Scenario Planning

Even in the midst of the recent financial crisis, you probably also noticed that the price of oil has dropped. In fact, it's had a record-setting drop. It was just in July that oil peaked at $147/barrel. Now it's trading around $60-70/barrel. I'm sure you've noticed the benefit if you're a U.S. driver, as the gasoline pump price has dropped from over $4/gallon to under $3/gallon.

A lot of people simply breathed a sigh of relief. "Well, that's one problem I can now forget about" is a typical reaction. But can you? How do you know oil won't go back up to $150? Or drop to $25? Regardless, doesn't it have implications on how competitors in your business behave? On who wins and who loses?

Things certainly haven't "returned to normal." The signs are all around us that there have been substantial changes in how companies manufacture, procure IT services and finance their business. Just because the price of oil went from $25 to $150 to $65 dollars doesn't mean things are "back to normal."

Most people spend a lot of energy achieving high precision understanding their historical sales, customers, technology comparisons, price comparisons and share. But they put very little energy on creating scenarios about the future. When they do, too few scenarios are developed and they end up being based on data people feel are "highly predictable" or “most likely to happen.” But the important scenarios are the ones where unexpected, even unlikely, events occur. They create opportunities for changes in competitive position.

Scenario planning should start with "big themes." But your objective is not to develop your "best guess." Instead, scenario planning should cast a wide net and explore, in detail, what the world will look like given different variations of that scenario. How would things change compared to what’s expected? How will that help, or hurt your competitiveness? Who will be the big winner? The big loser? Create a robust description of that scenario ─ what are the implications – rather than focus on the likelihood of it happening.

Over the last year the price of energy was one such big theme that interested a lot of people. But most only explored one scenario ─ what if oil prices went to $200 or $250? Interesting, but not sufficient. While that scenario is worth investigating in great detail, it's also important to investigate other options ─ like oil at $150, or $100 or $65 or $35. All of those have different implications. What's important in scenario planning is to investigate them all. To understand how each would impact competition and individual competitors. So your SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis can be done for the future ─ not just for today.

Another value from scenarios is identifying and understanding the triggers. By exploring scenarios, you start to understand what would make each of the outcomes more likely, not so you can develop a probability distribution ─ which will lead you to the "average" or "most likely" outcome ─ and thus the least likely to make any difference and, therefore, the least interesting. You don't want to use scenarios to become a forecaster ─ because odds are you won't be very good at it. You want to recognize the implications of these scenarios, and then figure out how you can use that scenario to improve your competitive position, to upend competitors who did not do the scenario planning and thus aren't prepared. Then you can start tracking key variables, key metrics, in order to recognize when you need to prepare for one of the various outcomes. And if you've done a good job with your scenarios, you’ll be the competitor best prepared to take advantage of the changed circumstance to improve your position.

The only way you can be prepared is to have considered the scenarios, and developed some plans should that scenario happen. To be a long-term winner it's not enough just to be good in the current environment, you have to be prepared to succeed no matter what the environment. By developing scenarios, you can be prepared to take advantage of market shifts ─ and if your competitor isn't, you can gain market share and improve your returns.

We all are subject to letting current events impact our views of the future. Then we try to "stand back" and look at a long-term trend and develop some sort of "average" point of view. But neither of these really helps when markets shift. What's needed is a set of scenarios ─ such as oil at $25 or $50 or $100 or $150 or $250 or $300. Understanding how you can grow sales and profits in each makes you prepared, and greatly improves your long-term chances of growth. It's the only way to prepare for market shifts, and worth a lot more during turbulent changes, like we're seeing now, than the deepest analysis of what you've done the last year, three years or five years.

Adam Hartung is managing partner at Spark Partners, and author of the recently published book from Financial Times Press "Create Marketplace Disruption: How to Stay Ahead of the Competition." He previously has worked as a corporate executive, leading business development for both PepsiCo and DuPont. And he has been an international consultant with the Boston Consulting Group, Coopers & Lybrand and Computer Sciences Corp.