Why every company should be doing scenario planning

Editor's Note: 

I have had a number of conversations with healthcare companies in recent months. Everyone wants "a strategy" - to deal with the new healthcare landscape. My response has been a consistent, " Do you really know how this is going to play out over the next few years?" Their answer is always, "No, there could be several very different ways the markets may go. But we need a direction." 

With great uncertainty and multiple different views of the future, a company needs to do scenario planning, so that it thinks about the different possible views of the future and how it would move or adapt to best position itself. 

The Mead Consulting Group utilizes scenario planning to help clients build flexibility into planning and execution and to help leaders think broader.. 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]

   

 Why every company should be doing scenario planning

If your business or industry is predictable, you need not continue reading. If, however, there is uncertainty about the future of your markets or industry, then your company should examine the way it plans. It isn't just healthcare companies, either. I would submit that there is little predictability in most industries.

Making assumptions gives us a false sense of security and puts blinders on us. What is the old line about the word "assume" making an "ass out of you and me?" Not to be profane, but traditional strategic planning totally botched the economic downturn/recovery of the last five years. Traditional strategic planning is based on assumptions. The planning group makes certain assumptions about the future - about variables such as economic, political, social, technological, regulatory, environmental, etc. Making assumptions is just another way of saying we are attempting to predict the future.

Really? I would suggest that there are situations where economic, social, political, technological, regulatory, and environmental factors will drive fundamental change in every business and industry of every person reading this e-Letter. It's really only a question of degree, pace, and timing.

Various organizations (e.g. Blockbuster, Kodak, Encyclopedia Britannica) could have avoided significant market pain by utilizing scenario planning. Without being overly critical, these organizations were complacent - and they made assumptions about the future that proved to be very wrong. Each was overtaken by forces that were not within their traditional industry competitive analysis.

Have the courage to consider the tough questions. How will your business be impacted by the following?

• Technology - How much will technology change your industry? Will your business or industry be affected by any of the following:
• Mobile ordering; Mobile product/ price comparisons
• Mobile payments
• "Showrooming" in brick and mortar stores and buying online  (e.g. Best Buy and Amazon)
• Contextual offers/specials, loyalty programs, other specific knowledge about customers
•  Social commerce
• Apps for everything
• Efficient visibility and management of supply chains (from end user order entry - directly impacting each step of the supply chain)
• Social/Environmental
• Power moving to the consumer (away from institutions
• Buyers have equal or greater knowledge than sellers
• Changes in culture, attitudes
• Will today's 20-something millennials abandon the desire for home ownership?
• What long-term impact will the "green" movement have on markets, products 
• Demographics - Is your customer base affected by demographics?
• Aging population in certain markets
• What does the negative birth-rate and aging population mean for European economies like Greece, Spain, Italy, or Iran and Iraq
• Baby boomers retiring, selling businesses, eldercare, etc.
• Economic
• Will the new housing construction market stay near  the bottom for another  years?
• Is the U.S. facing a period of structural high unemployment?
• Long periods of "stagflation" or inflation
• Will increasing labor rates make China less competitive? How will outsourcing look in 5-10 years? 
• Regulatory - The list is endless...
• Affordable Care Act
• FDA
• Trade
• Tax reform (Elimination of subsidies, elimination of deductions (e.g., mortgage interest), business expenses, etc.?)

Some organizations will say scenario planning is too difficult and elect to take a simpler course.  Most organizations perform traditional strategic planning or business planning/ budgeting because it is comfortable and addresses a short timeframe. However, we now know that the world is uncertain and interconnected. Companies can no longer ignore uncertainty or try to assume it away.  As author H.L. Mencken is quoted, "For every complex problem, there is an answer that is clear, simple, and wrong."

That is your opportunity. Since 2008, we've seen the number of our clients that are doing scenario planning more than tripled.  Companies that are scenario planning are examining different possibilities of the future and determining their competitive response. They are modifying the trends and information that they monitor so that they can develop "early warning" signs. These companies are building flexibility into their planning and adaptability into their leadership and culture.
Check out the full scenario planning series on our website. Comment on your experiences with scenario planning.

