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

Scenario Planning - Part 3 - Are you ready for disruptions?

Editor's Note: This is the third 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. And 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.

Disruptions can be sorted into four primary groups:

1. Market disruptions (new competition, market transitions, technology advances).

Many companies have been caught off-guard by market changes such as shifting consumer preferences, significant technology advances, and unexpected competition. Sony, for example, created the market for portable music players with the company's Walkman device, but missed the transition from hardware-only solutions to an ecosystem of products that includes integrated hardware, software, and services.

2. Natural and biological disasters (earthquakes, hurricanes, tornadoes, pandemics).  

Even though natural disasters are difficult to predict, it is relatively easy to prepare for them, because we know where they are likely to occur. For example, companies based in California need to be prepared for disruptions caused by earthquakes, while businesses located in the Gulf of Mexico and on the East Coast should be ready for the effects of the annual hurricane season. Pandemics, while in the same category, are harder to predict. From history, we know a pandemic is coming, but we don't know exactly when it will occur or how severe it will be. Many companies have not prepared for the impact of natural and biological disasters on the overall business. Businesses must be prepared to answer questions such as:   

● How can employees continue to work if they can't go to the office?

● How will we communicate with customers?

● How will we continue to manufacture or source our products?

● How will our business strategies change?

3. Political or social change (terrorist attacks, new regulations, new social trends).                   

Most terrorist attacks are nearly impossible to foresee, while increasing regulations from a shift in political parties can be relatively easy for which to prepare. As businesses become more global, preparing for political and social disruptions becomes more complex since each region of the world is subject to different political and social forces. Complicating matters further, we tend to think about the world from our own vantage points.

Google, for example, was caught off-guard by China's action to block its service. Google's stock price has dropped more than 15 percent (as of September 23) from its 2010 peak, in large measure over concerns about the China standoff.

4. Unexpected events.

Companies can prepare for and respond to unexpected events by creating business and technology architectures that are agile and flexible.

Impact of Disruptions

The impact of not being prepared includes missed revenue opportunities, increased costs, and even going out of business. The following examples highlight some of the risks of failing to prepare for the types of disruptions just discussed.

● Blockbuster-The world's largest movie-rental company filed for bankruptcy in September 2010 after failing to adapt its storefront model to online technology pioneered by rivals. Conversely, Netflix grew by renting movies online and through the mail, while Coinstar prospered by placing Redbox vending machines offering $1 DVD rentals in supermarkets, drugstores, and other convenient locations. Subsequently, Netflix is now under stress from streaming rivals.

● Encyclopedia Britannica-This provider did not fully envision how disruptive the Internet would be to its business. By the time executives recognized that most customers no longer wanted the company's content in book form, it was almost too late. The company has since done a good job of transforming itself by offering a mix of printed and online products.

● Kodak-Once known as a leading innovator in the photography market, Kodak's business was severely disrupted by the transition from physical media to digital media.

While these examples highlight the risks of losing focus and not preparing for future events, for most companies, the impact is much less dramatic. By not being prepared, however, businesses can expect higher costs and longer recovery time, potentially causing decreased customer loyalty and confidence. It is important to note that many companies have used disruptions to their advantage. Amazon.com, for example, helped transform retailing by enabling people to buy products online. YouTube created an entire business from the positive disruption of inexpensive, prolific video-camera technologies. And Facebook is benefiting from peoples' desire to connect and share information.   

Next - Benefiting from Disruptions

Check out the full scenario planning series on our blog - as it unfolds.Comment on your experiences with scenario planning.

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