The events of recent years have underscored the critical need for businesses to be prepared for a variety of challenges. While nobody can envision every potential set of circumstances (looking at you, COVID), many business leaders consider it standard practice to occasionally take stock of the most plausible future situations and make any necessary adjustments to maintain their business’s resiliency — a strategy known as scenario planning.
Not only is scenario planning important for companies wanting to be well-positioned for the long term, it’s a practice that investors look for in potential prospects. It should be done as early as possible in a business’s life, and periodically thereafter.
Here’s a closer look at how leaders can implement scenario planning in their businesses.
Integrating Scenario Planning into Your Business Strategy Step-by-Step
To better understand scenario planning, it helps to clarify what it’s not: It’s not an attempt to predict or forecast the future. Traditional forecasting often relies on linear projections based on past data; in contrast, scenario planning acknowledges uncertainty and complexity.
Think of scenario planning as risk management on steroids. Instead of making a general prediction about the future, a business examines what their world would look like if a particular event took place, then decides on a set of steps it can take to lessen the impact (if it’s negative) or seize upon opportunity (if it’s positive).
The process has several steps:
Honing in on Your Business’s Key Drivers
Drivers vary by business and industry, but common ones include:
- Sales leads
- Number of salespeople
- Number of stores
- Rent and utility costs
- Prices of raw materials
How do you know if a driver is key? Consider what the effect would be on your business if that number dropped down to zero.
Considering Plausible Scenarios Involving Key Drivers
Once you know the key drivers that are essential for your company to continue functioning, think about what might cause them to change significantly. Maybe a competing company starts poaching your best salespeople, or the rent at a store location goes up significantly, causing you to move to a different spot that doesn’t have as much foot traffic. Keep in mind, scenarios don’t have to be solely negative — they could involve good news for your organization, such as landing a major client or gaining a market foothold with a new product.
Bringing in Multiple Perspectives
Get your company’s executive team and primary stakeholders together to flesh out each scenario, making it feel as true to life as possible. Enlist anyone whose perspective could be helpful in pinning down details, be it a person within your organization or even an outside expert.
Quantifying Each Scenario
Make sure the model of each scenario is built on activities by individuals, each of whom has independently made the decision to use your product or become a customer. If you’re looking at one new customer, for instance, examine what needs to have been done beforehand to gain that customer’s initial interest, convert that interest into the decision to work with you, then serve them effectively.
Thinking with Rigor to Develop a Plan
Your goal should be to have a realistic set of steps to prepare for each future event you identify. If you were to gain a major new client or start collaborating with a new key partner, consider how you might need to grow your infrastructure by adding technology and fast-tracking the hire of new employees. Then take it a step further: How much money should you begin setting aside to pay for that technology? How can you eliminate obstacles to speed up your hiring process? If you absolutely, positively need an aspect of your business to remain above a set level, consider what you need to do to mitigate that risk — such as being able to cut costs quickly, buying insurance, or building a mix of long- and short-term customers so the departure of any one of them doesn’t make a major impact on profitability.
Oaklyn Consulting’s Role in Working with Businesses
At Oaklyn Consulting, we help the leaders of small and medium-sized businesses make a compelling case for capital providers. In our experience, the best organizations all do scenario planning, and the practice is extremely common among high-growth companies backed by sophisticated investors.
Investors consider it a good sign when prospective businesses have used scenario planning to examine the future in a thoughtful way before approaching them for capital. By employing these steps, organizations can better anticipate risks, seize opportunities and ensure long-term sustainability — eventually elevating themselves from the world of bootstrapping to being able to support outside investors.
