Managing Inflation's Impact - Why every company should be doing scenario planning - Inflation is but one of the uncertainties

Editor's Note:  I have had a number of conversations recently with business owners and professional service providers about the current operating environment and the possibility of operating in an inflationary environment as we move forward. While some believe the current situation of rising prices is a short-term blip, there is also the prospect of higher inflation for the foreseeable future. The supply chain issues (higher prices, long lead times, and shortages) with commodities like steel, aluminum, copper, chips, etc. have led, in some cases, to customers double- and triple-ordering to secure predictable future supply.

 

I can recall the last inflationary period in the 1980’s, shortages led to long lead times which desperate ordering which led to higher and higher prices. It becomes a vicious cycle.

Most of today’s business owners and senior executives have enjoyed 30 years of low inflation. Most are astonished when I tell them that in 1981, I had a 19% mortgage interest rate (thankfully for me, it was subsidized by my employer). Prices and costs were changing monthly and unpredictably.

 

Managing through an inflationary period requires different skills. That is the reason that many of our clients are doing scenario planning – assuming various levels of inflation.

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 and for its leaders to “rehearse” possible actions.

 

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

   

 

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. 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 after the recession of 2008. 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 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 disrupted - 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 short list?

• Economic
• Is the US facing a long period of inflation?
• Supply chain issues? How long before it normalizes?
• Longer-term sourcing issues
• Will increasing labor rates make China less competitive? How will outsourcing look in 5-10 years? 
• Impact of climate change
• Technology - How much will technology change your industry?
• Social
• Power continuing to move to the consumer (away from institutions)
• Buyers have equal or greater knowledge than sellers
• Changes in culture, attitudes
• What short-term and long-term impact will the "green" movement have on markets, products 
• Changes in work environment, employee, customer behavior that result from Covid19?
• Demographics
• Is your customer base affected by demographics?
• Labor shortages - Will you be able to hire the right skillsets?
• 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. Now the U.S. is facing similar signs with lower birth rates, lower immigration, retirements, etc.
• Baby boomers retiring, selling businesses, eldercare, etc.
• Pandemics (This was not on many lists 3 years ago)
• The impact of Covid-19 now and the possibility of the next pandemic -   
• Regulatory - The list is endless...
• Health care
• FDA
• Trade
• Tax reform (Elimination of subsidies, elimination of deductions

 

Some organizations may 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 triple.  Companies that are scenario planning are examining different possibilities of the future and determining their competitive responses. 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.

  

For more information on how you can take your planning process to the next level, contact me at (303) 660-8135 or meaddp@meadconsultinggroup.com    

Too Many Shiny Objects and the "Not Going to Do Now" List

 [Editor's Note: Recently, as companies are emerging from the "Covid era," two issues have emerged, The first is that some companies are totally focused on today's issues with little or no attention to the future. The second, is that some companies are "scattered" and diluting their efforts. In this issue, we will deal with the second issue - too many shiny objects.

As we have worked with companies over the years, one characteristic we have noted about successful companies is the ability to prioritize and focus. Many companies have a seemingly endless list of opportunities; the question is "what do we focus scarce resources on first." I hope you find this article thought-provoking. - dpm]

Too Many Shiny Objects and the "Not Going to Do Now" List

On a number of occasions, we have come into new client situations to "validate" an existing strategic planning process. In many instances, we find that the company has documented strategies and initiatives too numerous to fit on an 11X14 sheet of paper - with small font size! We then proceed to ask each of the managers which is the most important strategy or initiative for the coming year. Not surprisingly each manager has a different idea of what is most important.

Too many opportunities... Too little focus

These are not companies without opportunities. To the contrary, these are typically companies with compelling products and services. The problem stems from too many opportunities without an appropriate filtering or prioritizing process. Sometimes, it stems from a creative/innovative Founder or CEO who can see potential technologies, products, services, markets, partnerships, etc. everywhere. In the race to not miss out on these possibilities, the Founder /CEO can push the organization in many different directions. This behavior is so common that it has been coined the "Shiny Object Syndrome." In these situations, the organization pursues many different opportunities, executes poorly, distracts management attention, and in many cases, abandons projects partially completed in order to pursue new ones. Resources are wasted, time is sacrificed, and most importantly, attention is diverted away from core activities.

 

The "Not Going to Do Now" List

In determining strategic direction for a business, it is far easier to decide what you are going to do, than what you are not going to pursue now. The most important tool is the "Not Going to Do Now" list, which outlines projects, initiatives, strategies, acquisitions, etc. that might be interesting to explore at some time in the future, but are distractions to the current strategic direction. During the planning process, items are added to this list. The management team agrees that in order for the organization to pursue an item on the "Not Going to Do Now" list, something must be come off the current strategic planning list.

 

Prioritize

There are a number of techniques to use in prioritizing. Some companies use the following categories to further delineate priorities. Items noted as "Critical" are the focus of the business. Once these have been completed, the "Need to Have" category items are next in priority. It is interesting to note that companies that use this approach rarely get to the "Nice to Have" items, and almost never get to the "Can Be Deferred" items.

 

Critical

Need to Have

Nice to Have

Can be Deferred

Alignment around the Critical Strategies

It is our belief that most companies should identify no more than three major strategies. Companies that execute well on two of the three strategies are usually very successful. The key to success is focusing on a limited number of strategies, communicating the direction, aligning the team and incentives around those strategies, establishing solid action plans and metrics, and holding members of the team accountable for results.

 

Simple to identify...More difficult to do

Like most things in business, Identifying the "to do" strategies and the "Not to do" List is easy to describe and more difficult to achieve. We spend most of our time working with businesses to help them narrow strategies to ones they can execute well, focusing and aligning the team, monitoring the progress, and adjusting course as necessary.

 

If you would like to discuss this in more detail, please contact me.

 

The Mead Consulting Group has been helping clients develop and execute Strategic Growth & Execution plans for many years. Check out our website for descriptions of some client success stories.