Monday, August 19, 2013

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 ouwebsite. Comment on your experiences with scenario planning.

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