Über die Autorin bzw. den Autor

Dr. Simon Ramo, a recipient of the Presidential Medal of Freedom, is a pioneer in cofounding successful high-tech companies.
Dr. Ronald Sugar is chairman and CEO of Northrop Grumman, a $33 billion hightechnology corporation defining the future of global security.

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Strategic Business Forecasting

The McGraw-Hill Companies, Inc.

Contents

Chapter One

We begin our discussion of how to perform intelligent forecasting by examining the past record of predicting occurrences of great importance to society. That score, we shall find, has been so poor that it impels us to the conclusion that leaders of government and private entities must strive to be more intelligent in the future than in the past in predicting the future and shaping it. In this book we will present procedures that have worked well for us in making useful predictions. To shape the future, it is necessary to understand why leaders have done so poorly in the past. It is common, we must note, to cite poor performances in making predictions. Authors of books relating to forecasting seem often to revel in describing badly wrong predictions by others, especially when those predictors erred colossally and disastrous consequences followed (and when the predictors had been widely admired beforehand for their leadership and vision). But parading a collection of horrible past mistakes is not the object of this book. The examples of poor past predictions that we shall present were all chosen to aid in later discussion of why forecasting often has been inadequate and how to benefit from superior efforts.

In the decades closing the 1800s, a company known as Western Union was riding high. Its pioneering technology was revolutionizing the transmission of information worldwide. Having grown very large and prosperous, Western Union was a prime example at the time of how advancing technology could alter greatly and improve radically business and government operations. Western Union had turned down the opportunity to buy a new company founded by an inventor named Alexander Graham Bell. The big corporation's experts decided that "telephony" was an unnecessarily complex way to send messages, one foolishly employing human voices and ears. Fundamentally, and therefore permanently, the telephone would be limited in its transmission quality and its distance coverage. It would be costly compared with any possible advantage it might hope to offer, and it also would be extremely error prone in the critical elements of word generation and word recognition because of its dependence on those unreliable and quality-inconsistent human components. All in all, telephony, they concluded, would constitute an unsound investment by a company already possessing the proven answer to society's need for rapid and reliable communication at a distance.

Western Union's decision was an abysmal failure to envisage the future correctly. It occurred even though Western Union then housed the world's largest and most knowledgeable and experienced team in the application of technology to information transmission. Bell's company became AT&T, the world's top communication entity and one of the largest (for almost a century, the very largest) of corporations, while Western Union became increasingly minor.

Western Union was not alone in prediction failures, but it was a strong contender for the worst record among those attempting to foresee what was to come in their own specialized fields. We shall see shortly that failure to predict correctly, often even to anticipate at all, the coming of the most significant developments has been common. Indeed, those best positioned to visualize and gain from society-changing events have often erred most comprehensively.

In view of the enormous impact on the world of progress in technology, we shall describe more examples of the past record of forecasting in that category. We shall also note that poor foresight about the advent and effects of world wars served the world poorly. Prediction efforts in only these two very different areas, technology and war—and we shall describe briefly some examples in other fields as well—provide ample evidence to justify our assigning a low score to past predictions.

All now recognize that possessing the capability to exploit the progress of science and technology is necessary for a growing economy and a healthy and secure citizenry. Science and engineering advances occur continuously today through both private and government efforts. The forecasting by some individuals has been spectacularly insightful and has led to new and successful companies that grew large and became basic to the nation's gross national product (GNP). But most new companies, in contrast to their founders' and backers' predictions, fold quickly, and the established large corporations often fail to see and act on future potentials. There have been far too many huge prediction errors and oversights by both government and industry leaders.

Predicting TV

When World War II ended, it was apparent that broadcast television had become technologically achievable. Engineers, that is, could apply new technology so that scenes in studios could be reproduced on home televisions. But would broadcast TV soon arrive? Could studio cameras, transmitters, receivers, and programs worth watching all be produced at feasible costs? Would there be enough viewers so that advertisers would pay what it would take to reach that audience? Would the timing be the near future, or would successful—that is, profitable—commercial television broadcasting be far off in time? That a serious prediction effort was needed to probe such issues clearly was indicated for any company considering a large investment to create a future television broadcast business.

One of us authors (S.R.) was employed at General Electric in 1945 (as a research scientist, not a TV broadcasting expert) and remembers well having the privilege one day of sitting in on a presentation made by GE's TV market prediction team. The team compared TV broadcasting with radio broadcasting, which was at that time a well- developed, prosperous industry producing programs reaching many millions of listeners.

The GE team explained that the price of a home TV set would be more than 10 times the price of a radio because of the much greater complexity and quantity of the TV's parts. But the number of hours a day in which typical viewers could be expected to watch their TVs would be less than a tenth of the number of hours in which typical radio listeners were listening to their radios. The team pointed out that a listener could enjoy a radio program while preparing dinner, cleaning house, knitting, driving the car, boating, dressing, performing calisthenics, painting, bathing, or making love. In contrast, a viewer must look at the TV screen. If a radio is a bit off in sound quality, only serious classical music lovers might notice or care. A picture ever so slightly off in focus or stability, however, would be totally unacceptable to every TV viewer.

