One of the challenges I faced while in employment was that when I was starting a project, I was often not really sure what was likely to happen in completing the project. While I was able to describe what I hoped would be the outcome, I was unable to guarantee the results that were likely to be achieved.
I presume you are often in these positions, too. So how are you able to provide some “insurance” to your bosses on how the outcome of a project is likely to look like? Here’s my suggestion…
Sketch three possible outcomes for a project: the likely ‘upside’, likely ‘regular’, and likely ‘downside’ scenarios.
If everything clicks in your project, and you even get a bit lucky, what’s the likely outcome of your project? World domination? A successful product launch? A modest increase in market share? If this “upside” case isn’t very compelling, you might not want to embark on the project in the first place—or at least you might calibrate the level of investment in time and resources. The upside case for what you’re working on needs to be exciting, compelling, a strong commercial result for your and your business. You could also set some conditions which if achieved indicate the project is going well and may enable you to inject more resources into the project to make it even more successful. These should be included into the upside scenario.
If things go fine but not great, what’s the ‘regular’ scenario look like? To use a golf metaphor, if you hit the fairway – not the green, not the rough, just the fairway – with your effort, what happens? And will this result be worth the time and effort put into it… Yes? No?
If your project stalls or goes sideways, what’s the downside case look like? Is it mortal – i.e., is your company dead, are you dead (reputationally, financially, etc.) Or is the downside quite survivable? And how would you know reasonably early if this is likely to be the outcome so that you can rescue some of the resource going into the project.
Let me exemplify this by talking about one project I was involved in during 2011, the purchase of a small brewery in the South Pacific state of Solomon islands. There was one small brewery in the archipelago (called Solbrew), which was close to our businesses in Papua New Guinea, New Zealand, New Caledonia and Australia. The business was stand alone and incurred hefty charges buying raw materials. The staff were poorly trained and badly led… but despite this the business had a strong market share but in a small and under-performing market. I know if we were able to buy the brewery we could really turn the business around.
When getting involved in this project I took the time initially to talk through creating these three scenarios with my colleagues and present them in the business plan. Typically these projects were going to take substantial investment from myself, my colleagues and the company. So I had to decide what would the downside case would look like. I had to presume we got the deal there would be no downside if we didn’t. So what could go wrong? Well it was a small commodity biased developing economy- so declining commodity prices could crash the local economy. Secondly the democracy was very you and could fall foul of a challenge to rule of law. It was also in the typhoon belt, and on the Pacific ring of fire so earthquakes, tsunami or storm could impact the local economy. All of these were pretty much outside our control. But each case could be managed through insurance of some kind or that the cost of entry would be small enough that we wouldn’t mind too much closing the doors and walking away.
So what about the average case- well we’d get that if we were able to cut costs but not able to grow the market in terms of volume and price. So we used this as the base case scenario to go to the Board with seeking the $20 million to buy the brewery. In this average scenario we planned to implement plans clearly in our control- cheaper costs of raw materials, better quality beer, better management. This means that we believed we could generate sufficient profit to pay off the $20 million in five years.
How did we create the upside scenario- well we took the average case and considered how we could grow the market and also grow margin. The economy of the Solomon Islands grew around 6% p.a. over the decade since 2000 and we believed this was a likely growth scenario. The brewery had 60% share but mostly lost to smuggled beer and home brew. And there were no premium brands in the portfolio. We believed that through more efficient production we could double sales within 3 years, and do so at half the cost. We could effectively pay off the brewery in 2 years, but that this would require some extra effort and investments to make it happen, and we established the criteria for when we would kick in these extra investments.
When you and the business align around three simple scenarios you can calibrate your expectations and investment thesis accordingly. And of course work your hardest to go for the best scenario, while having management accept the potential for worst case.
OK so how would you go about creating these scenarios?
Scenario planning is not about predicting the future. Don’t look at current trends and forecast them into the future. It is about exploring the future. If you are aware of what could happen, you are better able to prepare for what will happen.
In the case of Solbrew- we didn’t simply forecast 6% GDP growth simply because that was the past trend- we looked at what the demand for Solomon Islands goods would likely be, as well as other sources of economic growth- trees, tourism, overseas aid, etc. We didn’t just accept that 12 litres per capita per year was the average consumption and then increase this by a percentage. We tried to discover why the numbers were so. The consumption number was low (12 litres) not because people didn’t want to drink, it was low because either they didn’t have access to beer (none was sent outside of Guadalcanal Island, deliveries were infrequent, bars and stores were often out of stock), or they drank other things (such as smuggled beer, home brew or drank spirits). By seeking ways to address each of these we were able to create growth stratgies to effect our upside scenario.
So stepping back to think more about Scenario planning… The trouble with the future is that you don’t know what it is going to be until it arrives. By then it can be too late to plan for it. If you cannot reliably plan for the future, what can you do?
The answer is to explore the future. The future is complex, but many of the influences that will determine it are already evident.
By exploring what might happen, rather than trying to predict what will happen, you can discover alternative outcomes and prepare for them; this helps you become sensitive to signals that will indicate possible directions as soon as they appear.
Scenario planning is a structured process for exploring the future. It is both a technique and a way of thinking that enables you to develop and test options before embarking on a strategic plan.
Practical scenario planning
The matrix below shows a model of how to look at the future and how standard management techniques can be incorporated into it. It has two axes: the horizontal one portrays certainty and uncertainty and the vertical one control and the absence of control. These two axes yield four quadrants: the most interesting ones are the bottom two, which provide ‘the rules of the game’ and ‘the key uncertainties’.
The first stage is to identify the ‘rules of the game’. Ask yourself: “What can we be certain of but cannot control”? Your answers might include “exchange rates vary”, or “governments like to regulate”, or “fuel/share prices fluctuate”. This process defines context, reveals unconscious prejudices, and helps establish what you do control.
Next, identify the key uncertainties by asking: “What do we not know and cannot control”? Answers might be “actual exchange rates’ or “the price of fuel”. Analytical tools such as PESTEL or Porter’s Five Forces will help identify significant factors, which might represent an opportunity or a threat. As well as trend analysis, look out for ‘wild cards’ – events that are completely unexpected, such as diseases or volcanic eruptions.
Scenario building and testing
You are now ready to develop three to five scenarios. Do that be selecting key elements of rules of the game mixed with your key uncertainties- what could the future look like with different mixes of these?
Once you have created some scenarios, assess them in two way- likely to happen, and size of impact (positive and negative). You can then chose which scenarios to focus on- those that are most likely to happen and that have the most positive impact, and you may also like to include some unlikely ones that may have huge upside or downside risks.
Different strategies can then be developed and evaluated against the scenarios using a SWOT analysis. Then you can say, “If the future turns out this way, this is what I will do”.
Finally, when you make a decision, confirm it using SMART or well formed outcomes.
While this has been a very brief introduction, Scenario planning will broaden your perception and alert you to possible developments so that you can prepare for the ‘unexpected’. With this improved understanding, it is then safe to proceed to strategy planning.