Four Possible Scenarios of the future: How would your company respond?¹

[Editor's Note: When we initially published this article in 2008, most business leaders were still expecting a "normal" recession and recovery cycle. We now know that we have seen a combination of uncertainty and slow growth. While many companies have reacted relatively passively, some are changing the dynamics. I hope you find this useful. - DPM]

 

Four Possible Scenarios of the future: 

How would your company respond?¹

 

1. Paralysis/Survival: This describes a situation where external events will be unknown and surprising, and companies will respond to them in a predominantly passive and reactive manner.

 

This, clearly, is the worst-case scenario. In this situation, "unexpected and disruptive events will increase over the next three years, and companies (and/or economies) will react by pulling into a protective shell." The external shocks could include economic developments such as the nationalization of major global industries (like oil, banking, auto) and significant disruptions to global material flows. On the political front, terrorist attacks could escalate in different parts of the world, and the U.S. led anti-terrorism coalition could fall apart. Isolationism and protectionism may be revived. Companies (could) react by trying to protect existing assets with layoffs, reduced R&D investment, reduced product development, and lower foreign direct investment. Consumers may compound the problem by reducing spending dramatically.

 

  The bottom line in this scenario: A long, global recession

 

2. Slow Growth:This scenario predicts a future where external events will be known and expected, but companies will respond passively to them.

 

This, too, is a grim scenario, though not as irredeemably dismal as the previous one. In this case, "disruptive events with moderate impact continue, and while seen as normal, they result in an economic malaise." This scenario would be marked by debt and currency problems in key world economies, though a full-blown long-term global recession is avoided. Unemployment would be higher but manageable, but consumer confidence would be low. Politically, the war against terrorism could head toward a stalemate situation. Companies would get used to the risks of terrorism and learn to cope with their losses. They would make modest investments.

 

The bottom line in this scenario: Life becomes an overpowering shade of gray

 

3. Thriving With Chaos: Here, external events will be unknown and surprising, but companies will respond mostly in an active and opportunistic fashion.

 

In this scenario life is still gray, but sunlight begins to filter through the gloom in some areas. "Unpredictable disruptive external events" would continue, but "corporate and national resolve to be successful in the face of adversity" would drive modest prosperity. While uncertainty would continue, it would be considered a cost of doing business. Companies would try to seize business opportunities amid the disruption and uncertainties, and make increasing investments in areas that seem to be potentially profitable. In the political arena, the continued global realignment of the U.S. with Russia and China would continue to open up new market opportunities, but the Islamic and developing nations would be shut out of these new alliances. The war against terrorism would continue without a clear victory.

 

The bottom line: Life could be better, but there's money to be made if you know where to look.

 

4. Global Growth: In this scenario, external events will be known and expected, and companies will respond actively and aggressively.

 

This, clearly, is the best-case scenario, one in which "countries and peoples of the world recognize common goals and focus on economic development and peace as the route to permanent stability." The key features of this scenario would be that the recession proves short-lived and the business cycle would return to normal; the global coalition against terrorism would evolve into a coalition for peace and commerce, and the threat of terrorism would fade. Investments in new technologies for energy management would reduce the role of oil in Middle Eastern politics. Consumers would feel confident about the future, increase their spending, and lay the foundations of a sustained economic recovery. Trade barriers would be lowered and the developing economies would grow in tandem with the developed ones.

 

If these four scenarios - or a combination of them - represent what lies ahead in the next three years, what strategies should companies put in place today to deal with them?  Clearly, though, neither these scenarios nor the strategies that follow from them will apply across the board. The scenarios will play out differently not only in different industries, but also in various regions of the world. Accordingly, the strategies that companies develop to cope with these situations will need to vary to reflect these differences.

 

It would be a mistake to allow the uncertainties that prevail today to put business decision making on hold. The future may be unclear, but one thing is certain: In today's circumstances, scenario planning is more than a tool. It is a weapon to combat uncertainty, and the future will belong to companies and executives that wield it well.   

