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Scenario planning for the future

This piece was written in early 2020 and originally appeared on the Venn Innovation blog.

Written by: Jonathan Dunnett (Are you the author?)
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We are in a time of great uncertainty.

The movement in the last number of weeks with the outbreak of COVID-19 in our region, among other dynamics like the recent rail blockade, certainly have businesses questioning a lot of things: remote work, how they’re going to continue to work with customers, their supply chain continuity and more.

If you haven’t been prepared for this, the coming months could be overwhelming for you. Thankfully, there is some good news:

  1. We’ve been here before and there are things you can learn and adopt;
  2. There are techniques that you can use, both now and for future planning; and,
  3. This can represent significant opportunity for you.

We’ve been here before

Well, we’ve seen this before. While the underlying drivers of various economic challenges that we have faced vary, Canada has experienced a total of five recessions since 1970 and twelve since 1929. While the most recent recession in 2008 felt like it lasted a long time, it lasted (officially) for seven months. There were various reasons why Canada’s recession was shorter, including healthy balance sheets going into the recession, trade surpluses, and so on.

Even before COVID-19 really broke, the rail blockade was having some significant impacts on businesses. Notably, one company that I spoke with was trying to source alternative suppliers as their main suppliers – mainly based in China – were not able to get their products to the Atlantic Canadian company in an economic or timely fashion.

Whether you’re dealing with a macro-economic reality like an impending recession, a global epidemic, or even supply chain interruption, these are all real things that can happen in your external environment, and the thing is, you cannot (generally) control it: but you can prepare for it.

Techniques to help with future planning

Wargames. Strategic Planning. Scenario Exercises. Strategic Foresight. Futurism.

You may have heard various terms like those above that talk about looking forward at what is coming. Even if you’ve never done a forward-looking exercise in your company and don’t have an expert on your team, doing some form of planning is better than no planning at all.

This type of planning happens constantly. Governments, businesses, non-profits and other entities all do forward-looking exercises to plan to mitigate risk, or to think through probability of potential scenarios that could emerge. As an example, just last October, the World Economic Forum ran a scenario exercise dealing with a viral disease outbreak.

Shell is a great example of a company that you will be familiar with that began thinking about how the company could use scenarios to plan ahead. The important nuance of their efforts was noted in the HBR article, “Living in the Futures”:

But Shell-style scenario planning has never really been about predicting the future. Its value lies in how scenarios are embedded in – and provide vital links between – organizational processes such as strategy making, innovation, risk management, public affairs, and leadership development. It has helped break the habit, ingrained in most corporate planning, of assuming that the future will look much like the present. As unthreatening stories, scenarios enable Shell executives to open their minds to previously inconceivable or imperceptible developments. Read more about Shell’s Scenario practice here.

For Atlantic Canadian companies, building scenarios (which you can think of as another application of competitive intelligence and market insights, with a future lens), to plan ahead for future disruptions is a pivotal opportunity and one that we need to do.

So, how can you go about doing this? Here are just a couple of resources to help you start:

A few key points from Scenario Planning: A Tool for Strategic Thinking:

  1. Organizations facing the following conditions will especially benefit from scenario planning:
  • Uncertainty is high relative to managers’ ability to predict or adjust.
  • Too many costly surprises have occurred in the past.
  • The company does not perceive or generate new opportunities.
  • The quality of strategic thinking is low (i.e., too routinized or bureaucratic).
  • The industry has experienced significant change or is about to.
  • The company wants a common language and framework, without stifling diversity.
  • There are strong differences of opinion, with multiple opinions having merit.
  • Your competitors are using scenario planning.

2. The technique is applicable to virtually any situation in which a decision maker would like to imagine how the future might unfold.

3. Scenario planning, then, allows us to chart a middle ground between under- and overprediction. It helps expand the range of possibilities we can see, while keeping us from drifting into unbridled science fiction.

4. The process (see the article for more depth) is as follows:

  • Define the scope
  • Identify the major stakeholders
  • Identify basic trends
  • Identify key uncertainties
  • Construct initial scenario themes
  • Check for consistency and plausibility
  • Develop learning scenarios
  • Identify research needs
  • Develop quantitative models
  • Evolve toward decision scenarios

All successful scenarios are focused in the sense that they are derived from a fundamental consideration of their client’s dilemmas and needs.
—Ged Davis, head of the scenario team, Shell 1999–2003 (Source: HBR)

Credit: Future Today Institute
Credit: Future Today Institute

Another useful tool was just shared by Amy Webb of the Future Today Institute. This model, called the Axes of Uncertainty, is a highly visual method of plotting the “what if?” to allow you to contextualize the possibilities.

