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?
- 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?
- 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?
- 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
- 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 email@example.com