There’s an old joke about the honest weatherman: “Today’s forecast is bright and sunny with an 80% chance that I’m wrong.”
If small and medium enterprises are equally honest, they’ll admit that they handle forecasting poorly. Rather than focusing on long-term trends, try scenario planning.
Forecasting vs. Scenario Planning: What’s the Difference?
Say you’re planning an outdoor event – a barbeque, picnic, baseball game. You could try to forecast the weather, or predict what it will do – which, given the number of jokes at the expense of meteorologists, is extremely difficult. Or you could do scenario planning. If it rains, then we will move it to the next weekend. If we get a freak snowstorm in July, then we will have it indoors. The difference is rather than trying to predict the future, you anticipate the various circumstances that could occur and plan your responses.
What Does That Mean For Business?
Scenario planning accounts for life’s nonlinear progression. It is essentially an “If/Then” exercise. If growth slows in the fourth quarter, then we do this. If this law is passed, then we do this. If our customers start moving in this direction, then we do this. This is the time to ask, “Based on what we see, what’s going on? What assumptions are we making? What can we do to respond to these scenarios?”
Trends and forecasting are only useful so long as there is consistency in the marketplace. Think about the dot-com bubble in the late 1990s – lots of investors, but not a lot of foresight. If everyone who followed that trend successfully saw into the future – well, we’d have a lot more billionaires in the world right now. If you bought a house in 2005, for instance, and expected the value to go up forever, you followed the trends. Too bad the market didn’t! The fact is nothing continues in a straight line, as we’re reminded when a bubble bursts or the market corrects.
Royal Dutch Shell: Saved By Scenario Planning
In 1965, Royal Dutch Shell started an experiment: they began to create plausible scenarios of the future and develop strategies to deal with each contingency. The “Long-Term Studies” team, now called the “Shell Scenarios” team, asked, “What would happen if the world’s oil supply were disrupted?” An exercise in imagination! They developed a response and shelved it.
Then, in 1973, the Yom Kippur War erupted, and the Organization of Arab Petroleum Exporting Countries (OAPEC) proclaimed an oil embargo. The price of oil went from $2.50 to $11. (Let’s pause to reflect on those numbers for a minute!) Gas stations had lines miles long; rationing, truck driver strikes, and violence all resulted. The world, the US, was not prepared. But Shell was. They had a plan, and they recovered much more quickly than their competitors.
Scenario Planning and Your Strategic Plan
All businesses should be looking into the future, whether it’s 3 years, 5 years, or even 10 years. But, since the world is changing so quickly, does this type of long-term planning still have value? The world has always changed quickly! That’s an excuse that you need to throw out. One of my best members still does a 5 year plan. Does it have value? He has grown 15 percent a year as long as I’ve known him – which has been about 20 years. And he’s in charge of a not-for-profit. Ask him if planning is worthwhile!
At the same time, you can’t develop a strategic plan – and then stop. The process needs to be iterative and continuous. You develop a plan and you revisit it, you adjust it going forward. In addition to annual planning retreats, the senior team must set aside at least a day every quarter. This is the time to reassess: “We finished up a quarter. Let’s push it out another quarter. Let’s look at our assumptions; let’s look at where we’re going. Let’s ask ‘what if?’”
Scenario planning allows companies to adapt to uncertainty with more nimbleness and agility. By creating “If/Then” situations, they can develop strategies to adapt to the future – whatever it holds – and continue to thrive. When it comes down to it, putting a contingency plan in place for the rain is a heck of a lot more useful than trying to predict whether or not it will rain at all.