      

How well is your company prepared to respond? Are you taking control of the things that you can? Are your actions strengthening your company  - or weakening it? Are you building flexibility into your plans? Have you changed your approach to planning?

The Mead Consulting Group helps dozens of companies and organizations - like yours - every year with scenario planning. The process has helped our clients consistently outperform  their competition.

 Please comment

HOW DO YOU HUNT FOR PROFITS? BY LOOKING IN YOUR OWN BACKYARD

[Editor's Note: Recently I have had a number of conversations with business owners and CEOs about sustaining profitability. I thought I would reach into the "article archives." While we first published this in 2003, it is still relevant ten years later in 2013.  - DPM]

HOW DO YOU HUNT FOR PROFITS? BY LOOKING IN YOUR OWN BACKYARD

Tier your customers by profitability by creating a profit map.  A profit map is a clustering of customers, products, services, and transactions by profitability, and an analysis of the key profit drivers. This forms the basis for rapidly improving a company's profitability through careful management of the details of the business without the need for major capital expenditures.

Let's look at the profit mapping process, using the example of a distribution company. The process has five steps.

Decide to analyze profitability at a "70 percent accuracy" level. Some companies spend a huge amount of time and money setting up an activity-based costing system that is much too detailed. All too often, the measurement becomes the project, and after endless debates, many projects lose momentum before they are translated into actions that hit the bottom line.

The most important results usually will be very clear from rapid, intelligent analysis using best knowledge and rules of thumb. Once a profitability picture emerges, it makes sense to improve the accuracy only where better information will change an important action. In most companies, after the analysis is over, the managers institute only a few high-leverage initiatives.

Construct a profitability database for the company. Select a time period, often two to six months, that is representative, and load the full set, or an excerpted set, of transactions (i.e. order lines) onto a computer. Each transaction should carry crucial information including the identity of the customer and product, as well as special services. Next, develop cost functions and use these to net the transaction's gross margin (GM) 

In developing cost functions, it is generally best to allocate costs using an easy-to-measure variable. For example, allocating operations costs by transaction or order line usually works well, as each line entails order-taking and picking. Inventory carrying costs can be handled by rules of thumb, such as holding "A" items for two weeks, "B" items for four weeks, and "C" items for eight weeks. Transportation costs can be allocated through simple decision rules based on customer location (region, near to or far from a distribution center). Where a sales call is needed to take an order, that portion of the selling expense can be allocated by orders. Other costs can be similarly allocated with reasonableaccuracy.

It's important to allocate all costs, including general overhead, for two reasons: (1) this enforces the discipline of viewing the whole cost of the business whendetermining whether to keep or change a major component; and (2) this ties the analysis directly to the company's financial statements, ensuring credibility and accurate projections.
  
This process will yield a database of transactions, each with revenues, GP, and NP. The database can be analyzed to display account, product, and transaction profitability. It will show you where the big pools of profits and losses are. The database also can be used to project the impact of changing the account and product mix, as well as changing the cost of key elements of operations and sales. The former shows the effect of focusing the company on high-profit market segments, while the latter shows the effect of altering the business model to change "bad" customers into "good" customers.

Model a customer - Determine the characteristics of the Chosen Customer. Choose a few customers and products that are reasonably representative, and look carefully at their economics. Try choosing a large and small customer each from a few key market segments, and a fast-moving and slow-moving product from each of a few key product families. Ideally, you will have about six to twelve representative situations to examine closely.

For each customer, look methodically at the profit drivers-revenues, margins, and costs-for different products. Try different business model configurations such as changing the order interval, sales interval, or service interval. Look at the pricing, both price levels and price mechanisms. Altering the product mix and developing substitution programs also can provide valuable levers for profit improvement.

Here, you are looking for "profit levers". Once you have found effective profit levers, check several other similar customers to be sure you can generalize your findings.