The GE predictors concluded that a very high cost would be incurred in preparing programs for sight and sound as compared with sound alone. The cameras and their handling, the costuming of actors, the creating of the scenes, and the complex rehearsals would obviously be vastly more expensive than what was required for simple audio broadcasting. Even if movies were to constitute most of TV entertainment, the visual quality of the picture and the anticipated small screen of a home receiver would be noticeably inferior to what the public was accustomed to enjoying in a movie theater.

Not surprisingly then, the GE team predicted that TV would be a disastrous failure as a business. The largest electrical company in the world predicted that if TV broadcasting was ever to be commercially sound, it would have to be in the distant future when the fundamentals might conceivably somehow change greatly. So GE passed on television. (GE later did make a serious but failed attempt to enter the field.)

Perhaps we can begin to detect a pattern here. Maybe we should ask why very large and very successful companies flunk out in foreseeing the coming developments in their own areas of specialization. But that is getting ahead of our story. For now we continue to describe amazing shortcomings in past predicting.

From Light Bulbs to Computers

Well over a century has passed since electric lighting and power altered the way people live and produce for their needs. Radio and television broadcasting arrived and added more changes in the patterns of society. A number of American companies dominated these remarkable applications of electricity-based technology—notably General Electric, Westinghouse, and RCA.

The last half century saw the emergence of more electrical technology breakthroughs with vast influence on the world. Semiconductors made possible electronic computers whose arrival changed by a factor of millions (often billions) the capability and usefulness of acquiring, processing, storing, transmitting, and utilizing information. Information is what makes the world's operations spin, so every activity of human beings is being transformed by the enormous expansion of information technology, be it in manufacturing, communications, banking, health care, entertainment, education, transportation, or military and civilian government activities.

The Industrial Revolution is often described as the replacing and/or the great magnification of man's physical capabilities by machines. The information revolution might be thought of as a massive extension of human brainpower. So did the large and successful electric corporations of the world predict these huge electric technology–based developments and exploit them? Did the centers of expertise in electricity see the coming of the computer age? Did they become the foremost computer companies? No. Not a single one foresaw the arrival of computers and then acted on that vision. IBM, a "punched-card" company, was not in the electronics field before the age of computers arrived; that company made itself over, becoming a new one to enter the new field. (The son of the founder of IBM, Thomas Watson, Junior, led this decision to change. IBM's founder, Thomas Watson, Senior, had predicted that there might be a national need for perhaps five or six electronic computers.)

Semiconductors, the core constituents of computer componentry, replaced most vacuum tubes. Yet not a single vacuum tube manufacturer saw the future of semiconductors and acted to become a developer and supplier. What a record of strange and unintelligent predicting!

The ICBM Race

In 1953, intelligence reports added up to the astonishing conclusion—by the U.S. Defense Department (DoD)—that the Soviet Union was well along in the development of an intercontinental ballistic missile (ICBM). This perception triggered a huge crash effort to develop an American ICBM, that project becoming the largest technological development in U.S. military history (well exceeding in assigned resources the wartime Manhattan Project to develop the atom bomb).

With ICBMs, the Russians could set off nuclear explosions against the United States with total disdain for the United States' multi-billion-dollar defense system constructed to protect America from a possible manned-bomber attack. The frightening prospects of ICBMs with hydrogen bombs arriving from the USSR included not only the short flight time but also the enormous velocity of the incoming warheads zooming down from the sky. Their speed would exceed greatly that of manned bombers, and, with their high-angle trajectory, they would cause the missile's nose cone—the container of the bomb—to go unnoticed by the U.S. radar tracking system in existence at that time. That existing radar installation was able to detect manned bombers traveling over thousands of miles of land and to then instigate a U.S. response by which its interceptor planes could be launched to attack them. But that radar system would likely not detect a fleet of Soviet ICBMs carrying nuclear bombs that could destroy the United States in half an hour.

The USSR could not be allowed a monopoly of so awesome a threat, so President Eisenhower decreed that the United States must develop an ICBM system at utmost speed, and he assigned to that project the nation's highest priority.

It was utterly amazing to the DoD that the USSR could have attained an early lead on so advanced a weapons system. The Soviets had been predicted to remain far behind us technologically. For an intercontinental ballistic missile to make military sense, several key technical problems, rated then by the DoD as close to insoluble, needed to be solved. An H-bomb would do enormous damage wherever it was detonated, but the accuracy inherent in the technology then available for guiding a missile was as yet so limited that a target thousands of miles away could be missed by an unacceptable degree.

The early H-bombs were extremely heavy. Furthermore, the enormous heat generated by the payload during its streaking reentry into the atmosphere would destroy the bomb unless it was protected by a heavy blanket of material. The solution to that problem appeared to be the use of rocket engines of absurdly gigantic, hence impractical, size as the only way to boost the weighty payload into space. Moreover, the warhead and the other required apparatus (guidance and control gear, pumps, valves, and other instruments) would have to withstand terrific acceleration and vibration that, it was thought, would destroy that critical equipment.

