. [2]
“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.” -George Soros
Are you interested in hearing more about our approach? Download our strategic foresight toolkit or have a call with us to discuss the opportunities to use strategic foresight to create an unfair advantage for your company.
Sources:
1. A Future-Back Approach to Creating Your Growth Strategy, Innosight (2014)
2 Swanlake Strategy (2022) Strategic foresight toolkit
3. Rohrbeck & Kum (2018) Corporate Foresight Benchmarking Report 2018: How Leading Firms Build a Superior Position in Markets of the Future
4. Ramírez, Churchhouse, Palermo, and Hoffmann (2017) Using scenario planning to reshape strategy. MIT Sloan Management Review