Modeling the effects of key profit levers on representative customers works well for three reasons: (1) it will be intuitively clear which elements of the business model (e.g. order pattern) can be changed and what the effect will be; (2) you can actually call the customers to see what their reaction to the potential changes would be; and (3) it will be easier to explain the changes using concrete examples when you "sell" the initiative to your colleagues.

Project to the whole business. Divide the entire business into clusters, or market segments, that are similar to the customers and products you've modeled. See where the big pools of profits and losses are now, and what the profit impact would be of making the changes. This will tell you what's most important to do.

With this picture of current profits and profit improvement potential, you can identify the few high-payoff actions that your company can take relatively quickly. First and foremost, act forcefully to secure the high-profit segment of your business. Only then institute a process to improve the profitability of the marginal part of the business. This process probably will include training front-line sales and operations associates in day-to-day coordination to improve profitability to its highest potential.

What about the unprofitable customers? Here's what the CEO of a major service company said about exiting unprofitable business segments or customers:
  

"Before exiting, give them a chance to pay higher prices or modify the profit levers. We did exactly that. We knew our profitability was eroding. Through analysis, we found a business segment where we were losing money. Profit analysis allowed us to determine what changes would be required to generate acceptable returns. The underlying issue was not pricing-it was order pattern, order size, and delivery requirements. Before exiting the segment, we told our customers what we needed in order to continue servicing them. To our pleasure, they agreed to make the changes, and we saw a quantum improvement in profitability in six months!"

 

Finally, phase out the parts of the business that cannot be made profitable. This will be counter-intuitive and some in the company will resist, but keep your eye on the huge upside to refocusing 20-40 percent of your sales force and operations assets away from tending unprofitable business and toward aggressively growing your share of the highest-profit end of the business.

 

Institutionalize profit mapping.Reflect on the value produced by determining the tiers of customer profitability ("profit mapping") and decide to institutionalize the process. Repeat the analysis every three to six months.Once you have set up the analysis, subsequent rounds will go very quickly. The process itself will build teamwork and it will become a new way of looking at the business. In parallel, build profit mapping into the new account qualification process. As your profitability improves, new opportunities will constantly be created. The better you get, the better you can get.

 

From financial information to action

A service company CEO mentioned above reflected on his experience with profit mapping, "Financial systems often do not have the information that you need. If they did, the problems would have been solved long ago. To be truly effective, you need to create a cross-functional team that understands how the business operates. This will allow the conversion of financial information into management information which, through analysis, will lead to action."

 

By the way, how do you hunt for profits? By looking in your own backyard-again and again and again! In work with Mead Consulting clients, our clients use proven methods designed to center their business around delivering continuous value to the best customers. Revenue and profit growth can be realized in the first 90 days of implementation.

¹Excerpted from an article by Jonathan Byrnes, The Bottom Line: The Hunt for Profits, HBSWK Pub Date: Nov.11, 2002

Please comment 

Policy Uncertainty Paralyzes the Economy

[Editor’s Note: This article in the Wall Street Journal on September 25, 2013 provides interesting insight that perhaps ending the “fight” between the President and both houses of Congress is more important to adding jobs than who is right]

Policy Uncertainty Paralyzes the Economy

Getting back to the 2006 level of uncertainty would add 2.3 million jobs.

By WILLIAM A. GALSTON

Endless strife over public policy increases uncertainty, and greater uncertainty slows growth. Beyond all the damage that political hyperpolarization inflicts on public trust, it undermines what the American people want most—jobs for themselves and expanded opportunity for their children.

A growing body of economic research supports this linkage between policy-based uncertainty and the real economy.

