The COVID-19 global pandemic rages on. The human cost is immeasurable. The economic cost is felt in disrupted supply chains; travel bans; canceled conferences, sporting events and entertainment shows; and empty malls and restaurants. Commodity price collapses, notably in the oil and gas industry, have created many losers and few winners across the value chain. As business-people, however, the virus is not our enemy -- it's the uncertainty.
Many firms I speak with are presenting a "deer-in-the-headlights" response. When they say, "We are closely monitoring the situation," what I really hear is, "We are going to do what we always do until it is obvious that we should be doing something else, and by then it'll be too late."
Let's face it: We are conditioned for the status quo. Now more than ever, we need our mental faculties to be trained to think clearly and rationally about recent events and their implications. If the enemy is "uncertainty," the antidote is "scenario planning."
I have no doubt many firms believe they are scenario planning when they construct typical low-, medium- and high-probability cases for their spreadsheets. The third option always seems to include the dominant number of cases. Worse yet, teams mentally gravitate toward the comfort of the middle case, whatever that might be. This is not scenario planning.
True scenario planning first identifies the external, "direct" drivers of business outcomes as a series of independent or loosely coupled variables. Think of them as the external forces on the business that have a direct impact but cannot be directly controlled. These could include customer demand, labor costs, asset reliability, raw material costs and availability, and inbound and outbound supply chain performance. Each driver is a degree of freedom on your outcomes that moves independently of the others. Subject matter experts are harnessed for their thinking about the range of movement of the variables with discrete positions along that range, avoiding the habit of always choosing three discrete settings. It is guesswork, to be sure, but guesswork that comes from the most experienced and knowledgeable among us.
Next, move to the comprehensive computer simulation model of the firm that treats these business drivers as input variables. Don't have a model of the firm? Build one, even if it's crude, in a single spreadsheet that calculates a handful of the most critical KPIs. My guess is most businesses have fragments of such a model in a constellation of files scattered across the company. Now is the time to integrate those to create a faithful replica of how the company works from an end-to-end operational and economic standpoint. Remember: The point of this exercise is not to be highly precise but to generate insights into how the business behaves under a wide variety of conditions.
At this stage, leadership offers ideas on strategy in the form of strategic alternative actions that could be enacted. Be careful not to prejudge the value of these strategic alternatives -- the model will do that for you. Err on the side of adding more strategic alternatives rather than fewer, and the model might surprise you.
You have now created a strategy table or matrix. All of the possible combinations of variable driver settings are represented by columns in the table, while all of the strategic alternatives are represented in rows. Each cell is the numerically calculated outcome that results from the variable inputs and the strategy lever settings on a group of KPIs that matter most to the business. Once the table is populated, ask the following questions:
- Which strategy works well in most of the plausible futures?
- Which single external driver causes the most negative outcomes?
The answers to these questions will likely prompt a more objective, data-driven discussion of responses to the conditions of the day. The very process of creating the model and matrix is healthy for every company. Get started right away.
George E. Danner is president of Business Laboratory LLC, a specialty firm that builds simulation and analytical models to solve complex problems for businesses worldwide. He is the author of two books, "Profit From Science" and "The Executive's How-to Guide to Automation."
For more information, visit www.georgedanner.com.
