Even in these tumultuous times, strategic planning doesn’t have to be an exercise in anxiety—or futility. APRIL 2009 • Renée Dye, Olivier Sibony, and S. Patrick Viguerie
Source: Strategy Practice
Editor’s note. When we published this article in April 2009, weinvited readers to take part in an online survey on changes in theircompanies’ strategic planning , given today’s challenging economicenvironment. See the results on page 2, and then tell us what your company is doing.
Strategic-planning season has arrived formany companies, and it couldn’t be more different than it has been inyears past. Gone are the days of linear trend-extrapolation exercisesthat produce base, upside, and downside cases. Strategists, now facingthe most profoundly uncertain times in their careers, are creatingdisaster scenarios that would have been unthinkable until recently andmaking the preservation of cash integral to their strategies.
Most strategists we know are avoiding the obvious mistakes, such asplanning as usual or, conversely, eliminating essentialstrategy-development activities or even strategic planning itself.Nonetheless, strategists remain deeply—and understandably—concernedthat the priorities emerging from the annual planning rituals won’taddress the demands of today’s tumultuous environment.
These are uncharted waters, and no one has a clear map for sailingthrough them. It’s clear that scenario planning, a well-establishedtechnique for coping with uncertainty, should play a critical role thisyear, but executing successfully has never been as challenging as it isnow. Most companies will have to consider more variables and involvemore decision makers than they have in the past. Strategists will alsoneed to place a greater emphasis on measurement—the only way torecognize when changing conditions merit quick strategic adjustments.Finally, the focus on new or surprising scenarios shouldn’t obscurerelevant long-term trends or devalue important existing strategies.
Be realistic about scenario planning In a highly uncertain environment, the advantages of scenario planningare clear: since no one base case can be regarded as probable, it’snecessary to develop plans on the assumption that several differentfutures are possible and to focus attention on the underlying driversof uncertainty.
Today’s pervasive uncertainty complicates scenario-planning efforts:the number of variables at play—and the range of plausibleoutcomes—have exploded in the past year. Consider, for example, thepredicament of an industrial supplier that is not only heavily exposedto commercial and residential real estate but also has many governmentcustomers. For this company, the critical uncertainties include thedirection of the commercial-credit and mortgage markets, housingprices, tax revenues, and government stimulus spending. Differentoutcomes for each of these uncertainties produce vastly different pathsfor the business. Since the heart of scenario planning—crafting anumber of strategies for different outcomes—has become significantlymore complex,1strategists should prepare for a more demanding process of gatheringinformation, exploring possibilities, and plain old hard thinking.
Senior executives outside the strategic-planning group—even thoseaccustomed to developing scenarios—may find the diversity andcomplexity of this year’s scenarios bewildering. It’s critical to bringsuch executives into the process early: for example, by kicking off theplanning process with a scenario-development exercise involving thefull senior team. Similarly, as the process of reviewing business unitsgets under way, a company can inculcate an appreciation of the threatsit faces and of its collective strategic response by invitingexecutives from a number of divisions to participate in theproceedings—rather than hold one-off events between the senior team andthe leader of each individual unit.
Intensify monitoring Depending on how events unfold, the industrial supplier mentioned abovecould make radically different moves. If the commercial and residentialreal-estate markets stabilized, it could expect reduced sales withinthose channels until the economy rebounded, but its business modelwould remain fundamentally the same. If those markets softened further,the bulk of the company’s market opportunity, for the foreseeablefuture, would lie in infrastructure investments underwritten bygovernment stimulus spending. In that case, the company would need toredeploy its sales resources to government-oriented business and focuson maximizing sales there.
The company’s strategy, in short, must account for many morecontingencies than it has until recently. Since the effectiveness ofsuch a strategy depends on an organization’s ability to adjust rapidlyas the fog starts to lift, managers must identify and intensivelymonitor key indicators suggesting which scenario might unfold. For theindustrial supplier, some of the most important indicators are sales ofnew and existing homes, foreclosure rates, mortgage interest rates, newbuilding starts, and announcements of “shovel ready” governmentprojects. Of course, the company’s managers always followed suchindicators, but the strategic-planning process typically collapsedtheir potential variations into average market growth forecasts. Giventhe present heightened uncertainty, however, the strategy groupdecomposed the average forecast into its individual elements to makethe possible outcome for each of the indicators more transparent and tomonitor them in greater detail.
There’s no occasion like the strategic-planning process to get a fix onsuch indicators—a fix that should also help companies make ongoingbudget decisions in real time. That’s critical, because it makes nosense to set each operating unit’s budget allocation at the start ofthe fiscal year if cash is tight and corporate executives expect todole it out carefully as plans become less uncertain. What companiesneed now is a dynamic “pay as you go” resource allocation process thatconserves cash and encourages adherence to the strategic road map laidout in scenario planning.
This year’s planning process should also generate unusually specificplans to monitor the performance of suppliers, customers, andcompetitors. As we’ve seen in the past six months, the most entrenchedincumbents can plunge into financial distress with dizzying speed.Early intelligence helps companies to recognize when they shouldnegotiate more favorable supply terms, line up alternatives to riskysuppliers, offer kinder credit terms to critical customers, acceleratecollections from faltering ones, or scoop up all or part of vulnerablecompetitors. Leading indicators of distress include such familiarsignals as delinquent accounts payable, downgraded debt ratings, largeshare price declines, late inventory deliveries, or lower-quality goodsor materials. These signs, though all too familiar to operatingmanagers, are typically addressed in an ad hoc way, not in thestrategic-planning process. This year is different.
Look beyond the crisis Given the vastness of the economic change now under way, the temptationfor many planners will be to gaze, mesmerized, at the unfolding crisis.That’s a mistake, for at least two reasons.
First, devastating as the current downturn may be, it cannot roll backfundamental market trends—such as the aging of consumers in Europe andNorth America or the continued economic development of Brazil, China,India, and Russia—which will continue to create strategic opportunitiesand threats. Managers must focus their eyes—and resources—on thesetrends no matter what happens.
Second, planners who become fixated on current economic events run therisk of overlooking a core responsibility: evaluating the effectivenessof current strategies. Although the crisis may force companies tosuspend or redirect some of them, others will remain relevant even inthe changed environment. This year’s strategic-planning process is atime to encourage managers to sort out which current strategies thecrisis has helped, hurt, or failed to affect and to ensure that asystem and metrics are in place to track their performance. While allthis may sound like common sense, extreme uncertainty makes it easy tooverlook.
One company that’s staying the course is McDonald’s, which has profitedin the downturn from its low-cost menu items and is enjoying its mostrobust same-store sales growth in years. Meanwhile, senior managementhas remained focused on longer-term strategies involving expensivestore renovations, operational overhauls, high-end coffee products, andhealthful menu options. Managers elsewhere can learn valuable lessonsfrom the company’s efforts to benefit from the current circumstanceswhile sticking to longer-term strategies and the underlying trends(such as healthier lifestyles) that they reflect.
Despite the challenging times, this year’s strategic-planning processneed not be an exercise in anxiety or futility. Developing scenarios ingreater depth, monitoring strategies more rigorously, and remainingfocused on the long term will all help strategists boost the odds ofcreating plans that can lead their companies through the turbulence.  |
