Why business should make scenario planning a priority
Hindsight is a wonderful thing, but should we have planned for this pandemic?
“We did not think this was a real threat” or “it was worse than predicted” are common distress cries when starting with a business as a Transformation or Turnaround Director. What they mean is that any predictive modelling or associated planning that had been done either didn’t cover that scenario or didn’t push the numbers far enough. But would any business have been modelling for the kind of social and economic impact we have seen in the last six months? And was it easier to do for this lockdown having been through the first one?
Spotting the good, the bad and the really ugly.
Some would argue that since the pandemic was largely unexpected, if you can’t plan for the unknown is there any point in scenario planning at all? To this I would reply that even if a scenario wasn’t picked up the modelling is not for the sake of the numbers but what the numbers are able to tell you about the health and agility of your business.
When C-suite are tuned in to the multitude of things that could happen, they are more likely to spot the warning signs of potential challenges and respond accordingly. Not only is it easier to spot a threat, or opportunity, when you have identified it as a potential before it happens, but you also have assessed the options of what to do in the event of it becoming a reality.
So, who does it and why?
Scenario modelling is common practice for Investors, Venture Capitalists and Private Equity houses to have the best of the best in terms of analysis to make sure their funds are well and credibly invested. Critical to committee decision making the modelling will allow for pros and cons discussed, extreme scenarios judged for probability and mitigating actions are used to compensate said risk. Fortunes are made while other business are left by the wayside as their futures just didn’t fit the modelling cut. Pandemic planning will have been on their radar although whether even they pushed the numbers out far enough may not be declared.
Following their lead, it would be prudent, as we head towards budget season, for finance leaders to invest time in agreeing which scenarios to model and work with their C-suite to plan out their business’ potential paths. If we are to learn from hindsight it is that the art of scenario planning should increasingly become a priority.
Why is this important?
In short, scenario planning can provide a competitive advantage by enabling decision-makers in your business to react quickly and decisively, safe in the knowledge that a situation has been thought through and actions documented. There is no panic and scrambling for data to attempt to form an on the spot strategy.
Simply put - investing in scenario planning means you are more informed about the impact decisions will have and can be more agile in your response – see my recent article about surviving a recession where ‘informed’ rather than ‘forced’ decision making can make all the difference.
Whatever the industry, the fundamentals of scenario planning remain the same. It helps business executives to understand the effects of various plausible events and allows for finance, operations, and other teams, to prepare initial responses. I personally think it helps to build teams who may be called upon to survive in exceptional (ok unprecedented) times. It is teams that move mountains not individuals and by working together to build a credible plan - that you can call upon if needed - you are already coming from a position of ‘buy in’ to move forward from the get go… and that could be the difference between sink or swim.
Scenario Planning: The Lowdown
There are four types of scenario planning from which you can choose from:
Quantitative scenarios are financial models that allow for the presentation of best- and worst-case versions of the model outputs. These models can be quickly changed by altering a limited number of variables/factors. This type of scenario can also be used to develop annual business forecasts. These models assume key variables are known and that relationships among them are fixed.
Operational scenarios are one of the most common types of scenario planning an organisation will undertake internally. Operational scenarios specifically explore the immediate impact of an event and provides the short-term strategic implications.
Normative scenarios describe a preferred or achievable end state. If you’re looking for a statement of goals then this is the type for you, steering away from objective planning and towards how a company would like to operate in the future. This type will often be combined with other types of scenario planning for the purpose of providing a summation of changes and a targeted list of activities.
Strategic management scenarios are essentially stories that say little about the company or industry, but more about the environment in which products and services are consumed. This type requires a broad industry, economic and world view and is often considered to be the most challenging for company leaders to put together. Although complex, planners retain more freedom to brainstorm decisions.