keymodels
The HOOF approach to demand forecasting
How can the hoof approach to demand forecasting support strategic choice or positioning?
Contents
Market size is all very well, but what often matters more in strategy development is what the market is doing, where it is going – the dynamics, as opposed to the statics.
A market-size estimate is a snapshot. Strategy also needs a view of direction and speed. HOOF translates historic demand and its drivers into a reasoned forecast for each product-market segment.
When to use it
Use the process whenever a decision depends on future market demand.
Origins
I developed HOOF as a four-stage forecasting discipline: Historic growth, Origins of past growth, Outlook for those drivers, Forecast growth. A strict acronym would be HDDF; HOOF is easier to remember and suggests the rising path every forecaster would like demand to follow. The football metaphor is deliberately imperfect: like a kicked ball or a product life cycle, growth can reach a summit and fall; see The strategic condition matrix (Arthur D. Little).
What it is
Growing markets usually give a company better odds than shrinking ones, but extrapolation is not enough. HOOF links a measured trend to the forces that produced it, asks how those forces will change and then derives the forecast. Its value is the explicit chain of reasoning, which can be challenged and updated.
How to use it
Apply the stages separately to each important segment and keep real volume growth distinct from nominal revenue growth.
Historic growth
Assemble a recent demand series from market research or a carefully constructed estimate. Do not anchor on the latest observation. A market that rose 8 per cent last year may not have an 8 per cent trend: it might have fallen two years ago, remained flat and then rebounded by 8 per cent, leaving average annual growth near 2 per cent.
Prefer a compound rate over several recent years and inspect the path. If annual movements were unusually volatile—as in 2008–11—use smoothing such as a three-year moving average before estimating trend. Measure comparative market growth in real terms. Nominal growth includes price change; real growth removes the relevant market-price deflator and better approximates volume. Add price forecasts back when converting demand into revenue and a financial plan.
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