Scenario Planning: How Can it Help Your Business Adapt and Thrive?

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It’s been quite a while since I felt this way. The sense of uncertainty lingering in the air like a heavy fog. The feeling of hesitation and insecurity for what the future holds. The underlying sense of pessimism everywhere I turn.

Now, I’m hearing all this talk of a double-dip recession. Some media outlets seem to be chomping at the bit to declare that that’s already the case. I’ve been operating my discount shoe business long enough to know my monthly sales tell the real story – not the economic indicators. But, suffice it to say, things are looking pretty unclear. The U.S. credit rating downgrade and market turmoil didn’t help matters.

The good news? I have a tool within reach that allows me to make sense of the uncertainty. It also helps me sleep better at night. It’s called scenario planning, and it’s already changing the way I think about the future. This simple-yet-powerful tool offers serious benefits for the small business owner. It can help you:

Get a grip on the political, economic, social, and technological factors that could impact your business down the road.

• My top two factors can be boiled down to unemployment and healthcare regulations. Over the past year, I’ve seen a direct correlation between the labor market and sales; people will put off buying new shoes if they don’t have jobs. The second factor is something that could increase my costs and limit my growth. But within this hotly contested political environment (and the 2012 elections just around the corner), nothing is set in stone; a new Congress or President could alter the healthcare regulations.

Weigh the tough decisions that shape the future of your company.

• Scenario planning is great for adapting to the changing marketplace. When it comes to making big decisions about your business, it’s equally capable. Imagine, for example, that you’re thinking about buying a smaller competitor. Using the approach outlined here, you can create alternate futures that could impact your decision. Knowing these possibilities – and “living in them” by creating detailed scenarios – can inform and guide you during the decision-making process.

Plan for low-probability, high-impact events.

• This tool is also very good at helping you plan for the low-probability, high-impact events that could shape your business. This article notes how the CEO of AutoNation used this approach to become more profitable during the recession. That’s an impressive feat, considering the auto industry’s turmoil. Regardless of the environment you’re facing, this type of thinking – which really boils down to living in the future – is essential for your long-term success.

So how do you do it? Scenario planning isn’t something that requires a lot of time or effort. It can be boiled down to five simple steps. First, create a planning time horizon – for example 2-3 years. Then...

• Step 1: List and prioritize the outside forces that will impact your business over that time period.
• Step 2: Using the two most important factors, make a grid; one factor is the X axis, and the other is the Y axis. The two ends of the axis are opposite extremes (for example, fewer regulations vs. higher unemployment, or stable regulations vs. lower unemployment).
• Step 3: Brainstorm what the possible future will look like for the four quadrants on your grid. (fewer regulations and higher unemployment vs. stable regulations and lower unemployment, etc.)
• Step 4: Figure out the implications of each of the four scenarios, and then determine specific actions to adapt to those changes.
• Step 5: Develop metrics to track your two key factors over time.

This online tool, which guides you through these steps in deeper detail, can be used to record your thoughts and save your scenario plan. (As the instructions point out, the tool can also be used to get a grip on the personal factors in your life. Very useful stuff!)

To make the most of the scenario planning tool, consider these questions:

• What shifts are taking place within your industry?
• What external forces keep you up at night, and how could they impact your strategy?
• Is each of your scenarios plausible and distinct from one another?
• Have you involved your senior management in the planning process?

• One of the great things about scenario planning is that it doesn’t require a lot of time or energy. Next time you have an hour to spare, sit down and start to work through the process. If you’d like to see a case study of this tool in action, check out this link.
• As you develop your different scenarios, it’s important to bring in a wide range of perspectives. Check out this link for useful ideas that can help you paint a full and accurate picture of the (potential) future, as well as avoid common scenario planning pitfalls.