Over the past few years, Stanford-based economists Scott Baker and Nicholas Bloom teamed up with the University of Chicago's Steven Davis to develop a measure of economic policy uncertainty and to explore the effects of changing levels of uncertainty on the economy. Between 1985 and 2007, they found, uncertainty varied within a narrow and mostly predictable range, moving up in response to presidential elections and international conflicts and then subsiding. Since then, however, policy uncertainty has risen to historically elevated levels, with the peaks—corresponding to events such as the collapse of Lehman Brothers and the initial defeat of the TARP legislation—surging above that after the 9/11 terror attacks.

In a finding that today's policy makers would do well to ponder, the highest level of policy uncertainty ever recorded—in mid-2011 as Washington struggled with the debt ceiling and narrowly averted default—stood at two-and-a-half times the average of the past quarter century. Since 2007, policy-induced uncertainty has become a larger and larger share of overall economic uncertainty.

 Policy uncertainty directly affects economic activity. Messrs. Baker, Bloom and Scott summarize their case: "When  businesses are uncertain about taxes, health-care costs, and regulatory initiatives, they adopt a cautious stance.      Because it is costly to make a hiring or investment mistake, many businesses naturally wait for calmer times to expand.  If too many businesses wait to expand, the recovery never takes off." The evidence also suggests that policy uncertainty   increasing affects the performance of the stock market.

This story makes intuitive sense. But how much of a difference does uncertainty make in the real economy? To answer this question, Messrs. Baker, Bloom and Scott make use of a statistical technique for which Christopher Sims won a 2011 Nobel Prize in economics. They find that restoring 2006 levels of policy uncertainty could increase industrial production by 4% and employment by 2.3 million jobs over current baseline estimates—enough to bring unemployment down by about 1.5 percentage points.

It's easy to dismiss a single innovative study: Every index is controversial, as is every model and statistical technique. But in July 2013, Sylvain Leduc and Zheng Liu, two researchers at the Federal Reserve Bank of San Francisco, published a paper that took a different route to a very similar result. Their point of departure was a historical relationship known as the Beveridge curve: As job openings increase, the unemployment rate tends to fall. The Great Recession has disrupted the terms of this relationship, however. The unemployment rate has fallen much less than the rise in job openings suggests that it should have, and there are more jobless workers per job opening than in previous recoveries.

The San Francisco Fed researchers find that heightened policy uncertainty has become increasingly important in the job market. It turns out that as uncertainty rises, the intensity of businesses' recruitment activities wanes, lowering the rate at which firms fill jobs. By the end of 2012, the researchers calculate, heightened policy uncertainty accounted for about two-thirds of the shift in the Beveridge curve. Their bottom line: "[I]f there had been no policy uncertainty shocks, the unemployment rate would have been close to 6.5% instead of the reported 7.8%"—a result that aligns remarkably well with the Stanford/Chicago team's conclusion.

In testimony before the Senate Budget Committee on Tuesday, an intellectually and politically diverse panel—Allan Meltzer (Carnegie Mellon), Chad Stone (Center on Budget and Policy Priorities) and Mark Zandi (Moody's Analytics)—agreed that policy uncertainty is a drag on the economy. Mr. Zandi's model suggests if political uncertainty had remained at pre-recession levels, output would be $150 billion higher and unemployment would be 0.7% lower than they are today—smaller effects than the other studies indicate, but still very significant.

If this emerging body of research is correct—and it is more than plausible—then elected officials should ask themselves some hard questions. Both parties are sure they are right about what's needed for economic growth. But when our governing institutions are closely as well as deeply divided, as they are today, neither side can get its way. Each party faces the same choice: It can fight on in the hope that a governing majority of the people will come to see things its way, or it can compromise with the other party to bring the fight to a close.

So far, both parties have chosen to fight, believing that their preferred prescriptions for the economy would yield much better results than could any feasible compromise. But the fight itself is taking a toll on the economy and is making life worse for millions of Americans. Maybe that's why the people are pleading with their elected officials to compromise. It's time for Washington to start paying attention.

