How disruptive are COVID-19’s unexpected impacts proving to be for your business? How clear is your team’s line of sight over the next year or two? The National Center for the Middle Market reports that 51% of recently surveyed CEOs indicated “ongoing uncertainty is the most difficult aspect of the current environment.” Businesses are reopening, but for many it’s too soon to discern and understand the new normal.
Scenario planning is a powerful strategic tool companies use to navigate through profound market uncertainties. Scenario planning is not about accurately predicting the future, it’s about generating strategies to keep the business alive and thriving in different “plausible” futures. We cannot say what the future will be; but we can envision different futures — and develop plans to succeed in each!
Scenario planning is a disciplined planning process that helps executive teams:
- Conduct critical conversations about the future
- Clarify strategic priorities
- Surface new options and opportunities
- Better understand cash needs
- Deploy resources more effectively
- Better navigate uncertainties
- Pivot faster as the new normal emerges
- Build confidence during high-anxiety times
Scenario planning is based on a number of assumptions, including:
- Predicting the future accurately is impossible, especially over longer periods of time or during times of unexpected shocks and change.
- Future business conditions are shaped by market, social, technological, political, regulatory, environmental and other drivers that create “uncertainties” which have major, structural impacts on future business conditions.
- Over time, these uncertainties can unfold in different ways to create distinctly different plausible futures.
- While business leaders cannot predict the future, they can better manage uncertainty by identifying plausible futures, and developing strategies to succeed in each.
With the discipline of scenario planning in place, businesses can generate better-informed, future-looking conversations. They can then identify and monitor leading indicators to discern which future is emerging, and promptly act accordingly.
Scenario planning is generally used for long-term strategic planning looking out as far as 20 years, long enough for different drivers to create distinctly different futures. But the structural shocks of the COVID-19 pandemic are accelerating profound market, social, and political shifts, and impeding our ability to predict confidently what business conditions will be even 6-18 months from now. We know that markets, customers, suppliers and overall markets will change, but we don’t know how.
Four Steps To Effective Scenario Planning
Implement scenario planning following these four steps:
Step 1: Rigorously Assess Your Current Business Situation
Complete a comprehensive assessment of your business now. Evaluate your firm’s current market demand, supply chain, positioning and potential future situations. It’s important that the leadership team be rigorous and candid about the current situation, and along with relevant implications, opportunities, requirements and responses.
Step 2: Describe What Is A Best-Case, Worst-Case and Likely Case Scenario
Select an appropriate time frame in the near-to-mid future (often 12, 18 or 24 months from now). Next, consider the distinctly different kinds of market conditions that would contribute first to a “Best-Case,” next to a “Worst-Case,” and then to a “Likely Case” scenario.
A way to do this is to identify two market uncertainties that are both highly unpredictable and have a significant impacts on your business over the selected time frame. For many firms, significant uncertainties could include industry economic conditions, changes in how customers buy, supply chain conditions, new technologies, and labor quality/quantity shifts.
Then, imagine scenarios where these uncertainties turn out in very different ways. For example, if the time frame is 12 months and the two uncertainties are economic conditions and supply chain health, scenarios might be:
- Best Case: A future one year from now where the economy has rebounded quickly and the supply chain is healthy and robust.
- Worst Case: A future next year where the economy is in deep recession and the supply chain is withered.
- Likely Case: A high/low combination a year from now of economic conditions and supply chain health that the team believes is mostly likely.
Step 3: Describe Strategies To Succeed in Each Scenario
Once the team has envisioned a Best Case, Worst Case and Likely Case, develop fuller stories of each scenario; what the future in that scenario looks like and how the firm can be successful in each plausible future. Some strategies will focus on new opportunities, others will focus on reducing costs and risks, and others still may involve fundamental changes to your business model. Along with the qualitative descriptions, we recommend the team models the P&L and cash flow financials of each scenario.
Step 4: Use Leading Indicators to Inform Near-term Decisions
Once the scenarios are developed, the team can then identify and begin to monitor specific leading indicators that foreshadow which future — and thus which scenario — is emerging. We recommend that executive teams track leading indicators at least monthly. Use these data points, along with other market intelligence and insights, to regularly re-assess which future is emerging. Then make near-term decisions and pivot accordingly.
Shepherd Advisors helps companies reshape strategies and pivot as markets shift. During this unprecedented time, we are encouraging companies to use scenario planning to navigate safer passage through this crucible! No one knows the future, but planning for different plausible futures will help your company move forward iteratively and confidently—regardless of what future actually emerges.
For effective and expedient scenario planning, download our FREE PIVOT 2020 Guidebook that features four integrated tools for effective scenario planning. Also, join us to learn more about scenario planning and PIVOT 2020 tools at Automation Alley’s May 27 virtual Tech Takeover: Use Scenario Planning to Better Navigate and Pivot Amidst COVID-19 Market Uncertainties.