Why every company should be doing scenario planning: How well are you prepared for what you don't think will happen?

[Editor's Note: Happy New Year! I recently listened to several economic forecasts for 2019 and was struck by an interesting caveat made by the economists: When the economy is continuing to go up month after month, optimism about the momentum and duration of the economic upturn tends to blur our vision. History tells us that most of us tend to ride on our optimism and miss the turns in the economy until they are upon us. (Think the tech bubble of the late 1990's or the big surprise in 2008).

 

Do we really know how this is going to play out over the next few years? There are a number of different views of where the markets and economy may go. But, we all need to chart a direction for our companies. What is universally true is uncertainty. 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 for success.

The Mead Consulting Group utilizes scenario planning to help clients build flexibility into planning and execution and to help leaders think "broader." This last recession was a game-changer. 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. Contact me for more information,  - dpm] 

Why every company should be doing scenario planning: How well are you prepared for what you don't think will happen?  

 

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 real 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 2008 - 2018. 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/industries could have avoided significant market pain by utilizing scenario planning. Without being overly critical, these organizations/industries were complacent - and they made assumptions about the future that proved to be very wrong. Each was overtaken by disruptive 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?

• Example: Efficient visibility and management of supply chains (from end user order entry - directly impacting each step of the supply chain - think blockchain.
• Amazon ....everywhere...

 

*   Geopolitical - Where to start - the list is endless. Tariffs, Refugees, Immigration, Changes in international influence....

 

*   Social/Environmental

• Power moving to the consumer (away from institutions)

 

*    Changes in culture, attitudes (Millennials and i-Gen or Generation Z vs. Boomers and GenX)

 

*    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. What about Japan?
  • Baby boomers retiring, selling businesses, eldercare, etc.

 *    Economic

• Is the U.S. facing a period of long-term labor shortages?
• Will increasing labor rates continue to make China less competitive? How will outsourcing look in 5-10 years?
• What will happen to Europe after Brexit?
• Impact of trade wars
• Impact of Cryptocurrencies 

*    Regulatory - This list is also endless...

• Healthcare / Affordable Care Act
• FDA
• EPA
• Trade
• Future of taxation)

 Companies can no longer ignore uncertainty or try to assume it away. 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 the 2008 downturn, the number of our clients that are doing scenario planning has 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.