Note: This post applies to both (a) business planning and the firm’s flexibility to change as needed and (b) personal planning and YOUR flexibility to change as necessary. In either case, we must be able to adapt to an uncertain future.
Scenario planning involves planning for the future by understanding that different marketplace outcomes may occur in response to any strategy and that each possible marketplace outcome must be planned for to avoid the worst case scenario.
Here’s a simple example: Suppose that a major soda company introduces a new non-carbonated cola beverage into the marketplace. These are just a few scenarios that are possible:
The sales of the new beverage meet expectations and do not cannibalize the sales of other company products. Overall company revenues and profit rise.
The sales of the new beverage meet expectations, but slightly cannibalize the sales of other company products. Overall company revenues and profits rise slightly.
The sales of the new beverage meet expectations, but greatly cannibalize the sales of other company products. Overall company revenues stay the same, and profits fall somewhat due to the investment in the new item.
The sales of the new beverage do not meet expectations and do not cannibalize the sales of other company products. Overall company revenues rise very little, and profits fall a lot due to the investment in the new item.
The premise of scenario planning is to anticipate the possibility of each of these outcomes occurring and have in place a pre-planned framework (contingency plan) to deal with each scenario.
Recently, Shardul Phadnis, Chris Caplice, and Yossi Sheffi wrote an article for the MIT Soan Management Review titled “How Scenario Planning Influences Strategic Decisions.” The authors reached three major conclusions:
“The use of multiple scenarios is not necessarily an antidote for overconfidence.One should not assume that simply using multiple scenarios to evaluate a long-range decision will help alleviate the negative effects of decision makers’ overconfidence in their own judgment.”
“Scenarios influence judgment — and their content matters.More than half the judgments in our studies changed after single-scenario evaluations. Scenario users became more favorable of investing in an element — either by increasing confidence in their original recommendation to invest, decreasing confidence in their original recommendation to not invest, or changing their recommendation to favor the investment — when they found the element useful in a scenario.”
“The use of multiple scenarios can nudge executives towards more flexible strategies.Executives often choose strategies optimized for a particular environment. While such strategies may perform well in the environment envisioned at the time of their implementation, they may not be easily adaptable to new opportunities or in response to unexpected threats. Under such circumstances, evaluating strategic decisions using multiple scenarios can help executives appreciate the importance of choosing more flexible assets or approaches — even if doing so is not the most optimal choice for present-day conditions.”
This television interview of Hofstra University’s Professor Joel Evans (from the Zarb School of Business) recently appeared on Fios1’s Money & Main$treet program. The interview was conducted by host Giovanna Drpic. It deals with several aspects of database marketing — from a small firm perspective. Database marketing can be a great aid to company success!
Doing Nothing New — “The most common mistake companies make when entering international markets is that they don’t do anything new, says Lavin. ‘They think that whatever works domestically will also work internationally,’ he says. ‘They don’t look at pricing or brand positioning or the competitive map. There will be gaps and you need to do some analysis to close them.'”
Not Embracing E-Commerce— “Lavin says that while the U.S. has a mature brick-and-mortar merchandising system that’s been around for two hundred years, Chinese customers primarily shop online. ‘E-commerce is often the icing on the cake in the U.S.,’ says Lavin. ‘But in China, e-commerce is the cake.'”
Failing to Market Differently— “Lavin says getting your products there is only the first step. ‘What we like to say is that distribution ain’t marketing,’ he says. ‘You’ve reached the starting line, not the finish line. Companies must realize that when they’re entering a new market like China, they are essentially starting over when it comes to building up brand awareness and goodwill among potential customers.”
Trying to Do It All Yourself— “If you’ve made the decision to sell in China, then you should also be willing to partner with other businesses to make that move a success.”
Obsessing Over Currency Fluctuations— “One thing you don’t have to worry too much about when selling in China is the fluctuation of global currencies. Lavin says that if you’re selling less than $3,000 worth of goods a day or less, you can simply make minor price adjustments to your products as needed without worrying about any kind of currency hedge strategy. Then again, if you are selling upwards of $50 million worth of goods a year, you might want to think about putting such a plan in place.”
Starting Too Fast— “Lavin suggests that every company start with what he calls a soft launch, where you begin selling a fraction of the products you might otherwise be doing in the U.S. as a way to work the kinks out of everything from the warehouse.”
To many expert observers, Jack Welch (who served as CEO of General Electric from 1981 to 2001) was the“Manager of the Century,” as he was called by Fortune. According to 60 Minutes, the value of GE stock rose by 4,000!!!! percent during Welch’s tenure as CEO.
Since his retirement from GE, Welch has not been idle on the business front — far from it. He has been involved with business education, done speaking engagements, authored/co-authored books, served on corporate boards, and done a whole more.
About this time each year, a number of well-known, reliable sources produce their forecasts for the following year.
Bloomberg(via itsBloomberg Businessweek) has just published its “The Year Ahead 2016” issue. Here is a video overview of the year ahead. It is followed by a link to the 50 companies to watch in 2016. Just click the chart to see an online discussion of the 50 companies covered.
24/7 Wall St.is a very useful site about which you may be unfamiliar. It has articles across all areas of business, top ten lists, and a lot more.
Here’s one interesting area in which 24/7 Wall St. reports:
“Each year, 24/7 Wall St. identifies 10 American brands that we predict will disappear, either through bankruptcies or because of mergers. Bankruptcies of large public companies in 2015 have already exceeded 2014 totals. Similarly, the total value of mergers and acquisitions is projected to hit a record high in 2015. While some of the companies on this list may disappear because they continue to be at the bottom of their industry, some may disappear because they are doing well. Over the years, some of our predictions have been better than others. Some of our predictions — like Alaska Air — have been dead wrong. Other brands we said would disappear — like Aeropostale — have survived but are still failing companies. Blockbuster, DirecTV, American Apparel, and Sony Ericsson are among the brands that have gone bankrupt or have been acquired since appearing on our list. These brands have not yet disappeared completely, but may still in the near future.”
And here are some specific examples of what 24/7 Wall St. publishes: