Maybe you’ve set aside a small rainy-day fund--just in case you have a month when your cash flow slows to a trickle. Or you’ve devised an ad hoc Plan B in the event that your carefully laid marketing plan flops. Both great ideas.
But what about the truly unexpected--the black swans you’ll never see coming?
It might sound counterintuitive, but you can plan for those, too.
People who get good at strategic thinking tend to notice the unexpected sooner than everyone else because they have prepared minds. They’ve done smart scenario planning, and as a result, they’ve developed a sense for what may come in the future.
So, if you’ve felt bamboozled by too many costly surprises and industry changes, read on.
The Makings of Smart Scenarios
Scenarios are well-crafted narratives about the future that tell very different stories about what might happen. A few scenarios are usually enough to define a broad range of potential fates--though the more volatile your recent past has been, the broader you’re going to need to think. Your focus should be on things you can’t control or predict, in order to put some boundaries around the range of possible worlds you may have to deal with (whether you like it or not).
Good scenarios provide competing intellectual windows on a complex phenomenon and challenge how you think about it. For example, if U.S. automakers had more seriously examined various globalization and technology scenarios a few decades earlier, they might have switched their design and manufacturing strategies much sooner.
The aim is to stress test your current strategy and make sure your plans contain enough flexibility that you will win no matter what the future brings.
How to Do It
Let’s see how scenario planning works in a simplified case. Your company is a small business with a mostly unionized work force manufacturing street sweepers for municipalities around the country. Here's how you'd approach scenario planning:
- Define the issue. Lay it out in terms of time frame, scope, and decision variables. So, if you make street sweepers, you might want to know, for example, what your industry might be like five years from now in terms of product prices, new competitors, and regulations.
- Make a list of what you know. What current trends will affect your industry five years from now? In this particular example, you know that union power is declining, the work force is aging, and overseas competition is stiffening. Briefly document these trends and explain why each exerts a significant influence.
- Identify what you don’t know. These are the uncertainties whose outcomes will significantly affect your industry, such as the strength of the U.S. dollar (which affects imports) as well as new safety regulations before Congress. Briefly explain why and how these uncertain events matter, and examine how they are potentially interconnected.
- Construct multiple scenarios. Brainstorm different outcomes for the top uncertainties. For example, suppose the tide turns against you: You’re hit with onerous new regulations and a strong dollar, making exports hard while inviting overseas manufacturers. How would you rebound?
- Assess the plausibility of each scenario. Identify where and why your scenarios may be inconsistent. Is it plausible that a strong dollar, perhaps the result of Republicans being in power in Washington, would also bring about tighter regulations?
- Eliminate combinations that are implausible. Maybe it’s unlikely that both weaker union power and higher wages would happen at the same time in your shop. So, in that case, you might remove it from your first scenario draft, correcting the inconsistency so that you end up with a few diverse but plausible scenarios (at least three). Also, make sure your final scenarios cover a wide range of possibilities you might face.
My book Profiting from Uncertainty offers much more detail about scenario planning, with fully developed examples from different industries. My next column will address how to use your scenarios, once developed, to arrive at better strategic decisions.