All in all, a ballistic missile to deliver atomic bombs far around the globe was mistakenly judged by the DoD at that time as a far-fetched idea. The United States already had the "right" means for bomb delivery, the manned bomber. The DoD's faulty predicting in the early 1950s thus caused it to misjudge the ICBM possibility. The inaccurate portents aside, America and the Soviets began a furious all-out ICBM race. Fortunately, the United States passed the USSR to achieve the first ICBM operational force.

What predictions then ensued? Did the ICBM capability lead to other advances? What of the possibility of utilizing space? We had learned how to loft a heavy package of equipment high above the atmosphere and to cause it to land on a precisely designated area several thousand miles away. With the planet's being spherical, what if the payload were given a slightly higher boost? Would it overshoot its target, miss Earth entirely, and become an artificial satellite? Thus, while developing the ICBM, we had automatically created the technology needed to orbit Earth.

Many promising new, advantageous applications thus were opened up. A radio signal could be directed to a receiver in a satellite whose companion transmitter could send the signal back down to a receiver elsewhere on Earth. It would become practical to telephone and to broadcast radio and TV programs intercontinentally and to direct military information and industrial, financial, medical, and every other kind of data throughout the globe via satellites.

Because satellites could be placed in highly stable orbits and also because their locations were always predictable with great accuracy, they could be used as instrumented "artificial stars" to create a breakthrough in airline navigation and to improve the navigation of ships at sea and vehicles on land.

The capability for instrumented satellites to examine Earth and transmit observations to ground stations led to obvious applications to military intelligence gathering, reconnaissance, and battle control. Earth-surface-probing spacecraft could be expected to benefit the mining, agriculture, petroleum, fishing, and forestry industries. Space-based atmospheric and surface instruments could simultaneously report on worldwide environmental conditions (temperature, moisture, pressure, tides, ocean-wave conditions, wind velocity, ice, snow, rain, fog, and so on). Great progress in Earth environmental prediction and weather forecasting would result.

A host of major industrial corporations in the United States— airplane companies, electric and electronics equipment manufacturers, chemicals producers, instrument makers, and numerous apparatus specialists—were involved in the huge ICBM program, and all should have noted these future space-based possibilities. Surprisingly, however, only one company—TRW—predicted that a "space race" would occur and that a space technology industry build-up would follow. TRW's prediction led it to take on the risk of creating an expensive special facility to design, produce, and test spacecraft. This anticipatory effort was rewarded by that company's becoming the first, and to this day a leading, producer of spacecraft for the DoD and NASA. (The U.S. Space Foundation, in its annual Space Report issued in 2006, estimated that the space economy added up to $180 billion in 2005, 60 percent coming from commercial goods and services.)

The USSR's Sputnik

Why had the United States not predicted Russia's Sputnik and instead been so shaken when it happened? The United States earlier had announced it would send into orbit a very small instrumented capsule by 1958 as part of the so-called International Geophysical Year (IGY). The idea had arisen early of assigning the producing and orbiting of that IGY satellite to the ICBM team, which was so large an assembly of pertinent engineering talent and installed resources that it would have been a tiny added chore to loft that small package. When the IGY plans were being developed, however, America's ICBM program was the nation's highest-priority project. Also, it was a secret at the time that the United States even had an ICBM program, and adding the satellite project of the IGY, an internationally open program, to the ICBM team would disclose that team's existence. The DoD would not countenance even a trivial delay in the ICBM's operational date to accommodate what they saw as a minor science project.

The Soviet Union was behind the United States in the efficiency of its nuclear bombs and in its electronics, so it had to design its ICBM to carry a much heavier payload. This mandated correspondingly larger rocket engines. The Soviet Union's ICBM consequently could boost a greater weight into orbit than could America's. Having this knowledge by itself would not have been enough for the United States to predict an early Sputnik launch. But there was more. Although the IGY was a multinational science program, it had been planned under U.S. leadership. The Soviet Union's contribution was wrongly predicted to be minor, befitting a nation backward in science and technology. It should have been foreseen that the Soviets might resent that rating and find it irresistible to shame the United States' little IGY instrument package by orbiting a much larger payload and doing it earlier.

As it was, the Sputnik launch amazed the world and shocked the United States. We were accustomed to the Russians' excelling in vodka, ballet, and caviar, but we had expected to be the first to launch an artificial moon. The Soviet's Sputnik offended and alarmed us. America responded and the Space Race began. The United States created a new government agency, the National Aeronautics and Space Administration (NASA), which was prestigious and reported directly to the president.

(Continues...)

Excerpted from Strategic Business Forecastingby Simon Ramo Ronald Sugar Copyright © 2009 by Simon Ramo and Ronald Sugar. Excerpted by permission of The McGraw-Hill Companies, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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