Landing the Plane: Putting the "Planning" into "Scenario Planning"

Most scenario planning resources are great at getting you to a good set of alternative scenarios to consider, but not always so great at helping you work through to an actual strategy or allocation of resources against real initiatives. Here is the approach I have used to do this with clients in my over-a-decade-and-a-half of scenario planning work.

Creating a strategy on the back end of a scenario planning exercise requires thinking about strategy more as a portfolio of bets rather than a singular effort. These bets fall into two main categories to start with:

1. A core strategy that gets most of your investment of time and money: A well defined core strategy clearly states where value will be created or captured, how your firm will win in terms of profitability, and the capabilities it needs to be great at to make this a sustained reality and not just messaging. (I tend to use the choice cascade framework in Laffley and Martin's Playing to Win to help describe this). The core bet will generally track to a scenario that you believe is more likely, or more quickly emerging--for now. (And as with any good strategy, it should be based on where your company is starting from and not just be a theoretical/generic best strategy. It is okay for a strategy to stretch, but a company focused on cost leadership will have a hard time suddenly becoming a premium-priced innovation leader over night.)
2. A set of side bets that get varying levels of attention: Side bets are options that you buy today to either take advantage of upside opportunity or mitigate downside risk if an alternative scenario emerges. Part of the decision to invest in side bets is how likely you think it is that one or more of the alternative scenarios will happen. But it's also the potential value that it might have on your business. For example, a low probability/high reward bet may be worth taking a flyer on. To add more nuance, the side bets should also be based on a company's level of preparedness and responsiveness: if an alternative scenario emerges, how quickly can you respond? And to what extent is it worth having some base level of a new capability so you are not starting at zero in that situation?

Scenarios can help sharpen a core strategy that's relatively up to date by allowing a company to see what it would be like to take both its assumptions and execution to their fullest extents. In some cases, where the assumptions and strategy no longer align, a more serious refinement is needed. In either case, it's helpful just to re-commit to an aligned set of market assumptions.

But in my experience the real action—and challenge—is in the side bets. Many companies have some these already as part of an innovation initiative or risk management practice. But they are often reactive, disconnected to larger market assumptions, and established as stand-alone efforts. As such, they may be either under-invested in (i.e. incomplete and not innovative or mitigating enough), or conversely, overly resourced.

The former come about because these new initiatives are started up based on small, knee-jerk reactions to immediate trends rather than the type of major system changes that good scenarios identify. The latter are often overly resourced due to a particular manager's own bias and power in the organization.

By pulling out the existing side bets out from their silos and looking at them more holistically—through a scenario framework—you can make more intentional and consistent side bets. It also helps to separate these out from the core strategy to help make resourcing and executive ownership more clear. And both core and side bets should have very different expectations for if and when they will add value.

Types of side bets

Here are the main categories of options a company might invest in across a scenario set.

A. Develop a playbook / contingency plan. This might be having someone craft a set of action items pending a sudden change in conditions, like a market crash, a major regulatory change, or other structural change in competitive advantage. In some cases, this could also involve doing a bit of due diligence around the execution of the playbook.

Example: a real estate company doing business in China conducted an audit of all the small local developers with attractive land holdings that might be bought out immediately if a sudden crash rendered them bankrupt.

B. Sharing the risk via partnering, JV, or venturing: These are investments that share the risk and reward for an idea that is viable only in certain alternative scenarios. Strategic corporate venturing has become particularly popular in recent years, as an alternative to innovating in-house—essentially, taking a stake to create an option to acquire later.

Example: a large travel IT company uses venturing as an extension of its innovation and M&A group, all of which is housed under its strategy function. Venturing is used for more speculative scenario bets.

C. Upside innovation investment: This is essentially putting scenario-specific ideas into the front-end of an innovation pipeline, without the expectation that they will get to market right away (or ever).

Example: An apparel company began increasing investment in natural fiber-based clothing as a hedge against a more carbon-intensive and resource constrained future, where synthetic fibers might be banned or priced out of a more environmentally-friendly market.

