Recently I had the opportunity to do a series of presentations on scenario analysis at the China Institute of Competitive Intelligence 5th annual conference in Shanghai. I used 3G/4G wireless as a use case for scenario analysis. The high-level scenario analysis the scenarios I’ve developed illustrate four very different possible futures for the telecommunications industry.
The true benefit of scenario analysis is that it helps decision-makers create strategies with a view of the multiple ways the future may unfold. The best and most important outcome of a full scenario analyzes is that it enables executives to learn about the trends in their industry, recognize the need to adapt to fundamental change, prepare for the unexpected and continue a strategic conversation (to steal some lines from Craig Fleisher and Babette Bensoussan).
With scenario analysis strategists get a view of multiple possible futures. They can make several decisions without knowing with certainty which scenario (if any) truly describes the future. Strategists will be able to identify strategies and tactics that are common to all of the possible futures described by the analysis. They can determine whether or not there are any steps the company can take to make it more likely that an ideal end state will come to pass, such as lobbying regulators or lawmakers to enact specific policies. CI professionals can use the scenario analysis to identify milestones as the basis of early warning systems so that the firm can be forewarned of which scenario is likely to be as time passes.
As I undertook this effort I came to see the true importance of having a diverse team with a variety of perspectives and skills in conducting a full scenario analysis. For example, it would have been great to hear from at least one network engineer about the challenges of transitioning from 3G to 4G and interoperability among the various wireless standards that are deployed in the market. CI professionals interested in conducting their own scenario analysis should take the need for diversity very seriously.
A true scenario analysis will be more bound than what you see here. Good scenario analysis bounds the timeframe, which I have left very vague but estimate as the next 3 – 5 years for these scenarios. Some scenario analysis can look as far as 10 years into the future. Also, because the telecommunications industry is a mix of global and local markets as well as regulations a true scenario analysis would likely limit itself to a specific market (telecom equipment or services) or geography (the US, Europe or China). This analysis is not bound on these dimensions and as a consequence is more “squishy” than a true scenario analysis.
The Four Futures of the Telecommunications Industry
As I conducted the analysis I concluded that these are the two most important uncertainties regarding the future of the telecommunications industry:
- Whether or not telecommunications systems will be largely open (as they are today) or closed (the extreme case being the Bell system in the US prior to divestiture).
- The cost of commodities is going to have substantial impact on global economies. The slower growth curve in the US and Europe versus the growth of China and India is a given. However, all economies will face the potential for major shocks if commodity prices vary wildly.
With these two uncertainties as my axis that enabled me to create a 2 x 2 matrix of four possible futures:
- Telcos Set the Pace: A world of stable commodity prices with closed and controlled telecommunications and IT infrastructure. Telecom service providers will seek to maximize the Return on Capital (ROC) by sweating existing assets. Telcos will be slow to roll out 4G infrastructure and prefer to limit new applications to limit the pressure on existing networks.
- Google World: A world of stable commodity prices with open telecommunications ecosystems. New devices and applications excite end users and create new value, driving adoption and requiring telecommunications service providers to upgrade their networks quickly to keep up with demand. Revenues for telecoms is high here, though ROC is much lower for telcos. Equipment manufacturers perform very well in this scenario.
- Innovation Stagnation: A world of economic volatility and with closed telecommunications systems. For Americans who remember the telecom industry of the 1970s this is a modern equivalent of that. There will be no move to 4G during this scenario. We’ll see a greater consolidation among equipment manufacturers, and could even see telecom carriers purchase equipment makers in a reverse vertical integration play.
- Reverse Innovation World: A world of economic volatility but open ecosystems. Every customer and provider in the IT and telecoms industry is trying to do what they are doing today with lower cost. Equipment manufacturers from China such as Huawei and ZTE are the big winners in this scenario. Chinese and Indian business models that function with lower revenue and less overhead are enthusiastically adopted in the US and Europe.
I’ll no doubt be doing more with this analysis and writing more about it in the future. If you have any thoughts reactions or questions as you read this I would love to hear them. I will be presenting an updated version that focuses more on the process and value of scenario analysis at the December meeting of the Society of Competitive Intelligence Professionals (SCIP) DC chapter. You can see more details about that event and register here.