What’s the biggest challenge with financial forecasting?
Uncertainty.
In 1994, during a cross country drive from New York to
Seattle, Jeff Bezos began writing down a business plan. This business plan
would ultimately lead to Jeff leaving the financial security of his job at a
New York hedge fund and begin launching his business from his garage.
Twenty-three years on, Amazon
is now worth half-a-trillion dollars.
Amazon entered the online retail
space at a time of relative infancy and took only three years to reach a
valuation of $505 million. Countless many retailers and dot-com companies have
fallen by the wayside, but many have benefited enormously from acquisition by
Amazon themselves and the subsequent investment of resources, both human and
otherwise. In fact, at one point – Amazon was worth just half of high-end
supermarket competitor Whole Foods.
Amazon’s $13.4 billion dollar acquisition
in 2016 immediately increased Amazons market cap by
a further $15 billion, effectively paying off the acquisition outright.
Amazon’s domineering influence on the online retail space means
that Amazon now accounts for over 43% of online transactions and shows no sign
of slowing down. Though, while Amazon may look to hold a monopoly over the
online retail space, Bezos Expeditions (Jeff Bezos’ philanthropic project) has
invested in a significant number of start-ups, of which – an even great number
have looked to disrupt their respective markets.
Notable companies that have
received funding from Bezos Expeditions include Airbnb, Business Insider, Uber,
Twitter and Google. Undoubtedly Bezos’ investments have helped transform mere
ideas into behemoths of the financial and commercial world with many already
taking majority shares in markets of their own.
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But let’s take a step back.
If we were to now look away from
benefactors of Bezos Expedition, look inwards and ask ourselves “is market
dominance and monopoly a bad thing?” – we’d cover the most common topics:
- Competition among two or three key rivals drives consumer costs down
- Competition among rivals promotes user experience
- Buying options are limited to a handful of reputable organisations
- Revenue generated by competition goes towards furthering advancements within the field.
But at what cost?
Because for every acquisition, there are
forty start-ups who now have an even slimmer chance of getting a shippable
product to market. Sudden growth in a competitor at start-up can draw further
investment from other sources – financially suffocating the less fortunate
competition. Ultimately, it would be fair to say that acquisition muddies the
water and results in fewer fresh ideas.
In the past, acquisition and mergers with competition were a
significant fear for businesses in the past and in some industries, they still
are. But while these are still a very real worry for mid-level competition –
the greatest fear for small-medium sized businesses doesn’t come from an
existing market leader, but from a disruptive entrant.
Google’s self-driving cars, Tesla’s SpaceX, Amazon GO, Uber
Eats and Microsoft Hololens are each disruptive entrants in new markets and
have notoriously changed the playing field. How could existing organisations
predict that some of the world’s largest conglomerates would suddenly enter
their field? Even the most accurate forecasting or financial
planning software wouldn’t be able to sudden market entry, and that’s sort
of where the one of the main issues with modern business lies.
Forecasting.
You can have access to all the historical data in the world,
you can account for seasonality and general market influence based on the
predicted growth of your competitors, you can forecast based on upcoming bills,
trade agreements and political elections…but there’s absolutely nothing one can
do to combat spontaneous market entry.
Recent years have offered up some of the most significant
market uncertainty in history, with the surprise Brexit referendum decision,
the election of Donald Trump and the emergence of Bitcoin and Blockchain to
name just a few.
Even the most experienced data scientists and economic
analysts have found it impossible to accurately predict how the market would
react to the events of recent years.
So, is forecasting fundamentally flawed? If we can’t predict
where we will be in five years’ time because we can’t predict acquisition,
mergers, or market disruption then should we even forecast to begin with? Of
course, because while forecasting is so uncertain when looking far ahead, our
short-term forecasts are more important than ever. It’s how we and the market
react to disruption that ultimately holds the key to business opportunity.
The
business horizon is treacherous, but not one fraught with opportunity.
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