Editor's Note: Many articles have surfaced in recent months about strategic planning. Acronyms abound - RED (rapid), FAST, EASY. Some others stress the creation of assumptions, or financial-based models. While acronyms and simple approaches may sell books or make for interesting speaking engagements, the truth is there is no magic button, no easy way to predict the future. Uncertainty and pace of change have accelerated, resulting in the need for a more flexible approach to 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]
How well are you prepared for what you think will happen in the future?
How well are you prepared for what you don't think will happen?
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.
Scenario Planning is NOT the same as contingency planning.
All organizations should include contingencies in its planning - a good example is disaster recovery from power failures, natural disasters, etc. However, scenario planning looks at the dynamics of potential changes in competitive landscape, disruptive innovation, changes to buying patterns, etc.
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?
Differences between traditional strategic planning and scenario planning
Traditional Strategic Planning
Strives to Maximize return
Strives to pursue possible opportunities
Fear of Uncertainty (Assumes away uncertainty)
Seeks gains from uncertainty
Focus is on "working the plan" and minimizing risk
Maximizes learning and flexibility;
Builds adaptability in management and culture
Typically blind to competitive threats from non-traditional sources
Anticipates sources of disruptive innovation and competition from non-traditional sources
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?
· What is the output from this process?
· Putting scenario plans into action - what are the implications? .Comment on your experiences with scenario planning.