The Wise Leader Are you "business smart," "functional smart" - or a blend?

Editor's Note: This article struck me as particularly appropriate, as this is the time that companies approach planning for 2014 and beyond. Many company leaders,  in the years since the recession, have approached planning in a very functional and risk-averse manner. These companies ignore potential "big picture" trends and "outside the box" opportunities. As you read this article, ask yourself - what kind of leader am I - am I - "functional smart" or "business smart" - or a blend of both.

  

The Mead Consulting Group utilizes scenario planning to help clients build flexibility into planning and execution and to help leaders think broader.. 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]

  

 The Wise Leader

Are you "business smart," "functional smart" - or a blend?

This article is adapted from the book, From Smart to Wise: Acting and Leading with Wisdom (Jossey-Bass, 2013) by Prasad Kaipa and Navi Radjou. http://www.strategy-business.com/article/00177?pg=all

Smartness is the operating currency of organizational culture in the 21st-century. Whether it's called cleverness, practical intelligence, or savvy, one can never have too much of it in a company. Smart leaders can see patterns in seemingly random information, enabling them to take decisive action while their peers are still assessing a situation, and to make the strategic choices that bring competitive advantage. But there are two categories of smartness, both of which carry benefits and risks. Most executives favor one or the other, and that makes it more difficult for them to lead.

"Business smart" leaders, like GE's Jack Welch and Oracle's Larry Ellison, are big-picture thinkers who recognize that opportunities are unlimited, at least for those ready to seize those opportunities. They are competitive, dynamic, and proactive. They relish high-stakes games, and display an aggressive, winner-take-all mentality. Bill Gates exemplified this form of leadership when he took Microsoft from a college dropout's startup in 1976 to a company with a market capitalization of more than US$616 billion by 1999. But these leaders' expeditious and sometimes self-centered approach to decision making can also cause trouble. Gates learned this in 1998, when the U.S. Justice Department (followed by a number of European countries) filed an antitrust suit against Microsoft. By most accounts, this was a rude awakening for Gates. Under questioning at trial, he appeared combative and defensive. Although Microsoft settled the lawsuit in 2001, these events contributed to the company's loss of dominance.

"Functional smart" leaders are grounded in the concrete, tangible, and tactical, enabling them to achieve operational and execution effectiveness. Like Genentech co-founder Herbert Boyer and HP founders William Hewlett and David Packard, functional-smart leaders tend to have deep expertise in narrow domains. They understand that constraints are unavoidable, but also know that they can be managed by those willing to design appropriate solutions. Tim Cook, for example, who took over as CEO of Apple after Steve Jobs's death, brought a new level of operational efficiency and bottom-line productivity to Apple, honed during his years as chief operating officer. Functional-smart leadership may seem like a safer bet, but these leaders are prone to repeating poor decisions or procrastinating on tough decisions. They are more likely to be caught in the weeds of habitual practice, neglecting things outside their purview. Cook, for example, in overlooking the poor working conditions at Apple's Chinese subcontracted factories, damaged Apple's reputation and some of its profitability.

Today's business leaders need to balance narrow and broad views of their business and of the world, and to combine flawless execution with big-picture thinking. This ability to navigate swiftly and effectively between the two forms of smartness based on the context, coupled with a focus on a higher purpose and enlightened self-interest-the belief that a rising tide can lift all boats-is what we call "wise leadership." Practical wisdom gives executives the tools they need to achieve both professional and personal success: the flexibility to anticipate disruptive change, the execution capabilities to meet today's demand, and the opportunity to build their facility in ethics and shared values.

Most people, when they start their careers, have potential for both business-smart and functional-smart leadership. But over time, as they move up the hierarchy, they tend to favor one or the other. They take on what psychologists call a perceptual filter. They see what they expect to see-they become conscious of only one set of possibilities and accept only one type of behavior. The perceptual filters of business smartness and functional smartness are so prevalent and yet so subtle that it's hard to recognize the extent to which they govern behavior. They shape executives' world view; although people may have an intellectual or intuitive appreciation for both types of smartness, they miss chances to bring them together.

