Life is uncertain--so why should your business be any different? While every business faces a mixture of shared and company-specific uncertainties, they all share a common feature: Companies that think about uncertainty and plan for it are likely to be better off than those that don't.
One giant ball of uncertainty is what will happen to the stock market in 2017. Last November, many predicted it would lose 10 percent of its value. Instead, the Dow added a few thousand points on hope that the so-called "Trump Agenda"--possibly including the repeal of Obamacare, a huge tax cut, slashed regulations, and $1 trillion in infrastructure spending--would be quickly enacted. But on March 24, Obamacare was not repealed and replaced--thus potentially tossing the rest of the Trump Agenda onto very thin ice.
What is a leader to do? Budget for different scenarios. Here are five steps through which I guided my Strategic Decision Making students for a two-class scenario planning exercise focused on the marijuana industry.
1. Identify what you know
Developing useful scenarios requires leaders to be intellectually honest--admitting what they know and what they don't know.
Indeed, I found in the research for my new book, Disciplined Growth Strategies, that such intellectual honesty is an essential ingredient to achieving market-beating growth. What's more, CEOs who insist that others follow their commands and squelch debate are much more likely to preside over revenue decline.
So when you start building scenarios, you should have good sources on which to base the list of things you know.
A case in point is the marijuana industry, which earlier this year had a complex mixture of favorable and unfavorable regulations that vary by state. For example, some states have legalized marijuana for medical purposes, while others have decriminalized it for recreational purposes. But federal law prohibits retailers and dispensaries from depositing their cash in FDIC-insured banks.
What key factors do you know will help or hinder the growth of your business?
2. List what you don't know
Admit the important factors you don't know that could shape the future of your business.
For the marijuana business, such uncertainties include whether state and federal regulation will become looser or tighter under a Trump administration; how much consumers will demand marijuana in different form factors--including plants, consumables, or tablets; and whether medical research will reveal new health benefits or risks for marijuana consumers.
What forces whose outcome you don't know are most likely to create threats or opportunities for your business?
3. Imagine four potential end-states
To construct possible end-states, you should pick what you think are the two most important variables and use them to construct a matrix that displays four possible end-states.
One group of students built scenarios based on the quantity of products each customer orders and the quality of those products. In this way, they imagined four end-states:
- Low quantity/low quality -> Exit
- High quantity/low quality -> Question Mark
- Low quantity/high quality -> Question Mark
- High quantity/high quality -> Gusher
What would the four end-states look like for your business?
4. Develop scenario plots
The next to last step is to develop more detailed scenarios that bring to life each of the end-states.
Here are the scenarios my students developed:
- Gusher. With customers preferring many high quality products, a provider could prosper by supplying high quality edibles and oils.
- Exit. With no market for smaller participants, a planned exit makes the most sense.
- Question Mark. If no large company enters the market, there could be enough room for many smaller participants.
What would scenario plots look like for your business?
5. Budget for the most likely scenarios
Having developed the most likely scenarios, you should develop budgets for each.
Here is an outline of how I would budget for each of the scenarios outlined in the previous step.
- Gusher. Under this scenario, a budget should be developed for manufacturing, distribution, and marketing of a wide range of high quality products.
- Exit. Here a budget should be developed to pay severance to employees and to terminate leases and wrap up other financial commitments.
- Question Mark. Under this scenario, a budget should be prepared to investigate the likely moves of large competitors. Should that research indicate that a large competitor's entry is imminent, then an exit budget should be developed. Otherwise, the budget should fund a focused product and geographic expansion.
You should develop similar guidelines along with a more detailed budget for each of your company's scenarios.
If you follow these steps, you should be better prepared for the uncertainty that lies ahead.