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    

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

[Editor's Note: I recently listened to a positive economic forecast for the first half of 2018 and was struck by an interesting caveat made by Alan Beaulieu - when the economy is continuing to go up month after month, optimism about the momentum and duration of the economic upturn has tended to blur our vision. History tells us that most of us tend to ride on our optimism and miss the turns in the markets (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.  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.  - 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 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 - 2017. 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 (e.g. Blockbuster, Kodak, print media, broadcast media, distribution ...the list goes on...) 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 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
• Artificial Intelligence
• "Showrooming" in brick and mortar stores and buying online (e.g. Best Buy vs. 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)
• Amazon ....everywhere

*   Geopolitical 

*   Social/Environmental

• Power moving to the consumer (away from institutions)
• Buyers have equal or greater knowledge than sellers

*    Changes in culture, attitudes

• Will 20-something millennials continue to defer the desire for home ownership?
• What long-term impact will the "sustainability" movement have on markets, products, and attitudes about companies

*    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

• Is the U.S. facing a period of structural unemployment?
• Potential future periods of inflation
• 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 Cryptocurrencies

   

*    Regulatory - The list is endless...

• Healthcare / Affordable Care Act
• FDA
• EPA
• Trade
• Tax reform (Elimination of subsidies, elimination of deductions)

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, we've seen 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.

If you want more information on the Mead Consulting approach to scenario planning, please contact me

   

What are your thoughts about these key points?

Seven traits of Colorado success stories. Why some companies grow and others get stuck.

[Editor's Note: Over the past seven years, we have met with the CEOs or owners of over 200 private Colorado companies. These companies range from new technologies, products and services in such diverse fields as education, web conferencing, technology, construction, trucking, logistics, medical devices, outsourced services, among others. Some of these companies are growing - some quite rapidly; others are stagnant or stuck.]

Why are there such differences? Certainly companies that depend on some industries such as homebuilding or construction were severely impacted by the economic downturn. However, blaming stagnancy solely on economic malaise is an oversimplification. The recession – and subsequent “selective recovery” has highlighted the differences between the good, well-managed companies from those others whose fortunes rise and fall with the economy. We have found that industry, size, and the overall economy are not necessarily the determinants of company success.

Companies that have become "Colorado success stories" share certain traits. While this is not intended to be an all-encompassing list, this list is intended to provoke some thought about what breeds success.

1. Lifestyle or Equity Value. How many of you have ever been involved with a company where the owner was conflicted about current compensation or cash flow vs. investment for the future?
Be clear with what type of company you want to be. A lifestyle company can allow the owner to call his/her own shots and to move at his/her own pace. It is run for the cash flow and lifestyle benefits of the owner(s). In an equity value company, the owner strives to build real assets with a scalable, tangible value that can be bought and sold. This leader is willing to sacrifice some short-term gains in order to invest in growing the market value of the business. These “equity value” owners focus more on building value as seen by potential buyers: sustained improvements in revenue/EBITDA, and a strong management team that can operate and grow the business without the owner's constant involvement.

There is no right or wrong answer to the lifestyle vs. equity value question, but owners must be clear in the distinction. Straddling both lifestyle and equity value camps is sure to generate both lower current cash (compensation for the owners) as well as lower growth and value potential (lower equity value).
Below are some of the characteristics of Lifestyle vs. Equity Value companies.  Lifestyle companies tend to have a short –term focus; they tend to run at the owner’s pace or comfort level. Investment in the business may be secondary to a passion of the owner, such funding the as sponsorship of a team, or sport, or the arts. While these companies may have some elements of other management styles, in the end, there is a centralized nature to decision-making and authority. Likewise, since there may be limited empowerment or upward mobility for managers, high performers are not attracted to Lifestyle companies, or do not remain. See the article “Which do you have – a Lifestyle Business or an Equity Value business?”