C. Insurance or other downside risk mitigation: These are outlays more related to protecting from a more downside scenario (though all scenarios have elements of risk and opportunity). For example, a shortage scenario might imply stocking more inventory as a precaution, despite the tie-up of working capital. The risk of another pandemic or health-related scenario could mean literally buying more re-insurance if you are a company with self-insured healthcare.

D. Hedge / split up a large capital investment: This involves breaking a larger capital commitment into smaller stages that allow you to have more go/no go decisions over time, as new information comes in. For example, if you think there is a good enough chance for a scenario where proximity outweighs cost, and you would lose by being overly invested with your supply chain in a particular region, then you may decide to reduce the size of a planned new factory (with perhaps an option to expand later), knowing that the cost per unit from that new facility may be higher as a result.

Side bets are options with future potential value, but near-term cost

Side bets are essentially options. But as with stocks and commodities trading, options do cost money. As such, it's important to think rigorously about where and how much to spend on them. And, as mentioned earlier, to look at them as an integrated portfolio and not a set of one-off projects.

Questions to answer when buying strategic options

There are two decisions you will need to make if you want to spend on future preparedness or managing the downside risk of disruption.

1. How much in total should you spend away from the core strategy?
2. How much on each option?

These are hard questions to answer! There is no objectively correct answer that you can get to through an overly detailed quantitative analysis. But you can quantitatively determine an order of magnitude that makes sense. Think of this as "real options analysis" without all the false precision that that methodology asks for. It's more higher order and judgment based. This is not a natural management practice or skill--most leaders are afraid to make decisions without firm proof of value.

However, I often make the case to clients that most big strategic decisions they make operate under a false precision already. Estimates for NPV terminal values, savings from synergies through mergers, or revenue from new market entry are all fraught with bias and buried assumptions, where best or worse cases always seem to be leaned on to justify a decision.

As such, the best way to get to decisions is through a combination of analysis and management conversations about the set of activities, points of access, capabilities, relationships, etc. that might be of even greater use to the organization in the future and whether you want to pay less for that now, or wait and pay more for it if and when the market has already shifted. In other words, agree on a preferred risk/reward profile that is consistent with how the company treats other types of decisions.

Not just "no brainers"

Some scenario planning books emphasize the "no brainers," or "no regrets" moves that emerge from the process. Certainly, investing in what works in any scenario makes sense, but the reality is that these are usually just table-stakes or housekeeping that a good company should be doing anyway: "get closer to our customers," "improve our technology," etc. 

Good scenarios should force you to consider much more specific, and yes, challenging, decisions in these areas, like particular customers, or particular capabilities in which technology will be most useful in creating advantage. These tend to more scenario-specific and ultimately look more like the side bet choices outlined above.

Data and dialogue

The dialogue and decision-making required in a portfolio-of-bets approach is typically complex. It factors in multiple variables simultaneously, including criteria that is highly subjective from one organization to another and requires making decisions based on incomplete information. And the dialogue is not meant to be one-time ("lock and load"), but rather requires a few iterations initially, and over time, more of a portfolio management mindset.

Asset management is a good analog for this approach to thinking about strategy: as a portfolio of bets placed against the future, combined with a process for continually updating the portfolio as new information is obtained or new opportunities emerge.

While investment may be weighted heavily towards a particular part of the portfolio—the strategy with high potential impact and oriented towards the perceived emerging scenario—smaller bets in other directions (e.g. entering joint ventures or strategic alliances, acquiring new capabilities, experimenting in new markets or with new models, etc.) provide a strategic footprint for evolving the business over time. Or, if need be, pivoting more dramatically on a shorter timeline.

In the end, scenario planning creates greater adaptability and agility at the top of the organization, which empowers this type of behavior at all levels. In times of great transition and uncertainty, this is how the best organizations not only survive, but thrive in the future.

To learn more about scenario planning, check out my four-part executive briefing, Scenario Planning 101, or visit www.mattranen.com/blog for other insights and related topics.