Editor's Note: This is the first of a five-part series on the impact of
scenario planning. The Mead Consulting Group has been utilizing scenario
planning to help clients build flexibility into planning and execution for
almost 20 years. While scenario planning was once conducted primarily with our
larger clients, today, over half of our clients (owner-operated, strategic, and
private-equity- backed) have discovered the benefits of scenario planning.
- DPM
Imagine yourself inside your business in September 2007. Life
is pretty good. Your business has been consistently growing with the market.
The Dow Jones is close to 14,000, unemployment is 4.5%; oil prices are at $45 a
barrel.
You are in the middle of developing your company's plans and
budgets for 2008. How likely is it that the assumptions in your 2008 plan
accurately forecast that one year later in September 2008 the Dow would be
below 9,000; U.S. unemployment would have risen to 6.5%, on its way to more
than 10%; and oil prices would have risen to more than $140 a barrel before
falling below $40 a few months later?
Uncertainty, volatility and risk are here to stay. Was this a one-time, isolated event? Are we ever
going back to life as it was in 2007? Life and planning in businesses have
changed. Uncertainty, volatility and risk are here to stay. The world has been
transformed from a series of loosely connected, reasonably predictable
economies to a complex web of relationships where the global impact of local
events is felt almost instantaneously.
The past is no longer a good predictor of the
future. In response to such uncertainty, traditional
strategic planning and budgeting simply no longer works. Scenario planning,
which was pioneered by Royal Dutch Shell in the 1970's, was traditionally used
only by large organizations such as AutoNation, British Airways, Corning,
Disney, General Electric, KinderCare, Mercedes, UPS, etc.
Today, scenario planning is being widely used by
many small and mid-size organizations. In the past 5 years , Mead Consulting
has seen the number of middle-market and lower middle-market companies
embracing scenario planning grow by more than 3X. These companies cross a
broad array of industries from technology, software, education,
and consumer, to manufacturing, distribution, health care, and business
services. These companies are seeing a dramatic improvement in their management
team's ability to adapt to changes in the environment, and to move more quickly
to gain competitive advantage. In addition, business owners, boards, and
investors are beginning to ask questions that can only be answered by scenario
planning.
Traditional strategic planning alone can be
based on a foundation of shifting sand. Traditional strategic
planning causes us to make calculated "guesses" about the future. We
make a series of assumptions about our industry and competition, as well as
social, economic, political, and technological factors. Then we develop
strategies based on those assumptions. Many times, it is the most senior, most
dynamic, or most powerful person in the room that forces decisions about these
assumptions. Black swans never seem to make it into the discussion and are seen
as unlikely and their consideration is regarded as a diversion, or waste of
precious management time.
Really? Since we now know how uncertain the future is, why
would we ever base our future on such a faulty foundation?
Scenario planning is largely focused on
answering three questions: (1) What could happen? (2) What impact would a given scenario
have on our strategies, plans and budgets? (3) How should we respond to
maximize our competitive position?
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Differences between traditional strategic planning and scenario
planning
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Traditional
Strategic Planning
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Scenario
Planning
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Static
Plan
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Dynamic
possibilities
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Strives
to Maximize return
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Strives
to pursue possible opportunities
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Fear
of Uncertainty (Assumes away uncertainty)
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Seeks
gains from uncertainty
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Focus
is on "working the plan" and minimizing risk
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Maximizes
learning and flexibility;
Builds
adaptability in management and culture
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Typically
blind to competitive threats from non-traditional sources
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Anticipates
sources of disruptive innovation and competition from non-traditional sources
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Scenario
Planning does not replace strategic planning - it adds an important context. Scenario Planning should be the first action your senior
management takes before embarking on a planning process. Best practices for
companies on a calendar fiscal year show that scenario planning occurs between
the months of April to July and strategic planning between the June to
September period.
Over the next few issues, we will address the
following questions:
·
What is scenario planning and why is it critical
for my business in today's environment?
·
How do you build scenario plans?
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What is the output from this process?
· Putting scenario plans into action - what are the
implications? .Comment on your experiences with scenario planning.