Table 1

	Lifestyle	Equity Value
Focus	Short-term Lifestyle; Run for Owner’s compensation	Long-term Equity Value; sacrifice short –term comp
Pace	Owner’s pace	Dictated by desired outcome
Management style	Command & Control; Centralized	Decentralized; individual decision-making
Owner Management	Can tend to be viewed as inconsistent, capricious and changing	Consistent with overall strategy and core values
Expense Control/Spending decisions	Tightly controlled at top	Managed through approved dept budgets and policies
Outside Capital	Debt; Investors not interested; Growth may be restricted due to availability of capital	Equity investors
Empowerment	Limited; Loyalty Rewarded; Small circle of trust	Expansive; Performance rewarded; Systems to enhance empowerment
Objectives	May change at owner whim	Clearly outlined; transparent
Employee Equity	No	Yes; equity awarded
Career Development	Limited upside	Significant upside
Employee Capability	“Steady Eddies” Thrive here	High performers thrive here
Sale of Business	Usually only to Employees or Family	To third-party Buyers (Strategic or Financial)

2. Empower employees. Companies can't grow beyond a certain point if all of the real decision-making stays in the hands of the owner or a small group of managers. Growth companies look to empower employees to make decisions. They also develop a culture that allows employees to make mistakes and a mechanism so that they can learn and grow from the mistakes.

3. Hire for the next level. Companies that want to grow understand that they need talent that can manage at the next level. Successful companies hire people who can grow 1-2 levels higher in the organization so that the talent pool is constantly being strengthened. These companies also understand that paying more for top talent more than pays for itself.

4. Develop flexible strategies you can execute well. Traditional approaches to planning and execution assume away uncertainties and set a fixed plan in place for a year or more. Successful companies are developing multiple possible views of the future, developing a plan and actions, then revisiting the plan every 8-12 weeks to adjust to changes in the market or the competitive landscape. Otterbox, the designer and marketer of protective cases for smartphones, has grown from $15M revenue in 2008 to approx. $1B revenue with a flexible approach that re-evaluates all strategic operating plans every 6-8 weeks for possible adjustment. Other companies are utilizing scenario planning to develop and “rehearse” their responses to different possible future states in order to maximize their competitive position. See our article “Why every company should be doing scenario  planning” and the 5-part series on Scenario Planning.

5. Develop an adaptable organization. Successful companies focus on creating a culture of adaptability. They develop an organization, and leadership that can react quickly and make necessary course corrections in response to market opportunities. See the article “Adapt is new thinking” and the 7-part series on Creating an Adaptable Organization.

6. Focus on a superior customer experience. Dan King of ReadyTalk calls it developing "emotionally-connected" clients; Maria Vogt and Sonya Yungeberg of government contractor, Ayuda Management, call it "under-promising and over-delivering". These companies focus on wowing the customer and build systems and hire and reward people who want to delight the customer with every interaction. Engagement of customers is key.

7. Play offense instead of defense. If you do anything long enough it becomes a habit; then it becomes part of your culture. Many companies have created defensive cultures with several years of cost-cutting and deferring or eliminating new projects and new products. "NO" has become the operating word for "stuck" companies. Successful companies look for opportunities to develop and test new business models, new products and new projects. They see the market as ripe with opportunities to grow and innovate. "HOW" is their operating mantra.

Conclusion: Examine your company. Do you live the traits of successful companies?

Let us know your thoughts.

Scenario Planning Part 5: 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.

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.

In Scenario Planning Part 4 – Benefiting from Disruptions, we discussed how 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

o   Mobile ordering; Mobile product/ price comparisons

o   Mobile payments

o   “Showrooming” in brick and mortar stores and buying online  (e.g. Best Buy and Amazon)

o   Contextual offers/specials, loyalty programs, other specific knowledge about customers

o   Social commerce

o   Apps for everything

o   Efficient visibility and management of supply chains (from end user order entry – directly impacting each step of the supply chain)

·        Social/Environmental

o   Power moving to the consumer (away from institutions)

o   Buyers have equal or greater knowledge than sellers

o   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

o   What does the negative birth-rate and aging population mean for European economies like Greece, Spain, Italy, etc.

o   Baby boomers retiring, selling businesses, eldercare, etc.

·        Economic

·        Will the new housing construction market stay at the bottom for another 10 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…

·        Healthcare?

·        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. We’ve seen the number of companies doing scenario planning triple since 2008.                                                                                                                                                                                 

Since 2008, 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.

Scenario Planning – Part 4: Benefiting from disruptions - benefits of scenario planning

Editor's Note: This is the fourth of a five-part series on the impact of scenario 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

Events that disrupt business occur every day. While it is impossible to predict exactly where and when these disruptions might happen, scenario planning can help organizations protect revenue streams, increase profitability, and ensure business continuity despite major upheavals.