Webb does an excellent job of walking you through the model (which is simple, so we won’t explain it again here), but in short, it leaves you with very tangible and understandable possibilities to which you can create a response. Check out the full breakdown here.

Want to go work through your specific plans for your company? Reconverge is a great opportunity to do just that. The annual conference gives your time 3 days of focus to go through your strategic plan.

There can be significant opportunity

As we came out of the 2008 financial crisis, the OECD completed a study on the impact on innovation and business performance. As noted in the report:

Competition may increase because gaining other firms’ market shares is the only way to maintain sales levels. However, the shock may also force the exit of small firms and thus decrease competition faced by big businesses.

While consumption may go down in the coming months and this may sharpen the impact on competition (especially on pricing), firms that are prepared may be sitting on significant opportunity. Those that are not prepared and cannot adapt may also exit the market, to create a new market equilibrium for competition.

So, what makes a great company during times like these?

  1. Our analysis shows that making obvious moves (for instance, cutting costs) as well as counterintuitive ones (such as increasing sales and marketing expenditures) quickly can improve a company’s position when the recovery begins. — McKinsey, discussing high-tech firms coming out of the 2000 recession
  2. In another study of 4,700 public companies, it was found that, “companies that master the delicate balance between cutting costs to survive today and investing to grow tomorrow do well after a recession. Within this group, a subset that deploys a specific combination of defensive and offensive moves has the highest probability – 37% – of breaking away from the pack. These companies reduce costs selectively by focusing more on operational efficiency than their rivals do, even as they invest relatively comprehensively in the future by spending on marketing, R&D, and new assets.”

One of my favourite illustrations coming out of the 2008 crisis was an Atlantic Canadian example. A manufacturing company had a top leader, who knew their market inside and out. They intricately understood their competition, and where the competition stood in terms of assets, products, market share/position and more. This CEO took the opportunity to double down in the market. As others were riding the fence, trying to ride out the storm, or even divesting of assets, this CEO took the time and invested and significantly upped their market share prior to the downturn. They invested significantly in R&D and innovation, and it was a game changer.

Another interesting illustration of investing in R&D and innovation is 3M, which currently invests just short of 20% of its revenue on R&D: the company also earns 30% of its revenue from products introduced in the last five years. While this mix may have to be altered as we enter some uncertain times, it does show that a leading innovator puts significant resources behind moving the company forward in product innovation.

In addition to R&D and internal innovation efforts, downturns can create opportunities for M&A. Cisco is a great example of that:

Credit: McKinsey
Credit: McKinsey

While you may not be ready to spend $15B, understanding the landscape – both near and far – can bring opportunity for you.

  • Do you see someone laying off staff?
  • Is someone removing products from their website and focusing on fewer products?
  • Has someone just done something that burns a lot of cash (hires, patents, etc.) and are pre-revenue or early revenue?

All of these may be potential indications that a company could be in a less-than-favourable position, and that you could acquire them. Or, there may also be opportunities in times like these to find synergies with other companies, to create new joint ventures, partnerships or even mergers.

Downturns can also create significant opportunity for startups and emerging companies that have better solutions than incumbents. For instance, Disney, Microsoft, Hewlett-Packard, Oracle and Cisco were created during or near downturns, as were Groupon, Electronic Arts, and Adobe.

So what?

At the end of the day, consumers still need solutions: putting your customer at the centre of your intelligence, insights and strategy is going to be fundamental to your success.

Right now, you may be wanting to react quickly, or, feel the need to batten down the hatches and hide: “Tell me when it’s over!”

Yet, this is really a great time of opportunity. By using scenarios and other tools, you can articulate without fear what the future may hold, and how you will respond. As part of your response, you can ensure you maintain that ever-so-important balance of cost-cutting and investment that we noted above from McKinsey and HBR to move things forward.

Sometimes, you’ve been sitting on things for too long: maybe you have bloat in your company, maybe underachievers, or, maybe you’ve got the next great thing that you’ve been waiting to pull the trigger on and just haven’t done it yet.

This is the time to zoom out, contextualize using scenarios or other tools, and make confident decisions as you move forward. Don’t let the waves knock you around: plot your course, and go.

Want to talk about your challenges? Click here to email Jonathan.

Special thanks to Alicia Roisman Ismach for her contributions to this article.

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