To see the world more clearly, leaders need to become aware of, and then set aside, their perceptual filters. This type of reflection doesn't always come by choice-it is typically forced upon people. Bill Gates didn't wake up one morning and say, "I want to become a wise leader." He must have been compelled, by the lawsuit and other factors, to reconsider his leadership style. Gates, who had been known for his intensely competitive personality and take-no-prisoners strategies, made a major course correction. In early 2000, while awaiting the antitrust court decision, he stepped down as Microsoft's chief executive. He took on the role of chief software architect, which emphasized functional smartness. In the same year, he embraced a higher purpose by establishing, with his wife, the Bill & Melinda Gates Foundation. Although some people initially accused Gates of using his charitable activities to sugarcoat his image, his foundation is today respected and appreciated for its highly effective approaches to combating global challenges. Gates, the successful but polarizing figure, has become more righteous and moral in the eyes of many people.

Tim Cook was driven by Steve Jobs's advancing illness to change his leadership style. He moved from a narrow form of smartness to a more opportunity-oriented perspective, turning his attention to the big picture and becoming sensitive to the changing context in the world around him. When the factory scandal broke, Cook went to Chinato inspect working conditions firsthand, and he is now striving to improve conditions there and elsewhere. He also started matching employee contributions to nonprofits, encouraging commitment to the greater good. Although he has not fully emulated Steve Jobs's agenda or style-for example, he pays dividends, which Jobs avoided-Cook has adopted some important business-smart approaches. He discusses strategy with investors, reaches out to developers, focuses on top-line growth, and has defended Apple's position as a leading innovator by winning a patent infringement case against rival Samsung.

A balanced approach also enables leaders to lead their companies to sustained growth, even through trying times. Here we can look to Ford CEO Alan Mulally as a model of wise leadership. Long before coming to Ford, Alan Mulally was a general manager at Boeing in charge of developing the 777 passenger aircraft. Even at that time, he deliberately cultivated a mix of business-smart and functional-smart actions. Traditionally, Boeing teams operated in silos with little collaboration, leading to project delays and higher costs. Mulally's job was to coordinate multiple teams and integrate their efforts. In every project review meeting, he began by reminding all teams that they had to factor in the larger system, the whole plane, when making narrow decisions; then he moved to intensive, detailed review of the technical and design issues.

Mulally took the same decision logic to Ford. When he arrived in 2006, the company was losing market share and brand equity. Mulally mortgaged all of Ford's assets to secure a $23.6 billion loan, which he said was needed to invest in R&D and serve as "a cushion to protect from a recession or other unexpected event." This decision, made at a time when the economy seemed healthy, was widely criticized. But Mulally defended it on the grounds that "we have to control our own destiny." Two years later, this business-smart decision allowed Ford, unlike GM and Chrysler, to avoid government-funded restructuring.

Around the same time, Mulally also made a critical functional-smart decision. Walking through the parking lot at Ford headquarters in Detroit, he noticed the plethora of Ford brands, with no common attributes in shape or style. He set about pruning the Ford model portfolio. This allowed Ford to concentrate on improving the engineering quality of a smaller roster of models, to make life easier for Ford distributors and dealers, and to reuse components across brands, reaping big savings on supply chain costs.

Becoming a wise leader is not always a smooth journey-people can easily revert to their familiar smart behaviors. Practical wisdom requires the unlearning of one's past success formulas. Even today, Bill Gates becomes intense and defensive when addressing Microsoft's lack of growth in the past decade. And Tim Cook saw a significant decline in Apple's market valuation when he focused more on tangible products and services than on intangible connections to the marketplace and end-users. Such struggles are to be expected. But wise leaders are resilient, and they learn from failure. They are flexible, enabling them to maintain this crucial balance: The business-smart leader can give voice to aspiration, the functional-smart leader can appreciate limits and execute within them-and the wise leader can do both.