In Scenario Planning –Part 3 Are you ready for disruptions?, we discussed three examples of companies that were caught flat-footed by disruptive innovation. What could these companies have done with effective scenario planning? In each case, there were early signs:

·      Blockbuster— by Netflix and Redbox (Coinstar), now video streaming. Customer dissatisfaction with the inconvenience of having to travel to physical locations, pricing, and late fees - in Blockbuster’s case. New business models (mail and kiosk) addressed customer dissatisfaction with the cost and inconvenience of brick and mortar stores. Video streaming has been coming for over a decade. The primary driver to its arrival as a mainstream competitor was the availability and speed of broadband and wireless. Was anyone at Blockbuster watching this? Was anyone listening to customer dissatisfaction with exorbitant late fees? Perhaps, if Blockbuster management was monitoring its own customer response (complaints) and tracking the scaling of broadband, it could have initiated steps to provide alternatives – either through internal pilots, new products, or acquisitions. Instead, it viewed competition in a traditional manner - as coming from the other brick and mortar video rental companies. When new competitors began to gain steam, Blockbuster’s response was slow and awkward.  Clearly they had been totally unprepared and management had not thought through what competitive actions or responses should be taken.

·      Encyclopedia Britannica – by the internet providing content online. We could lump many print publishers in this category. In fairness, the inability to decide how to monetize online content has paralyzed many management teams in the publishing business. However, lessons learned in other industries dating back to the transistor radio have taught us that many times disruptions occur first on the fringes or lower end of markets. Wikipedia (the “free encyclopedia”) may have seemed to be a joke to EB executives at first, if they noticed it at all, but the sheer volume of visitors to the Wikipedia site could have been seen as a precursor to today’s online content world.  

·         Kodak—transition from physical media to digital media. Kodak may be the poster child for the need for effective scenario planning. Kodak actually invented the disruptive technology – digital photography. In Kodak’s case, management clearly did not want digital technology to cannibalize its “golden goose”, the exceptionally profitable film world. So rather than understanding, monitoring, and acting on the drivers of digital photography, Kodak management spent years executing defensive strategies, attempting to protect the existing revenue stream.

Disruptions have occurred in just about every market over time. Mature industries with little change for decades, are now being transformed by technology which is enabling changes to business models, industry economics, and competitive balance. You cannot prevent disruptions from occurring, but you can be aware, prepared, and capable of turning disruptions into opportunities.

Business benefits of scenario planning

As the Boy Scout motto indicates, “Be prepared.” Disruptions are a risk only if businesses aren’t prepared. Effective scenario planning requires senior managers to take a broader view of their roles. By being prepared, companies can avoid the pitfalls of becoming irrelevant through disruptive innovation. Scenario planning benefits include:

·         Management preparedness and confidence. By reviewing possible scenarios and the impact on competitive balance, management can “rehearse” the appropriate steps that would be taken in the event a certain scenario begins to occur. Just as an athlete visualizes his or her performance in a certain critical game situation, when potential disruptions occur, management can respond in a calm, confident, thoughtful manner.

·         Building an adaptable culture. By developing a flexible approach to planning, companies can build adaptability into the culture. Adaptable teams perform far better than those that are mired in a static approach or limited view of the world.

·         Greater customer loyalty and retention. Companies that know where they are headed instill greater confidence in their customers. This confidence often translates into greater loyalty, which protects important revenue streams. In addition, by moving swiftly when disruptions occur, companies can keep their customers from worrying and switching to other vendors. Don’t underestimate the “coolness factor” of being a leader – Apple benefits from a “halo effect” for being on top of latest innovations, being fearless about cannibalizing previous products and models, etc. Customers want to be “seen” using Apple products because Apple is perceived as knowing where they are headed.

·         Increased revenues. Companies that are prepared for disruptions can attract more customers. This is because customers want suppliers on whom they can rely on for a steady stream of products and services.

·         Reduced costs. Companies become inefficient when they don’t have a roadmap. By establishing confidence and a clear direction based their ability to monitor, predict, and react to, possible disruptions, companies can be more effective and efficient.

·         Enhanced employee productivity and retention. A common direction also instills confidence in employees, increasing their productivity and company loyalty.

·         Creating new business opportunities. By anticipating market disruptions and technology trends, visionary companies can create and enter new markets to ensure future revenue streams.

¹ Excerpts from Scenario Planning: Are You Ready? By Dave Evans and Rick Hutley, Cisco IBSG Innovations Practice

Next:  Why every company should engage in scenario planning