A version of this article appeared September 25, 2013, on page A15 in the U.S. edition of The Wall Street Journal, with the headline: Policy Uncertainty Paralyzes the Economy.

 What do you think?

Trying to sell a business with only one prospective buyer is a bad idea.

Doing a sale with only one prospective buyer is typically a bad idea. Recently, there have been a number of failed sales transactions where the seller negotiated with only one prospective buyer only to have the deal fall apart, or to have the sales price significantly lowered during due diligence.

Here are a few comments from disillusioned sellers:

  

• "We received an unsolicited offer for our business. The process wore on for more than nine months. Then the buyer just withdrew the offer and disappeared."
• "We were planning to start a process, but had a pre-emptive offer. Due diligence with the buyer dragged on and the price was adjusted several times. While we went ahead with the sale, when it was all said and done, we realized that the price we got was significantly lower than market. We obviously left money on the table."
• "I was tired. The last few years had been a grind. When I got an offer for the business, it seemed like my way out. What was presented as a fast track to close, became an ordeal. After a long process, I was worn out and wound up with a large amount of the price dependent on future earnings."
• "We received an offer to sell our business to a large competitor in our industry, orchestrated by one of our Board members. The sales process took over a year to finally get done. By the time the sale was completed, the competitor knew so much about our business that I felt we had no choice but to sell."

While there are some sales transactions with one buyer that have been successful, there are many stories of disillusioned sellers. Here some of the reasons not to conduct a sale with only one prospective buyer:

• No price or terms competition. Competitive bidding will help reassure the seller that they are receiving the market value.
• No opportunity to engage an outlier. In a competitive bidding process, often a buyer emerges from outside the industry or with a different business model or value proposition which enables them to offer a significantly higher price than the usual suspects.
• No control over the process or timetable. With only one buyer, the seller has no leverage to move the process along. Time is the enemy of most transactions. Buyers may wait to see how risk factors play out over time. Buyers can have unreasonable demands for due diligence. Company performance may suffer.

Fundamentally, it's a question of leverage. Some may call it "keeping the buyers honest." Having competitive offers - even if there are only two offers -provides an alternative that can ensure that the process keeps moving and generally provides greater value for the seller.

  

The Mead Consulting Group acts as a "seller's advocate" and helps prospective sellers prepare for a sale, build the team, and assist through the process. Our consultants have been buyers and sellers in dozens of transactions and thoroughly understand the process. We are not investment bankers, but operate in tandem with your banker and lawyer to assure the best outcome for the business owner. Our clients have realized greater value by having experienced an advocate in their corner. Visit our website to see what our clients say about us.

  

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.                                                                                                                                   
  

Uncertainty and 2014 - How prepared are you.....?

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	Scenario Planning
Static Plan	Dynamic possibilities
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.

Lessons my Mother taught me

Lessons my Mother taught me

As we approach Mother’s Day, I am preoccupied with thoughts about my mother. While Mom passed away over 10 years ago, not a day goes by that I do not actively think about the lessons I learned from her.  While my mother was not a business person, she was the best manager I ever met.  While raising six children she was able to maintain a myriad of interests – from potting and ceramics, to becoming a world-renowned hybridizer of daylilies. 

Here are some of the lessons in no particular order – and if you knew my mother you’d know it certainly is not a comprehensive list.

•         Always leave it better than you found it - make a difference
•         Treat others the way you want to be treated
•         Never ever give up
•         The Lord helps those who help themselves
•         If you keep your mouth open long enough, something unfortunate will come out         
•      Do your best and, if you keep trying, you’ll be the best
•        Do the important things first … and the less important will take care of themselves
•        Do what you know is right
•        Birds of a feather flock together
•       You are judged by the company you keep
•        There are no boring jobs, only boring people
•        Always do more than is expected
•        Never let a “wrong” go unaddressed
•        Learn something new every day
•       If you teach a person to fish, he’ll never be hungry

Feel free to comment on your experience.